Generational Wealth and Upward Mobility (October 24, 2012)
Advanced democracies have lost upward mobility.
Both capitalism and democracy promise the opportunity for upward mobility. Capitalism offers upward mobility to anyone with a profitable idea or productive skillset and work ethic. Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement.
Crony capitalism offers wealth to the class that already possesses it. Feudalism bestows "rights" to wealth to a favored few. In a way, upward mobility is a real-world test of a nation's economic and social order: if upward mobility exits in name only, then that nation is neither capitalist nor democratic. Stripped of propaganda and misleading labels, it is a feudal society or a crony-capitalist economy masquerading as a capitalist democracy.
Japan is an interesting case study. Some readers of last week's series on Japan noted that Japan was still very wealthy and life was good there. Indeed, some commentators have made the case that Japan has purposefully indebted itself to mask the wealth generated by its export machine: The Myth That Japan is Broke. (via Mike H.)
Here is last week's series:
Narcissism, Consumerism and the End of Growth
My focus was the consequences of economic stagnation, not measuring Japan's national wealth, and this raises the issue of upward mobility: Yes, Japan remains very wealthy, but the wealth is concentrated in a specific neofeudal class; Japan's economy has lost the upward mobility of its long 1950-1990 growth phase.
We are blessed to have many young (20s and 30s) Japanese friends, single and married. Though it is not a random selection, it is geographically and socially diverse. In reviewing each friend/couple's education, financial stability, homeownership and the wealth of their parents, I realized every young person (under 40) who owns a house or flat has parents who made the purchase of their education and home financially possible.
Everyone without wealthy parents--and "wealth" means enough income/savings to pay for an entire university education in cash, and then pay 50% or more of their child's home purchase in cash--does not own a home, even those with a college education.
In other words, wealth is being transferred within the class that already earned and accumulated the wealth. It is not being earned by young people. The untidy truth is that they aren't paid enough to buy a home and accumulate wealth for their children.
What nobody in Japan dares discuss is the fact that tens of millions of young "freeters" will never make enough to get married, much less own a home or save enough to educate their children, unless they receive a lump sum of wealth from their parents while they are young enough for it to matter. If their parents don't have enough wealth to matter, then the freeters are doomed to membership in Japan's expanding underclass.
So a nation can claim $3 trillion in offshore assets or whatever wealth metric you choose, but if that nation has lost upward mobility, then the wealth is increasingly concentrated in a neofeudal structure. How "wealthy" do we say a nation is that has lost upward mobility?
Once upward mobility is lost, "social recession" sets in and the social contract frays.
How different is the U.S.? Most people who don't have physicians in their nuclear family or close circle of friends think that an M.D. is the ticket to upward mobility. In many cases, this is an exaggeration. I just received an email from an M.D. who stated that adjusted for inflation, his highest earnings were 30 years ago, in 1981. Others write to tell me that the hundreds of thousands of dollars in student loans that those without wealthy parents must borrow to attend medical school take many years to pay off, even with salaries that most people consider generous.
This is an example drawn from what most assume is the top-level "surefire ladder to wealth." We could look at non-Elite graduates of Ivy League universities (i.e. the non-Elites accepted in the name of diversity) and see how they're doing in terms of wealth accumulation that can be passed down to their kids. Sure, they're "doing well" in most cases, making a comfortable living, but are they making enough to pay off their student loans, own a home that isn't 90% owned by the bank and accumulate enough savings to not only pay their children's education in cash but also help them buy their own home with at least 25% down in cash? If not, then they're not really accumulating wealth that can be transferred, they're simply consuming it.
Correspondent Chris Sullins added transferrable generational wealth to my short list of "what makes someone middle class": Priced Out of the Middle Class (June 28, 2012). How many American households can pay for their children's university education in cash and then fund their purchase of a home?
Here are the eight "threshold" characteristics of membership in the middle class:
1. Meaningful healthcare insurance
2. Significant equity (25%-50%) in a home or other real estate
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, income property, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job
6. Reliable vehicles for each wage-earner
7. Hard assets and cash that can be transferred to the next generation, i.e. generational wealth.
8. Ability to invest in offspring (education, extracurricular enrichment activity, etc.).
How many households meet these criteria? Not many. This is now a list for the upper-middle class, the top 10% who earn in excess of $150,000 a year. But even households with significant incomes and inheritances from their parents are losing items on this list.
What I am seeing, once again anecdotally, is the consumption of family wealth as America "eats its seed corn." Families with savings are "investing" them in $120,000 per child college educations that may not qualify the young person for a job that pays enough to duplicate their parents' purchasing power--or a job at all.
Having lost their corporate job, they're burning $12,000 to $15,000 annually buying their own health insurance.
Having drunk the debt-is-cheap Kool-Aid, they're heavily indebted, and much of their income goes to debt service and taxes.
Families that had significant cash wealth in 2000 are burning through that cash at an alarming rate. By the time the children are all educated and back living at home or in their own apartments, then Mom and Dad have to buy them vehicles, pay their dental bills, etc. because Junior doesn't earn enough to actually support himself.
The wealth that could have been transferred to the next generation has been consumed suporting a "middle class" lifestyle and providing the next generation with what was once the basis for advancement: a university education, healthcare insurance, a reliable vehicle, etc. Now that jobs are hard to find and compensation is low, the next generation still needs the accumulated wealth of the household to get by.
That is not upward mobility, it is downward mobility, on a vast and largely unnoticed
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