Why the 20%, and not the 1% are the real problem

Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do about It. By Richard Reeves. Brookings Institution Press; 196 pages; $24.

WHICH of America’s social fault lines is most dangerous? Race remains as wide a rift as ever. Supporters of Bernie Sanders seethe at the richest 1%. Donald Trump won office exploiting the cultural chasm between an urban, cosmopolitan America and the rest. But if America’s woes are rooted in the inaccessibility of the American dream, the increasingly impenetrable barrier around those who manage to achieve it is the place to probe.

That is where Richard Reeves, a scholar at the Brookings Institution, a think-tank, aims his fire in “Dream Hoarders”: at America’s richest fifth, its upper middle class. Having grabbed their piece of prosperity, the upper middle class are fighting like hell to keep it. They—which is to say you, in all probability—are the problem.

Mr Reeves, who is British and recently emigrated to America, is perhaps better positioned than most to recognise class barriers for what they are. Whereas worry over inequality commonly focuses on eye-popping growth in incomes among the very rich, he notes that it is this top 20% as a whole which has pulled away. Between 1979 and 2013, average incomes for the bottom 80% of American households rose by 42% (adjusted for price changes). By contrast, those of the next richest 19% rose by 70%, and of the top 1% by 192%. This upper middle class stands apart from the rest of America in a number of ways: in terms of wealth and incomes, in educational attainment—perhaps the most salient of status markers—and broader health.

The irony of America’s class system is its foundation in a culture of meritocracy. The upper middle class believe they deserve their good fortune. Its members are well-educated and hard-working, prudent savers and attentive parents. Yet meritocracy ultimately undermines equality of opportunity because the successful are best placed to pass on their high status. They hand on good genes, rear their children in homes rich in human capital, and provide the best of every educational opportunity.

It is hard to fault the well-off for nurturing their children, but efforts to protect their status amount to opportunity hoarding. The upper middle class fight to restrict house building in their well-groomed neighbourhoods, thus making cities unaffordable for most Americans. They lobby for tax benefits for higher education and home ownership, which disproportionately benefit the upper middle class; Mr Reeves cites figures from the Congressional Budget Office, which show that the top 20% of American households receive tax benefits worth nearly $450bn; benefits for the bottom 40% are roughly a third of that. The 20% arm-twist elite universities into accepting their children, and draw on their network of successful friends and colleagues to place their offspring in the desirable internships and jobs that are the first rung on the ladder to success.

The result, Mr Reeves argues, is a chasm between the upper middle class and the bottom 80% of households, which makes a mockery of America’s vision of itself as a land of opportunity. More than 40% of the children of the wealthiest 20% of households will themselves end up among the wealthiest 20%. And nearly 50% of those born to fathers who are among the best educated 20% will themselves end up among the best educated 20%. This gets to the brutal heart of Mr Reeves’s argument. In his fourth chapter he turns to the camera, so to speak, to address his readers directly, saying: for American society to work as it should, your children, some of them anyway, must be downwardly mobile. Those who consider themselves exemplars of American achievement (and he includes himself among the offenders) are in fact economic villains.

It is a stinging point, and well delivered. “Dream Hoarders” is a slim and engaging book which can be read in an afternoon, but whose message lingers for longer. But it is hardly the final word on American inequality. It is not quite right to lump the top 1% in with the rest of the best-off quintile. The top 1% has done better than the top 20% as a whole (as Mr Reeves acknowledges), the top 0.1% better still, and so on. Since around 2000 the incomes of the upper middle class, excluding the top 1%, have not grown by much, and the income premium earned by those with university degrees has plateaued. Rising inequality resembles the sort described by Thomas Piketty rather than Mr Reeves, in which the concentration of wealth among a small group of plutocrats squeezes the upper middle class: the patrimonial middle class whose prosperity gives them a crucial stake in political stability.

That, in turn, may help explain why the upper middle class is so resistant to rolling back privileges. Many of the mechanisms through which the protected class defends itself are sources of a sense of precarity. The value added by an Ivy League university relative to a high-quality public university may be small, but desperate upper-middle-class families may feel they have to find the resources to pay for the more expensive option. High house prices in prosperous cities shut out those outside the protected class—and simultaneously add to the pressure on those attempting to stay on the rich side of the great divide.

Yet among Mr Reeves’s most striking findings about relative intergenerational mobility is that it seems not to change over time. It is not the case, in other words, that the children of the poor once had a good shot at joining the ranks of the rich, but no longer do. The protections erected by the upper middle class mostly raise the share of income captured by the protected class, at the cost of both a smaller share for others and less growth overall. That does not mean that Mr Reeves’s proposals to ameliorate the problem are unwelcome. Opening up new housing construction, ending regressive tax subsidies for the rich and investing in better teachers for the poor would improve both the size and distribution of economic gains in society. “Dream Hoarders” implies that lower inequality would be valuable whether or not mobility changes. The great divide between rich and poor creates an incentive to work hard, but also to reinforce the “glass floor” keeping the well-off in comfort. Its most controversial conclusion is that dulling those incentives could be just the thing a divided society needs.