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1995 Annual Report—Federal Reserve Bank of DallasBy Our Own Bootstraps
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| — | Robert D. McTeer, Jr. |
| President and Chief Executive Officer |
The Land of Opportunity. Anywhere in the world, those words bring to mind just one place—the United States of America. Opportunity defines our heritage. Waves of immigrant farmers, shopkeepers, laborers and entrepreneurs came to America for the promise of a better life. Some amassed enormous fortunes—the Rockefellers, the Carnegies, the Du Ponts, the Fords, the Vanderbilts. Many millions more, descendants of those who arrived in the New World with little more than the clothes on their backs, improved their lot in life through talent and hard work.
Opportunity permeates our folklore. There's no better example than the 120 novels Horatio Alger churned out in the years after the Civil War, all featuring ordinary boys going from rags to riches. His tales of luck and pluck so touched the national psyche that the writer's name became shorthand for achieving success.
Even today, opportunity is rarely far from our experience. Most Americans are familiar with dozens of real-life Horatio Alger stories— Sam Walton, Ross Perot, Bill Cosby, Mary Kay Ash, to mention just a few of the famous. They catapulted themselves from the lower or middle ranks to the top.
Although millions of people still manage to make the American Dream their reality, a dissonant chorus can be heard mourning the United States as the Land of Opportunity Lost. It's hard to ignore their litany of the crises of our times:
What these skeptics typically offer up as evidence of ebbing opportunity is the distribution of income—the slicing up of the American pie. They seize on two points. First, there's a marked inequality in earnings between society's "haves" and its "have-nots." Second, and perhaps more ominous, the gap between the richest and poorest households has widened over the past two decades.
The Census Bureau provides statistical support for these claims.[1] In 1994, the latest year for which data are available, the top 20 percent—or quintile—of American households received almost half of the nation's income. Average earnings among this group were $103,253 a year. The shares of the national income going to the next three-fifths, in descending order, were 23.4 percent, with an average of $49,114; 15 percent, with an average of $31,562; and 8.9 percent, with an average of $18,735. The bottom fifth had just 3.6 percent of the economic pie, or an average of $7,565 a year.[See Exhibit 1.]
Evidence of increasing dispersion emerges from the same Census Bureau data.[See Exhibit 2.] The lowest 20 percent of income earners saw their share fall from 4.2 percent in 1975 to 3.6 percent in 1994. Over the same period, the distribution to the middle three-fifths also slipped. Only the top fifth increased their piece of the nation's income, rising from 43.7 percent in 1975 to 49.1 percent in 1994. The shift of income toward the upper end of the distribution looks even more striking when put into dollar figures. After adjusting for inflation, income of households in the lowest quintile rose only $87 from 1975 to 1994. The top tier, meanwhile, jumped $25,934.
This picture of the income distribution would be useful if America were a caste society with rigid class lines keeping those in the bottom today there tomorrow. But if ours is not a caste society, such statistics tell us virtually nothing—particularly about opportunity. By nature, opportunity is personal, an assessment of how well-off you can be tomorrow relative to today. Even the most sophisticated income distribution studies fail to tell us what we really want to know: are most Americans losing their birthright—a chance at upward mobility?
Judging from the public debate, some Americans seem to prefer a more equal distribution of income to a less equal one, perhaps on moralistic grounds, perhaps as part of an ideal of civic virtue, perhaps to avoid any overtones of class conflict.
The notion that a more equal distribution of income is a better one may appeal to philosophers or social planners, but there's no economic reason to prefer one ranking of incomes to another. In and of itself, the income distribution doesn't say much about the performance of an economy or the opportunities it offers. A widening gap isn't necessarily a sign of failure, nor is a narrowing gap a sure sign an economy is functioning well. It's a heroic leap of logic to conclude, after looking at increasing disparity between rich and poor, that Americans' opportunities aren't what they once were. Economists can point to a number of forces and trends that tilt the income distribution one way or another, many of them not bad news at all.[See Exhibit 3.]
It's quite common to find a widening of the income distribution in boom times, when almost everyone's earnings are rising rapidly. All it takes is some incomes rising more rapidly than others. On the other hand, the distribution can narrow when most income earners are experiencing hard times. In fact, compression of incomes is often what we observe in poorer countries.
Most important, a static portrait of income shares doesn't answer the question of whether low-income households are getting better or worse off over time. By definition, there will always be a bottom 20 percent, but only in a strict caste society will it contain the same individuals and families year after year. To decide that upward mobility has been lost in America, the evidence must show that the poor, for the large part, remain stuck where they are and that there's little hope of climbing up the income ladder.
In short, between opportunity and equality, it's opportunity that matters most. The prospect of upward income mobility is what individuals seek—indeed, that's what powers the whole economic system. Income's distribution comes second, both in order and importance.
To gauge opportunity in America, we need data on individuals over time. Income distribution studies aren't much help because they lump together a hodgepodge of ages, educational levels, work effort, family and marital status, gender, race and so much more. The sample never stays the same from one year to another, and researchers have no way of knowing what happened to particular members of any quintile. How many people worked their way up? How many remained at society's bottom year after year? Cross-sectional income studies can't say.
A better approach involves identifying individuals and tracking each of them year after year, capturing the ups and downs in income over a lifetime. When combined with personal data, such as age, education and marital status, individual earnings profiles pinpoint changes on life's journey, so researchers can see a person's income go up, down or stay the same.
In a mobile, fast-changing society, it's no easy task to collect data on individuals over a long period of time. All the statistical mills in government and private industry produce precious little information on lifetime earnings. One source of data, however, can shed some light on the patterns of income—the University of Michigan's Panel Survey on Income Dynamics, the longest tracking study ever done on Americans' earnings. Since 1968, the University of Michigan's pollsters have collected detailed information on a total of 50,915 Americans. This mass of data, carefully designed to replicate the characteristics of the population as a whole, has over the years served as the basis for hundreds of studies.
Not all the respondents in the University of Michigan survey are suitable for testing the degree of income mobility in the United States. The focus should be on those earning money or seeking to earn money—what the government calls "active" members of the labor force. That includes the employed, those laid off, the unemployed, students and retirees. Those at home maintaining a family aren't included, largely because that decision is a personal one that says little about the economy's opportunities. Also left out are children (youth under 16), prisoners, military personnel, the permanently disabled and the mentally ill. The Census Bureau uses these same exclusions for its income distribution studies.
Analyzing income mobility requires one additional step—identifying those respondents who reported their income to the University of Michigan's survey over a long period of time. Many people failed to report once or more. Some dropped out and others were added. Only long strings of uninterrupted observations will show us what's really happening to incomes in America. Although respondents had to report every year, they didn't have to earn income. Using the standard government definition, income includes wages, investment earnings, pensions and government transfers such as Social Security, unemployment benefits and welfare.
The University of Michigan's income data collected before 1975 aren't compatible with later observations. Results after 1991 aren't yet in final form. The best longitudinal sample that can be put together consists of 3,725 individuals for the 17 years from 1975 to 1991. This sample may seem small, but most social science research relies on similar-sized, or even smaller, slices of the population. Even Census Bureau studies of the income distribution rely on relatively few people, rather than the entire country. What's important is that a sample offer a good proxy for the characteristics of the population as a whole—and this one does.[2]
Tracking individuals' incomes over time gives a startlingly different view of the forces shaping America's income distribution. Let's begin with the people who were in the bottom fifth of income earners in 1975. The conventional view leads us to think they were worse off in the 1990s. Nothing could be further from the truth. In the University of Michigan sample, only 5 percent of those in the bottom quintile in 1975 were still there in 1991.
Even more important, a majority of these people had made it to the top 60 percent of the income distribution—middle class or better—over that 16-year span. Almost 29 percent of them rose to the top quintile. This is a far cry from the popular vision of a society in which the poor are getting poorer. In fact, the evidence suggests that low income is largely a transitory experience for those willing to work, a place where people may visit but rarely choose to live.[See Exhibit 4.]
There's further evidence that being in the low-income bracket isn't, for a large majority of people, permanent. Less than 0.5 percent of the sample showed up in the bottom quintile every year from 1975 to 1991.[3] Nearly a quarter of those in the bottom tier in 1975 moved up the next year and never again returned. More than three-quarters of the lowest 20 percent in 1975 made it into the top 40 percent of income earners for at least one year by 1991. In fact, the poor made the most dramatic gains in the income distribution. Those who started in the bottom quintile in 1975 had a $25,322 average gain in real income by 1991. In the top quintile, the increase was $3,974. In other words, the rich have gotten a little richer, but the poor have gotten much richer.[See Exhibit 5.]
The patterns are similar in other quintiles. Among the second poorest quintile in 1975, more than 70 percent had moved to a higher bracket by 1991—with 26 percent going all the way to the top tier. From the middle grouping, almost half of the income earners managed to make themselves better off. A third of the people in the second highest quintile made it to the highest fifth during these 17 years. All through the University of Michigan data, there's a consistent, powerful thrust toward the top of the income distribution.
The sample shows, too, that the rise in income can be swift, especially for those with education and skills. More than half of those in the lowest quintile in 1975 had reached the top three tiers within four years. Two- thirds made that leap within six years, and three-fourths did it in nine years. Not surprisingly, it's the young who move up most quickly, particularly those who get an education. Among respondents 20 to 24 years old in 1975, workers who finished college saw their real income rise fivefold, from $7,711 to $40,303 in 1991. High school graduates doubled their income to $27,627. Even high school dropouts weren't completely shut off from opportunity. Their earnings rose, too, although much more slowly than those of any other group, going from $11,628 in 1975 to $19,091 in 1991.[See Exhibit 6.]
The sample also tells us what happened to the "rich" of 1975. Nearly two-thirds of those in the top income quintile in 1975 could still be found in the top in 1991. Another 23 percent slipped just one bracket, leaving them in the top two-fifths of income earners. Less than 1 percent of the top fifth in 1975 plummeted all the way to the bottom of the income distribution by 1991. The trends suggest a comforting conclusion: once a household moves up the income ladder, it rarely gets pushed back down again.
What these findings reveal is that our economic system is biased toward success. When income mobility is examined for individuals over a long period of time, there's strong evidence to contradict notions of a society settled into stagnant income classes. No doubt, a fair amount of the upward mobility is due to young people completing their education and moving up. But you can't simultaneously count the young when compiling the numbers on poverty and omit them when figuring upward mobility. All people matter.
The University of Michigan data are not the only evidence that contradicts the prevailing pessimism. In 1992, the U.S. Treasury Department, using a similar income-tracking analysis, reached a similar conclusion. Significantly, the Treasury used an entirely different sample, a database of income tax returns from 14,351 households, so there's no chance this study merely offers another interpretation of the same data.
Covering the nine years from 1979 to 1988, the Treasury study found that 86 percent of those in the lowest income bracket moved to a higher grouping. Two-thirds of them reached the middle strata or above, with almost 15 percent making it all the way to the top fifth of income earners. Among people who started in other quintiles in 1979, there was similar movement up the income ladder. Nearly half of those in the middle tier, for example, rose into the top two groupings, overwhelming any downward mobility that took place.[See Exhibit 7.]
The Treasury study affirms that most Americans are still getting ahead in life. The University of Michigan data show more upward mobility, probably because they cover a period almost twice as long. Truncated at the nine-year mark, these data show just about the same upward movement as the Treasury data do, suggesting that upward mobility is a cumulative process that gathers momentum as years pass. In addition, it verifies that the quickest rise occurs among the young. The Treasury also found that wage and salary income was primarily responsible for pushing people upward in the distribution, indicating that work, not luck, is the widest path to opportunity. Ours is not a Wheel of Fortune economy.
Although dynamic tracking studies offer a big advantage over static income distributions, they can still underestimate upward mobility in living standards. As a society gets richer, the quintile boundaries in the income distribution rise, so individuals are gaining even if they're staying put in the pecking order. A worker at the midpoint of the bottom 20 percent of income earners today, for example, lives better than someone in the same spot did two decades ago. When relative gains are mixed in with absolute, real gains, we can't tell how much of the rise in income is merely keeping up with the Joneses and how much of it is getting ahead of where we were.
Overall income in the United States has risen since 1975, so by 1991 the entire distribution in the University of Michigan data had moved upward. Using a constant yardstick—living standards prevailing in 1975—we can see the real gains. How many people are better off by this measure?
The absolute gains are even bigger than the relative ones.[See Exhibit 8.] Almost 98 percent of those in the bottom quintile in 1975 rose to a higher level over the next 17 years. Two-thirds of these people achieved a living standard better than what the middle fifth had in 1975. Every other income group exhibits the same strong upward push. Almost three-fifths of the people in the bottom fifth made it to the top at least one year during the period from 1976 to 1991.
By carefully tracking the path of individuals' incomes year by year, these results go a long way toward quelling fears that the United States is becoming a nation polarized between the privileged rich and permanently poor. What's particularly encouraging is the ability of those who start out in the lowest income brackets to jump into the middle and upper quintiles. There's evidence that most Americans are making their way up the income ladder through education, experience and hard work.[See Exhibit 9.]
That's what the American Dream is all about.
If so many Americans are rising through the income ranks, and if only a few of us stay stuck at the bottom, who makes up the lowest fifth of today's income earners? One group, of course, is the downwardly mobile, those who once earned enough to be in a higher quintile. Their descent can be voluntary, usually from retirement. Or it can be involuntary, resulting from layoffs or other hard luck. One other group is new entrants into the labor force—those adults previously outside the labor force and, predominantly, the young.[4] Most young people begin their working life as part of the bottom fifth, either as students with part-time jobs or as relatively unskilled entrants to the labor force.
Although they usually start at the bottom, the young tend to rise through the income distribution as they become better educated, develop skills and gain experience. In fact, income tends to follow a pattern over a person's lifetime: it rises rapidly in the early years of working, peaks during middle age, then falls as people ease toward retirement. When the average earnings of each age group are placed side-by-side, they create a pyramidal lifetime earnings profile.
Over the past four decades, the income profile of the typical American has gotten sharply steeper. In 1951, workers reached their peak earning years at ages 35 to 44.[5] Average annual earnings for these individuals were 1.6 times the income of those in the 20 to 24 age group. By 1973, the ratio had risen to 2.3 to one. By 1993, the peak earning years moved up to ages 45 to 54, and these workers earned over three times more than 20- to 24-year-olds.[See Exhibit 10.]
A steeper lifetime earnings profile reflects greater opportunity. One way to see this is to imagine a perfectly flat pattern of lifetime income. Workers would then earn the same income every year, with no prospect of "getting ahead" over their lifetimes. This would be a world devoid of upward mobility.
What's behind the faster rise in Americans' lifetime earnings? Most likely, it's the by-product of broad changes in the way we work. When the economy was largely industrial, most jobs employed motor skills and muscle power. People worked with their hands and their backs. Today, more Americans than ever earn their livings with "brainpower." The skills of the mind, unlike those of the body, are cumulative. Mental talents can continue to expand long after muscle and dexterity begin to falter, and that probably explains why the peak earning years have shifted to an older age group in the past two decades. As the United States retools itself for a more knowledge-intensive era, as the country moves from a blue-collar economy to a white-collar one, the income rewards to education and experience are increasing.
The lifetime earnings profile is the thread that sews together recent trends in upward mobility and income inequality. As workers are increasingly rewarded for what they've learned in the workplace, earnings become sharply higher with experience. The result is that the income gap widens between youth and middle age. It's not that the young are getting worse off; it's that older workers are doing much better.
In the end, the steepening of lifetime earnings leads us to a somewhat surprising conclusion: upward mobility may well be an important factor in the widening of the income distribution! This is not the harsh world envisioned by those who see the rich getting richer and the poor getting poorer. In reality, both rich and poor are becoming better off. Most of us getting nowhere? To the contrary, the majority of Americans are busy climbing up the income ladder. Greater returns to education and experience can skew income toward the upper end, but we would be foolhardy to become so obsessed with the pecking order that we lose sight of what's really important. And that's opportunity.
A steeper lifetime earnings profile also puts a different slant on the notion of a vanishing middle class.[6] The center of the income distribution isn't a destination. It's just one step on the ladder of upward mobility. Forty years ago, with a flatter earnings profile, people spent most of their working lives in the middle income brackets. Today's more rapid rise in incomes means we're moving upward faster, thus spending less time in the middle.[7]
Worries about Generation X's future can be put to rest, too. Those entering the labor force in the 1990s might look at their parents' income and wonder how they will ever attain such heights. They should, however, find a steeper earnings profile encouraging: today's young workers are likely to see their incomes rise more quickly than did their parents'.
The economy is providing opportunity—more, in fact, than ever before—but it's up to each individual to grab it. The rewards go to education, experience, talent, ambition, vision, risk-taking and just plain hard work. Success isn't random. A lucky few may make getting ahead look easy, but most of us will have to make our way upward the old-fashioned way. Young people are not guaranteed success any more than were their parents. Their chances will improve, though, if they make the right choices in life.
The American economy ranks as one of history's great success stories. By most measures, we enjoy the world's wealthiest, most productive, most technologically advanced and most competitive society.
Over the years, the driving force in creating this economic dynamo has been the prospect of upward mobility. There should be no surprise in this. Self-interest provides a powerful incentive for people to do what's necessary to make themselves better off. Our free enterprise system gives us the opportunity to act on the natural desire to improve our lot in life. It gives us the opportunity, through work, to reap the rewards of our initiative and our talents.
Striving to better oneself isn't just private virtue. It sows the seeds of economic growth and technical advancement. There's no denying that the system allows some Americans to become richer than others. We must accept that. Equality of income is not what has made the U.S. economy grow and prosper. It's opportunity.
If people are allowed to seize opportunity, many will. If rewards are there for the taking, most of us will strive to attain them. In this country, we've envied, admired and even vilified those who have made themselves better off. Yet, regardless of our views, the prosperous have provided us benefits. Our proper cultural icon is not the common man. It's the self-made man or woman.
There are those who would deny that America is still providing opportunity for most of its citizens. There's ample evidence to refute them. Upward mobility is alive and well. Even lower income households usually aren't left out of the country's progress: the consumption of those in the bottom fifth of the income distribution has shown improvement over the past two decades.[See Exhibits 11 and 12.]
When, from their perch of the future, historians look back upon today, what will they conclude? Uncovering merely the fact that four out of five of today's 400 richest Americans are self-made, certainly they will pause to question today's popular rhetoric of snuffed opportunity, unfairness and trampled economic rights.
Without a doubt, the problem of poverty amid plenty continues in the United States, and we should help those who have difficulties grasping even the lowest rungs on the ladder. To be sure, many people have tried and failed, only to try again and fail again. There are no guarantees in life. Even so, hard data suggest that the popular view of America as a Land of Opportunity Lost—a caste society with strong class lines between the "haves" and the "have-nots"—is just plain wrong.
Capitalism is by nature an anti-establishment system. Its essence is change: destruction of the old, creation of the new and better.[See Exhibit 13.] Today's American society is almost certainly more fluid than ever, even less establishment-based and more entrepreneurial than yesterday's. In the information age, the barriers of wealth and status are disappearing. Knowledge and effort alone can open doors, and both are available to us all.
The statistics strongly suggest that the American Dream still comes true for many, if not most, citizens. Perhaps even more powerful, though, is the experience of members of our own community who have proven that our country is still the Land of Opportunity.
Among them are—Eddie Diaz, partner in New Mexico Chili Products, a company in Deming, New Mexico, that processes and distributes chili-based products.
Ron and Pam Jones, owners of Handy Andy Janitorial, a commercial cleaning company in Plano, Texas.
Liz Coker, chief executive of Minco Technology Labs in Austin, a processor and tester of semiconductors for the aerospace, medical and defense industries.
Le Thi and Hai Minh Huynh, founders of Fulton Seafood in Houston, one of the country's largest distributors of fresh seafood.
Phil Hagans, owner of three McDonald's franchises in Houston.
Patricia Pliego Stout, president and chief executive of Alamo Travel & Tours in San Antonio.
And Todd Burns, founder and owner of Time-It Lube, a quick oil-change and lube service business in Shreveport, Louisiana.
—W. Michael Cox and Richard Alm
Exhibits 1 & 2 |
Exhibit 3Inequality Is Not InequityIn the early 1970s, three groups of unemployed Canadians, all in their 20s, all with at least 12 years of schooling, volunteered to take up residence in a stylized economy where the only employment was making woolen belts on small hand looms. They could work as much or as little as they liked, earning $2.50 for each belt. After 98 days, the results were anything but equal: 37.2 percent of the economy's income went to the 20 percent with the highest earnings. The bottom 20 percent received only 6.6 percent. This economic microcosm tells us one thing: even among similar people with identical work options, differences in talent, motivation and preferences will lead some workers to earn more than others. Income inequality isn't some quirk or some aberration. Quite the opposite, it's perfectly consistent with the economic laws that govern a free enterprise system. Equality of opportunity doesn't yield equality of results. Inequality is not inequity. In a complex modern economy, there are plenty of reasons for incomes to vary, and most of them have little to do with issues of fairness or equity. Among the most important factors are: Education, experience. The lifetime earnings profile tracks income for various age groups. As an economy becomes more advanced, there are usually increasing rewards for education and experience, so earnings rise faster over a typical lifetime. As that happens, there's increasing diversity in income. Two-income households. Obviously, two workers can earn more than one. The trend toward both spouses working creates some higher income households. As families choose different lifestyles, the income distribution will grow more unequal, even if individual incomes don't change at all. Baby-boom demographics. A bulge in the population can alter a society's income distribution. When the baby boom first enters the labor force, it floods the economy with lower income workers. As the generation ages, entering peak earning years, it provides a disproportionate number of high-income households. In both cases, the distribution becomes skewed, first toward lower incomes and then toward higher incomes. A greater "churn." A healthy economy grows by creating new, better and more affordable products. The process creates new industries and new jobs. They replace jobs in fading sectors. Economists call this the "churn." It makes society better off, and it produces big gains for entrepreneurs and higher incomes for most workers. For others, there will be spells of unemployment and downward mobility. When there are larger ups and downs in income, the distribution is likely to spread. Longer retirements. Individuals who anticipate longer periods of retirement will, on average, accumulate more assets during their working lives and earn more interest. The income of middle-aged workers will rise relative to that of the young, once again widening the distribution. Higher rates of return on assets. If accumulation of assets increases income disparity, higher rates of return on investment will do the same because those assets will produce more income. A wealthier society. Once a society progresses to the point where most people can afford food, clothing, shelter and other necessities, some people choose to work harder for luxuries, while others opt to enjoy more leisure. When people make different choices about goods versus leisure, the income distribution pulls apart. No one ought to be surprised that these are trends that have reshaped the U.S. income distribution over the past two decades. Although most of them widen the income distribution, none necessarily entails lower income households becoming worse off. |
Exhibits 4, 5, 6, 7, 8 |
Exhibit 9Listen to Your EldersBelieve it or not, family fortune and luck aren't the way most Americans make their way toward the top. The experiences and choices of those who have prospered, as well as those who haven't, provide the basis for the following "secrets" on how to get ahead in life: Get an education. Nearly half of those in the top 20 percent of income earners graduated from college, compared with just 4 percent of people in the bottom 20 percent. Only 2 percent of those in the highest tier dropped out of high school, but a fifth of the lowest income group failed to get a diploma. In 1993, median income of households headed by someone with a professional degree was $87,666. It drops to $51,480 for an undergraduate degree, $28,700 for a high school diploma and $16,067 for dropouts. Get a job. Households in the top income quintile have, on average, 2.1 workers, compared with only 0.6 for the bottom fifth. Among the nonworking poor, only 13 percent say they are unable to find a job. Work full-time, all year round. In the lowest fifth of income earners, 84 percent worked part time, worked less than half the year or did not work at all. Four-fifths of the top bracket worked 50 or more weeks of the year. Only 7 percent of part-time workers say they are looking for full- time work and unable to find it. Save money. In the top income-earning quintile, median assets of households, excluding home equity, are $45,392. The bottom 20 percent has just $949. Not surprisingly, income from assets for the first group is 30 times what it is for the second. Savings can make a big difference, especially for retirement. For individuals 65 and older in the bottom quintile, 83 percent of income comes from Social Security and only 9 percent from savings. In the top bracket, earnings on savings account for 54 percent of income and Social Security for only 20 percent. Form a family. Only 7 percent of the top fifth of income earners live in a "nonfamily" household. In the bottom fifth, 37 percent do. People can live more cheaply together than they can apart. Be willing to move. The unemployment rate in McAllen, Texas, is 17.5 percent, whereas in Austin it is 3.5 percent. Wages can vary substantially, too, across regions. Geographical mobility is one way to close the income gap. Be willing to retrain. Average hourly wages for computer programmers are $20.64, whereas for textile workers they are only $9.51. Jobs come and go as the economy evolves, often requiring that workers learn new skills to keep up with economic changes. Get a computer. Workers who know how to operate a computer earn an average of 15 percent more than those who don't-and that's for doing the same job. The machine makes them more productive. Stick to it. Average income tends to rise quickly in life as workers gain work experience and knowledge. Households headed by someone under age 25 average $15,197 a year in income. Average income more than doubles to $33,124 for 25- to 34-year-olds. For those 35 to 44, the figure jumps to $43,923. It takes time for learning, hard work and saving to bear fruit. Little on this list should come as a surprise. Taken as a whole, it's what most Americans have been told since they were kids—by society, by their parents, by their teachers. |
Exhibit 10 |
Exhibit 11A Consuming InterestThe rich and the poor live differently, no doubt about that. The gap, however, narrows quite a bit if we look at consumption rather than income. The table below gives details of how much an average U.S. household spent in 1993. Top income households outearned bottom ones by a factor of 13 to 1. When it comes to consumption per person, though, the gap was only 2 to 1. Why? Richer households pay heavy taxes, give more to charity, invest more in education and allocate more to savings. At the other end of the spectrum, poorer families often supplement their consumption through food stamps, unemployment benefits, Aid to Families with Dependent Children and other programs. Workers temporarily laid off often fall back on their savings rather than sharply reduce their living standards. The low-income households, moreover, are smaller and have more free time—a substitute for money. Households in the top quintile average 3.1 persons, 2.1 of whom are working, whereas lower income households have only 1.8 persons, 0.6 of whom are working. What that suggests is that poorer households have more time to meet their needs through home production—cooking, housecleaning, maintenance, child care, yard work, laundry and much more. Though these activities make families better off, they typically aren't included because studies measure consumption in money. When top income earners pay others to perform these services, it gets captured in the statistics on consumption, making them look better off than they are. Even these numbers don't tell the whole story of living standards or consumption. Low-income households can benefit from several noncash programs, such as subsidized housing and school lunches. They also consume a variety of public goods—bus service, schools, roads and parks. |
Exhibit 12Progress and PovertyHistorically, economic growth, not welfare, has been the remedy for poverty. An expanding economy pays its dividends in rising incomes, lower prices and better products, all of which enable families to satisfy their basic needs with smaller and smaller portions of their income. For households in the bottom income quintile, spending on food, clothing and shelter was 45 percent of consumption in 1993, compared with 52 percent two decades earlier, 57 percent in 1950 and 75 percent in 1920. As a result, today's poorest households have more discretionary income than ever before. That helps explain why today's poorer households are more likely than those of a decade ago to own appliances and motor vehicles. Their consumption of these modern-day conveniences even compares favorably with that of all American households as recently as 1971. As consumption patterns show, many of today's poorest households have more than yesterday's, and more, even, than the general population had two decades ago. By today's consumption standards, the majority of Americans were once poor. |
Exhibit 13 |
For the Diaz family, monumental success or failure isn't a once- or twice-in-a-lifetime experience—it's something that can happen every other growing season. "That's just an inherent part of the farming business," says Eddie Diaz, a first-generation American. "My father taught my brothers and sisters and me that to succeed in a land of opportunity, you've got to create opportunities for success where others might only see a chance to fail." In 1978, the Diaz family had to do just that, after poor market conditions forced them out of the cotton- and sorghum-growing business they had been in for more than a decade. Enter chili peppers, a crop that does extremely well in southeastern New Mexico but one the Diaz family had never grown before. Initially successful because of the increasing popularity of Mexican food, the family soon realized they were losing too much money to middlemen. That's when the family took another step that many considered too risky and launched New Mexico Chili Products, a company that processes and distributes dehydrated chilies directly to its customers. Going from processing 200,000 pounds a year when they started in 1992 to 4.5 million pounds today, the Diaz family nonetheless knows they can't rest on any laurels. "You can't dream the American Dream," says Diaz. "You've got to live it."
In 1986, Ron Jones found himself without a full-time job for the first time in his professional life, courtesy of middle-management downsizing at a major oil company. Like thousands of others across corporate America, he was left with a wealth of management experience but nothing to manage. When he was 13, Jones had started working evenings and weekends for his uncle in the commercial cleaning business, a job he kept until the oil company transferred him from Oklahoma to Massachusetts in 1983. So when "early retirement" forced him back into the job market, Jones decided to parlay the part-time work he'd done for his uncle into full-time work for himself, and he and his wife moved to Dallas to start Handy Andy Janitorial. What began as a two-person company earning $32 a month is today a 190-person company servicing 35 office buildings a week. "I grew up in a family where you worked hard," says Jones. "When my wife, Pam, and I started the company out of a spare room in our home, we used to wake up every morning around 7 o'clock to start calling on prospective clients, and we wouldn't get to sleep until after we finished cleaning buildings around 3 o'clock the next morning....I guess it goes back to what my uncle used to tell me all the time when I was growing up: if you want your prayers answered, get off your knees and hustle."
Liz Coker grew up poor on a little farm in the foothills of Tennessee. At 5 years old, she was milking cows and helping her father in the cotton and tobacco fields. "We were dirt poor, but then so were all of our neighbors," she recalls. "I didn't get my first store-bought dress until I was 14." By the time she was 15, Coker had quit school and gotten married. Four years later, she was a single mother working in a print shop in Dallas. She eventually landed a job at Texas Instruments, working on the production line during the day while waiting tables at night and on the weekends. In 1963, she became TI's first female engineering technician. Twelve years later, Coker left to join a start-up semiconductor company in California. Dissatisfied with how employees were being treated, she decided it was finally time to live her dream—to start her own company. After taking out a second mortgage, Coker persuaded investors to lend her $70,000 to start Minco Technology Labs, a company that processes and tests computer chips. "All the experts said the company wouldn't make it, but I didn't know any better," she says. The first full year of operation, the company did $3 million worth of business. This year, Coker expects to earn $16 million. "I never thought of failing," says Coker. "The way to make it in America is to roll up your sleeves and get to work."
When Hai Minh Huynh was 20, he and his family were imprisoned for eight months in Vietnam. His only crime was that he was not a communist. "Every day I would see young men, strong and healthy when they arrived, die from starvation," Huynh says. "We had to eat grass, roots, tree bark—anything that moved—to stay alive." When he was finally released, Huynh paid fishermen to help his family and him flee Vietnam. For seven months, they lived in a refugee camp until they received word that they were welcome in the United States. With the little money they had saved, Huynh and his wife opened Fulton Seafood in Houston, even though they knew nothing about the seafood business. "I bought a little dock in Louisiana and would buy from the Vietnamese fishermen there," he says, "while my wife ran the store in Houston. We had to live apart for seven years." In the beginning, things were tough—they had no customers, and Huynh's wife, who had no formal schooling and had been a street peddler since she was 13, couldn't speak English. But they believed in the American Dream—that if you work hard, you will make it. Today, Huynh's company is the largest seafood distributorship in Houston. "We love this country—it is the land of hope," Huynh says. "If you work hard in America, you will get rewarded."
Phil Hagans was a "street-rough" teenager from one of the poorest areas of Houston when he got his first job flipping burgers for minimum wage at a McDonald's restaurant. Today, Hagans is a 40-year-old entrepreneur who owns two McDonald's franchises on Houston's northeast side. He plans to open a third this year. The success he now enjoys didn't come easy for Hagans, who left his two-room Houston home at 16 because of domestic problems. A promising athlete, he attended the University of Oklahoma on a football scholarship but had to quit school after injuries ended his football career. He was just 19 when he came back home, broke and with dismal prospects of finding a job. That's when he decided to return to McDonald's, where he worked for $1.60 an hour. Six months later, Hagans was promoted to the McDonald's management training program, where he managed various restaurants around town. In 1991, Hagans bought his first franchise with $35,000 he had saved. How does Hagans account for his success? "A positive attitude is everything," he says with a broad smile. "I tell kids every day that the only difference between a stepping stone and a stumbling block is how high you lift your knees."
When Patricia Pliego Stout tried to get her travel agency off the ground, she ran into some major roadblocks. "I couldn't get a loan or find anyone who would lease me office space," she says. "I had three strikes against me—I was single, Hispanic and female." But Stout, who is originally from Mexico City, refused to give up. Pouring her life's savings into the venture, she worked nights and weekends, handling every aspect of the business herself. "I couldn't even afford to pay for a courier, so I would personally deliver airline tickets to all my clients before and after work." Today, Alamo Travel & Tours is one of the largest agencies in San Antonio, with Stout establishing herself in the community as a successful entrepreneur eager to help other women interested in operating a small business. In 1992, she was named the Hispanic Chamber of Commerce's "Small Businesswoman of the Year." "I have had to struggle alone as a woman in business for many years," she says. "I was raised in a culture in which women were expected to be wives and mothers—not to have a career outside of the family. My greatest desire is to be a role model for other women who may be trying to establish themselves in the business world." For Stout, America is still the Land of Opportunity. "This is the most incredible country in the world. If anybody has the desire to succeed, they can."
Todd Burns was expecting to join his father in the oil business after he finished college in the early 1980s. The oil bust and a devastating bankruptcy that left his father with practically nothing quickly put an end to those plans. Instead, Burns found himself leaving college a year early so he could work nights at a freight shipping company and complete his education at a local school. Two and a half years later, Burns finally got his chance to get into the oil business—albeit not the one he originally thought he'd be in—when he heard from the man who owned the oil-change shop where Burns had worked as a teenager. The man told Burns he'd sell out for $15,000—about $15,000 more than Burns had at the time. Unable to get a loan, but not wanting to pass on the opportunity, Burns and his wife took out a second mortgage. That was in 1987, when Burns was 25. Last year, he opened his sixth Time-It Lube location and was offered $2 million for the company. Along the way, he had to refinance his home and car for operating capital and pay to repair 80,000 gallons worth of flood damage to his second store. "I didn't know what else to do but keep going," says Burns. "My wife and kids were counting on me, and there was no way I could let them down. To make it, you sometimes just have to take a leap of faith and then work as hard as you can."
"By Our Own Bootstraps: Economic Opportunity & the Dynamics of Income Distribution" was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by W. Michael Cox, vice president and economic advisor, Federal Reserve Bank of Dallas.
Battalio, Raymond C., John H. Kagel, and Morgan O. Reynolds, "Income Distribution in Two Experimental Economies," Journal of Political Economy 85, 1977, 1259–1271.
Browning, Edgar K., and Jacquelene M. Browning, Public Finance and the Price System (New York: Macmillan, 1987), Chapter 8.
Eller, T. J., and Wallace Fraser, Asset Ownership of Households: 1993, U.S. Bureau of the Census, Current Population Reports, Series P70-47 (Washington, D.C.: Government Printing Office, 1995).
Elliot, Alan C., A Daily Dose of the American Dream: Business Success Stories (San Francisco: Saybrook, 1988).
Energy Information Administration, Residential Energy Consumption Survey: Housing Characteristics (Washington, D.C.: Government Printing Office, various issues).
Forbes, "Vision's the Thing," Forbes 400, October 17, 1994.
Heritage Foundation, "How Poor Are America's Poor?" Backgrounder, September 21, 1990.
Hodge, Robert W., and Steven Lagerfeld, "The Politics of Opportunity," Social Mobility in America, Winter 1987.
Hubbard, R. Glenn, James R. Nunns, and William C. Randolph, "Household Income Mobility During the 1980s: A Statistical Assessment Based on Tax Return Data," U.S. Department of the Treasury, Office of Tax Analysis, unpublished paper.
"Income Mobility and Economic Opportunity," report prepared for U.S. Rep. Richard K. Armey, June 1992.
Institute for Social Research, A Panel Study of Income Dynamics: Procedures and Tape Codes (Ann Arbor: University of Michigan, 1989).
Jacobs, Eva, and Stephanie Shipp, "How Family Spending Has Changed in the U.S.," Monthly Labor Review, Bureau of Labor Statistics, March 1990.
Mellor, Earl, A Profile of the Working Poor, 1992, U.S. Department of Labor, Bureau of Labor Statistics, Report 847 (Washington, D.C.: Government Printing Office, March 1994).
Ryscavage, Paul, "A Surge in Growing Income Inequality?" Monthly Labor Review, Bureau of Labor Statistics, August 1995.
Sawhill, Isabel V., and Mark Condon, "Is U.S. Income Inequality Really Growing? Sorting Out the Fairness Question," Policy Bites, Urban Institute, June 1992.
Schiller, Bradley, "Who Are the Working Poor?" Public Interest, Spring 1994.
Shea, Martina, Dynamics of Economic Well-Being: Poverty, 1991 to 1993, U.S. Bureau of the Census, Current Population Reports, P70-46 (Washington, D.C.: Government Printing Office, 1995).
Short, Kathleen, and Martina Shea, Beyond Poverty: Extended Measures of Well-Being: 1992, U.S. Bureau of the Census, Current Population Reports, Series P70-50RV (Washington, D.C.: Government Printing Office, November 1995).
U.S. Bureau of the Census, Statistical Abstract of the United States (Washington, D.C.: Government Printing Office, various years); "Age: Persons 15 Years Old and Over, by Median and Mean Income, and Sex: 1947 to 1993," unpublished data; "Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, by Race and Hispanic Origin of Household: 1967 to 1994," unpublished data; Current Population Reports, Series P60-185, Poverty in the United States: 1992 (Washington, D.C.: Government Printing Office, 1993); Current Population Reports, Series P60-186RD, Measuring the Effect of Benefits and Taxes on Income and Poverty: 1992 (Washington, D.C.: Government Printing Office, 1993); Current Population Reports, Series P60-183, Studies in the Distribution of Income (Washington, D.C.: Government Printing Office, 1992) and Current Population Reports, Series P-60, no. 159, Money Income of Households, Families, and Persons in the United States: 1986 (Washington, D.C.: Government Printing Office, 1988).
U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, vol. 42 (Washington, D.C.: Government Printing Office, November 1995); Consumer Expenditure Survey, 1992–93, Bulletin 2462 (Washington, D.C.: Government Printing Office, September 1995); Consumer Expenditures in 1993, Report 885 (Washington, D.C.: Government Printing Office, December 1994) and Consumer Expenditure Survey Series: Interview Survey, 1972-73, Bureau of Labor Statistics, Bulletin 1985 (Washington, D.C.: Government Printing Office, August 1978).
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Exhibits 1 and 2
U.S. Census Bureau ("Share of Aggregate Income
Received by Each Fifth and Top 5 Percent of Households").
Exhibits 4, 5, 6 and 8
Institute for Social
Research .
Exhibit 7
U.S. Department of
the Treasury, Office of Tax Analysis.
Exhibit 10
U.S. Census Bureau
("Age: Persons 15 Years Old and Over").
Exhibit 11
U.S. Department of
Labor, Bureau of Labor Statistics (Consumer Expenditures
Survey).
Exhibit 12
Hourly Earnings
Eller and Fraser.
Exhibit 13
Forbes.
The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States. Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve System and function as the nation's central bank. The System's basic purpose is to provide a flow of money and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks supervise banks and bank holding companies and provide certain financial services to the banking industry, the federal government and the public.
Since 1914, the Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District. The Eleventh District encompasses 350,000 square miles and comprises the state of Texas, northern Louisiana and southern New Mexico. The three branch offices of the Federal Reserve Bank of Dallas are in El Paso, Houston and San Antonio.
Federal Reserve Bank of
Dallas
2200 North Pearl Street
Dallas, Texas 75201
(214) 922-6000
El Paso Branch
301 East Main Street
El Paso, Texas 79901
(915) 544-4730
Houston Branch
1701 San Jacinto Street
Houston, Texas 77002
(713) 659-4433
San Antonio Branch
126 East Nueva Street
San Antonio, Texas 78204
(210) 978-1200
That
good-looking fellow in the picture below
is me, standing in front of my family home
in June 1949. My only memory of that house
is returning from school one day and discovering
that it was missing. I had forgotten that
it was to be moved that day about a quarter-mile
up the road. Once it was relocated, my dad
added a couple more rooms to it. A few years
later, when his income permitted, he expanded
the other side of the house.