The American Dream Still Exists–If You’re Smart Enough

From Freakanomics Radio: Is the American Dream Really Dead?

It depends how you define it and for whom. The podcast defines the ‘American Dream’ in terms of upward mobility, or the percentage of people born in the bottom fifth of income who advance to the top 20%. Because the size of each bracket is always fixed at 20%, the mobility rate (going from the lowest bracket to the highest) is always between 0-20%. San Francisco and San Jose have higher levels of upward mobility (13%) than Atlanta (5%). The main guest on the podcast, Stanford professor of economics Raj Chetty, argues that environmental factors, specifically the neighborhood a child grows up in an early age (before the age of 9), plays a major role, and that children in who grow up in areas with a lot of ‘social capital’ have higher rates of upward mobility.

Predictably, the podcast doesn’t mention IQ or how some groups may be inherently smarter than others. So does that mean we can discard HBD? I disagree. On an individual basis, all else being equal, smarter people will have a higher likelihood of upward mobility. As discussed in earlier posts, the US economy is becoming increasingly bifurcated and deterministic, with biological factors such as IQ playing an increasingly important role in determining who succeeds (or has the most potential to succeed) or fails, and such determination is made very early in life.

Kids who are ‘wired for success‘can easily learn high-paying skills such as coding. According to an immensely popular Reddit AMA, one such individual taught himself a fairly difficult programming language in under a year using self-help books, upon which he developed a complicated app, making himself and his company presumably a lot of money. His story is the epitome of the American dream – to start from nothing (as he did) and then become successful in a relatively short period of time through one’s own efforts and gifts.

Also, the fact the AMA was so hugely popular, getting over 40,000 votes and 4,000 comments, is further evidence we’re in the era of the ‘STEM celebrity‘, which I wrote about in 2014 and 2015, and is another example this blog correctly predicting and observing nascent social and cultural trends.

For the high IQ, they are on what appears to be a permanent plateau of abundance, for which the American Dream is alive and well. Obviously, they still have to work to attain it, but as the Reddit AMA above shows, success comes much faster and easier than for most, and the payoffs can be huge (as the meteoric stock prices and private valuations of websites and apps such as Uber, WhatsApp, Instagram, Amazon, Facebook, Google, and Twitter show). Never before in the history of the world has there been a better time to be smart and rich. But for those who make up the ‘fat middle’ of the Bell Curve, not so much. I believe the sun has set on the American Dream for those people.

This pessimism has to do with how the US economy has evolved, but also the winner-take-all nature of post-2008 American capitalism, in which there are too many losers and few winners, the latter which keep growing by taking advantage of cheap borrowing costs and globalization. Entrepreneurs of average IQ tend to start businesses that deal with tangible products–restaurants, grocery stores, clothing stores, and auto repair shops–but such businesses also have high start-up costs because a lot of space and labor is required. But since the 80′s, overhead costs (rent, insurance, legal, advertising, etc.) have surged relative to inflation, and since 2008 credit has become more scarce because banks are reluctant to lend, increasing the failure rate for businesses that have high initial capital requirements.

The technology industry, especially coding, is largely insulated from these trends because the start-up costs are much lower: you don’t need many employees or a lot of physical space to create an app or a website. A team of three or so people in a singe bedroom or garage can code an app potentially worth millions or even billions of dollars should it go viral. Getting that kind of growth and ROI with a brick and mortar business is unheard of. All this growth in the technology and financial sectors over the past few decades has made the surrounding west and east coast real estate among the wealthiest in the nation:

… 70 of the top 100 ZIP codes nationwide are in California and 20 are in New York state. The remaining 10 include two each in Connecticut, Massachusetts and New Jersey and one each in Florida, Maryland, Nevada and Washington state.

On overage, tech jobs not only pay more than construction and other ‘blue collar’ jobs and sectors, but high-IQ jobs also tend to be more stable. In the 80′ and 90′s, US auto workers were hit hard by foreign imports, the shuttering of domestic auto factories, and the demise of auto unions. Hundreds of thousands of jobs were lost, to never return, and the workers that remained faced lower pay. Then in 2006-2008, the housing market burst, again hurting blue collar workers, in the construction industry, who tend to be of average IQ. Those jobs also didn’t recover even though housing prices have rebounded, because too many homes were already built in the 2003-2007 boom. And in 2014-2015, the energy market imploded as oil fell from as high as $110 in 2013 to as low as $35 in 2016, and as many as a million workers in various energy sectors and industries lost their jobs, due to factory closures. Again, those jobs haven’t returned. The bursting of the the bubble in 2000 hurt tech jobs to some degree, but it was much less longstanding than the prior examples.

Despite record high stock prices and earnings, most of the job growth since 2008 has been in the low-paying service sector. High-IQ jobs that require advanced degrees fared the best and have seen strong wage growth, but middle-class jobs that in the past only required a high school diploma were hollowed out. And then when you add all the student loan debt, compounded by weak job prospects, and it’s understandable why so few are celebrating the DJIA recently crossing the 20,000-point milestone.

It may not seem fair, but that’s the economy we have. For those who are smart, the American Dream dream is still possible. For everyone else, maybe not.