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This was inspired by a nostalgic trip lead singer Dexter Holland took to his old neighborhood, Garden Grove in Orange County, California. Many people he knew had met tragedy (i.e., car accidents, nervous breakdowns, etc.).
Holland: "You grow up in America, and you're supposed to have a bright future."
The rest of the album explores other, more light-hearted, aspects of life in the United States.
The title is a takeoff on the name of a concert documentary and compilation album released by The Who in 1979 called The Kids Are Alright.
This was featured in the film The Faculty. (thanks, Bertrand - Paris, France)