Poor little rich folks

Kevin Drum wants to know how it can be that 10% of people who make more than $240,000 per year – about 4x the median household income – can be reporting that they don’t have the money to buy the things they need, and 37% say they’re cutting back financially.

One obvious answer is that a bunch of those high incomes are being earned in places such as New York and San Francisco, where housing is heartbreakingly expensive. (I’m doing just fine, thanks, but then I’m single.) Add some private-school or college tuition to that outrageous rent or mortgage payment, and subtract off income taxes and payments on (in some cases) six-figure student-loan debt, and you don’t have to invoke bad money management to explain that some of those folks feel squeezed.

One way to deal with the squeeze, as Matt Yglesias keeps reminding us, would be to get rid of the zoning rules that artificially boost the cost of housing in those high-income places. Another would be to reinvest in public schools, and especially in public universities, to get rid of some of that tuition and student-debt burden.

But the basic fact, as some of Kevin’s commenters note, is that people can spend almost any income level, both because they need to keep up with one another’s spending patterns and because they acclimate psychologically to whatever standard of living they’re accustomed to, so that a consumption level that seemed like luxury five years ago seems like a necessity today. All of this is laid out in detail in Robert Frank’s Luxury Fever, a book that looks sharper and more prophetic with each passing year; once you’ve read it, what surprises and puzzles Kevin will no longer surprise or puzzle you.

The strong implication of Frank’s analysis is that increasing rich people’s private incomes is very much a zero-sum game, and that all of us prosperous types would benefit from higher marginal taxes on our own incomes, as long as those taxes fell equally hard on the people we compete with for status and, especially, housing. As a country, we could use that money not only to relieve the much greater financial pressure felt lower down the income distribution, but also to buy public goods and publicly-provided services – environmental protection, for example – that would genuinely enrich rich folks’ lives in a way that the game of competitive consumption can’t.

Footnote And whether you’re rich or poor, it’s nice to have money, so run out and spend some of yours right now on Harold Pollack’s Index Card, the best guide ever written to common-sense money management.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

7 thoughts on “Poor little rich folks”

  1. Having grown up with some relatives earning that amount of money, I could totally see how some of them would have money stresses – I've seen it first hand. You buy the bigger house, the new cars, the expensive week long sports camp for one of the kids, private school for the other at the most expensive private school in the state, and so forth. It all adds up to a lot of expenses and debt, leaving you really vulnerable to downturns in income.

    And of course, if it's 10% of the upper middle class/affluent, then that group could also be the group with chronic medical issues that are burning a hole in their pockets.

  2. It's always nice to think that others would actually benefit from your taking what's their's away from them, and spending it on what you want instead. Sooths the conscience wonderfully, doesn't it?

  3. Relaxing zoning restrictions might (*might*) make a difference for the merely well-off, but it's unlikely to do anything for the rich because — as you point out — housing is one of the positional goods, so it's basically about what the market will bear.

    But let's do a back of the envelope on what some of those numbers might actually be, to get a better sense for things. Say a couple in their 40s making $300K with a couple of kids in college but employer-paid health coverage.

    Social security taxes: $10K
    Federal taxes: $30-60K (more if bad planning)
    Housing (including real estate taxes): $50-100K (for a house costing $500K – 1M, give or take)
    College: $40-100K (perhaps borrowed or saved for, but I'm ignoring student loan payments, so likely a wash)
    cars: $10-20K (two leased plus a beater for one of the kids, gas, maintenance).

    That gets you to $290K at the high end before food, clothing, homeowner's insurance, vacations, hobbies, furniture, medical out-of-pocket, bandwidth, or any other odds and ends. And yeah, obviously these churls could cut back.

    But. I'm leaving out another crucial item: savings. If they want to maintain their lifestyle after retiring, these folks need to tuck away $30-50K a year (more if they don't trust their house as a source of funds when it's needed, or if they rent, also more if they're pessimistic about investment returns when they need the money). And if they want to be secure against the likelihood that one or both will wake up without a job because of a decision made by someone in an office hundreds or thousands of miles away, they probably need a couple hundred grand in the bank just in case.

    This is the world that the "greed is good" folks have created, where even the merely rich are constantly looking over their shoulders.

  4. These figures never seem to distinguish whether the households are single or two earners. When I was a child my mother did not have an outside job but she cleaned and cooked a lot better than I do and she maintained neighborhood contacts way, way more than I do. When I started my double-earner life, I fully realized that I would be missing some things that my mother had done but I had thought we would be lots richer, like the kids in my school whose families had beach cottages. I also thought that I would achieve my father's depression era dream of being able, if unhappy, to tell any boss to "go to hell".

    At the start, this sort of worked out, our first real-estate purchase, a medium size apartment, cost around the recommended four times either one of our salaries. Then the real-estate prices exploded – when we bought a house it was four times the price of our combined salaries. I stayed in a very boring job so we could handle the mortgage payments.

    My theory is that the prices went from what one earner could afford to what two earners could afford.

  5. I feel like the blogosphere had this discussion about 4 years ago when some Henderson character who's a professor in Chicago posted how he and his (doctor) wife could barely make ends meet on ~$250,000 a year.

  6. Housing and college costs can decrease a huge amount if that upper 10% stops bidding them up. Really, that's true for price compression that would happen for the top 25% or so as well. Pain in the short term, of course, but adjustment over time. Cars could shrink. And so on. The wealthy would still have more stuff, but not to that scale.

    I'm blown away that 10% of US residents earn over $250,000.

    1. You should really be blown away that the rest of US earners make so much less. When I was starting out, 35 years ago, I made a perfectly livable $20K as a cub reporter — about the same as the administrative assistants. More-experienced hands at the same place made $30K, and journalists at fancy papers could expect $50K and up. Teachers made similar numbers, as did auto workers, police officers and so forth. The equivalent numbers adjusted for inflation would be $50K, $75K and $125K. At which all the journalists reading this can laugh heartily. Real GDP per capita and national income per capita are up, so a household income of $250K for two earners in their peak years would not seem so unusual if we had anything like previous generations' income distribution.

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