What's Happening to the American Dream?

Hey everyone, and welcome back to the blog. Today, we’re gonna have some fun with data.

Before we get started, I should note that I am not a political person, and this piece is not intended to be political. This is merely a thought starter based on data and observations. I don’t have the answers — there are people far more qualified than me for that.

You can also check out my previous posts here and follow me on Twitter!

Let’s hop into it.

Last week I saw a startling statistic: in 2022, a third of US homes were purchased with all cash.

At first glance, this is a good thing, right?

The economy must be doing well, people must have increased cash savings, and they’re probably confident enough in their financial situations that they don’t want to take on debt for a mortgage.

But there’s a problem…

This rise in all cash offers is coupled with a 40-year low in first time home buyers — only 26% of homes purchased in 2022 were by first-time buyers, down from 34% in 2021.

That’s right, more homes were purchased with all cash than by first-time home buyers last year.

What’s going on?

If we dive deeper, we can see that the median age of a first-time buyer in 2022 was 36 years old (up from 33 in 2021) — a staggering increase for just a single year later.

In a neat data visualization tool from the Washington Post, we can explore how all-cash purchases varied across regions.

Take Palm Beach, FL as an extreme example. The median age in Palm Beach is 70 years old, and the median household income is $169k. Here, 76% of homes were purchased with all cash.

Let’s zoom out to the bigger picture, though. The demographic situation in the US radically changing:

• People are delaying marriages

• People are having less babies

• People are delaying when they have those babies

Combine these trends with advances in medicine helping people to live longer, and everything points to one inevitability: an aging population.

As a larger percentage of people grow older, we’re not prepared to fund this aging population with taxes on a shrinking working population.

Looking at the wealth distribution by age brackets, we can see that more wealth is accruing to older people than in the past.

We’re continuing to see the economy lean in favor of people who already have assets — particularly the older generations.

What even is “middle class”?

“Middle class” is mostly a subjective measure. Funny enough, 89% of Americans believe they are “middle class.” Jack Raines wrote a great piece that describes the underlying social dynamic of this phenomenon.

A thriving middle class is a strong sign of upward mobility. If you’re below the middle class, a large middle class indicates that the “next rung on the ladder” is attainable.

But for the sake of this article, we’re going to try to stay objective.

While estimates vary on what middle class is, let’s take the median household net worth as a starting point, which is about $122,000. This tells us an absolute value, but we also want to know the variance.

You may have heard of the Gini coefficient — a method of calculating the evenness of wealth distribution in a system. With this measure, a score of 0 is perfectly equal, while 1 is perfectly unequal.

Of the 35 OECD countries, the US has the 5th highest Gini coefficient (meaning it’s more unequal than 30 of those countries). As a nation who prides itself in being the best, we aren’t doing so hot compared to our developed nation counterparts.

Inequality is also happening within generations

But it’s not just the older wealthy people who are benefitting. This same trend plays out on a smaller scale, within the millennial generation.

Looking at the $122k we mentioned above as the broader middle class net worth threshold, what percentage of millennials would qualify as middle class or above?

Only 20%.

The median net worth of a millennial aged 30-34 is approximately $19,000.

Meanwhile, to be a “top 1%” millennial requires a net worth of $1.37M (that’s 72x the median!).

Compare this to the 65+ population, where the 1% net worth is only 54x the median.

The takeaway? The gap between the top 1% and the median is growing larger for younger generations.

Debt, home ownership, and inheritance

I’d be remiss if I didn’t point out the elephant in the room here: age is a key factor in determining net worth, since young people have more debt and have had less years to benefit from compounding.

However, debt among young people today is higher than it used to be, and the type of debt is different.

Young people’s primary source of debt today is student loans (see increased cost of education). For our parents’ generations, the primary source of debt was a mortgage, which gave them access to one of the greatest wealth builders of the last 50 years — a home.

Ever since World War II, homeownership has been the way of building wealth and the path to the American Dream. Homeownership is also a type of “forced savings” in the form of monthly payments (which is a good thing for most people).

So what happens when we have ballooning costs of education, rising housing prices, and less new home buyers?

A smaller subset of people are getting ahead much faster. We can break this down into 4 categories:

1. Inheritance

2. Student Loans

3. Property Ownership

4. Income

The Baby Boomer generation has seen its wealth explode in recent years, and some fortunate millennials stand to inherit a total of around $70 trillion when it’s all said and done. Exacerbating the problem is that millennials already in the top 10% will inherit twice as much as the rest.

In addition to inheritance, student loans and property ownership are factors that are highly impacted by the situation we were born into. Chances are, millennials born into wealthy families have no student loans, already own property, and stand to inherit a lot in the future.

Put this all together with rising home prices and education costs, and millennials who are already rich could end up being the wealthiest group of people America has ever seen.

The great thing about America

The great thing about America is that we reward talent and exceptionalism better than any other country in the world.

But in the past, you didn’t have to be exceptional. You had to be good, hard-working, and a decent citizen; but 50 years ago, the ability to buy a house in your 20s was common, no matter what you did for a living or how gifted you were.

What’s changed today?

The system (on aggregate) is taking advantage of young people who are more dependent on current income. Minimum wage is still $7.25 an hour (and we should note that this would be closer to $25 had it kept up with inflation).

But it’s not just people on the lower end of the income scale that are getting screwed, it’s the people in the middle as well, who are more dependent on income instead of assets. The doctors, lawyers, accountants, and others who we traditionally would have considered to be well-off (middle class), rely on income more than capital appreciation. Unfortunately, income (especially for those earning in the $100-500k range) is taxed at much higher rates than capital gains (i.e. the value of someone’s stock increasing).

This group described, that is more dependent on income, is part of a shrinking middle class, and it’s becoming harder for them to move up to the “next rung of the economic ladder,” as the rules favoring those above them essentially shut them out. But let’s leave the tax discussion for another day.

More than anything else, today’s youth need quality education, healthcare, and housing.

And the common theme among each of these: prices have skyrocketed recently.

But why?

People who already have assets want to preserve those assets (and rightfully so!). In education, alumni want less people to get degrees from their schools, because scarcity makes their degrees worth more. In housing, we have a shortage of homes made worse by NIMBYists stamping out supply in order to prop up prices of their homes.

And in full transparency, I don’t blame people for wanting to protect the value of what they own. This is the wise and rational thing to do in a system that allows it, and there’s nothing wrong with avoiding taxes legally.

The question we need to ask ourselves is, “Is this a world we want to live in?”

Today’s graduates enter a system that creates more “haves” and more “have nots” than their parent’s generations. The cost of living is rising faster than median wages — and if you don’t own assets, you’re falling behind.

Young people are discouraged — just look across social media and you’ll find people who have “given up” on capitalism. Civil unrest is on the rise. More opioid overdoses, suicides, and shootings. Social media only makes the mental health problem worse, as we’re constantly reminded that we’re not doing as well as somebody else (whether it be careers, socially, or physical appearances).

From the looks of it, you’d think the world is in shambles. But this couldn’t be further from the truth. We have enough “doomers” out there complaining about everything they don’t like in the world. It goes both ways — it’s not just the left, and it’s not just young people who are upset. Older generations complaining about “the youths” is a tale as old as time.

In reality, young people of today (in aggregate) are talented, tech-savvy, and driven to make a positive impact in the world. What they’re lacking is the same opportunities. It’s a differentiation between absolute standard of living, and relative standard of living.

In absolute terms, life has never been better (and this fact is overwhelmingly true for the top 10%).

In relative terms, the bottom 90% are really struggling.

And as long as we have a system that disproportionately rewards those who already have means, while depriving those who do not of the same opportunities to earn, this gap in relative standard of living will only grow wider.

America is not about turning the top 10% into billionaires. It’s about giving the bottom 90% a shot at being millionaires.

What can we do?

There is no quick fix, and progress takes time. We need more investments in education, healthcare, and infrastructure.

Our education system is broken, and kids should be learning actually valuable skills that will allow them to add value to society and make living (not just rote memorization and test-taking). More vocational training, more computer programming, and more freshman seats in colleges generally.

We also need to recognize that college is not for everyone, and we need better respect for kids who don’t end up at Ivy League schools or working at bulge bracket investment banks.

Returning to our list of 4 things that most impact young people’s wealth (inheritance, student loans, property ownership, and income), income is the one that we have the most control over.

The best way to get ahead as a young person today is by creating more marketable skills and increasing our surface area of opportunities (which means that a bachelor's degree in gender studies or basket weaving alone isn’t going to cut it).

Increasing our income (starting with education that actually teaches valuable skills) creates more opportunities for savings & investment, which leads to more opportunities for ownership (the path to wealth). This means increasing income, while also living below our means.

We need more affordable healthcare such that individuals aren’t reliant on an employer for it. Less reliance on employers creates a culture of self-sufficiency and equal access to the same opportunities for everyone, regardless of the circumstances we’re were born into.

We need a system that creates better citizens.

In the end, what’s the point of it all?

The economy and productivity are important, but they’re both just a means to and end.

The real goal is living happy & fulfilling lives, racking up experience points and helping others. As we mentioned in a previous article on experience points being the goal in life, if we’re doing it right, we don’t want to leave anything on the table when it’s over. Most of the excess wealth accumulating to those who already have is just more being left on the table that could probably be put to better use.

Every study on happiness boils down to the same thing that’s the number one predictor of fulfillment: the number of deep & meaningful relationships.

I believe in capitalism.

Capitalism has the power to eliminate absolute poverty, but relative poverty will always exist in a meritocratic society — one where we reward people for adding value. Naturally, there will always be a variance in value provided. This is totally fine — we should reward people more for contributing more. The problem arises when the rewards accrue disproportionately to those at the top, shutting out those at the bottom and their descendants of opportunity.

Unfortunately, as we’re starting to see, capitalism needs guard rails to function properly and not self-destruct.

Churchill was probably right, and in a capitalist society, the number of deep & meaningful relationships comes back to economic security.

If we can modify the system such that it creates greater economic security for more people, while retaining the valuable pieces of the capitalist incentive structure, we can get this wonderful country back on track to the core principles that made it so great to begin with.

Hopeful and optimistic,

-Owen

Fresh Finds

This Book Changed My Relationship to Pain (The Ezra Klein Show)

Podcast | 64 minutes

We’ve all heard the saying that goes something like “it’s all in your head.” This episode dives deep into the experience of pain in humans, and why increasingly more people seem to be suffering from chronic pain. We tend to treat pain as a purely biological phenomenon, but Rachel Zoffness argues that it’s also deeply influenced by the mind and social context — which creates implications on how we should treat it. Some interesting fodder for how we think about pain.

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