What it means to be “rich” in America

Every once and a while I do posts on the utter absurdity of almost all data used for analysis of income inequality.  Tyler Cowen links to a perfect example from Kevin Drum:

Via Harrison Jacobs, here’s a recent study showing the trend in income segregation in American neighborhoods. Forty years ago, 65 percent of us lived in middle-income neighborhoods. Today, that number is only 42 percent. The rest of us live either in rich neighborhoods or in poor neighborhoods.

Since the overwhelming majority of Americans self-identify as “middle class,” this puzzled me.  Or I should say that it puzzled me until I discovered Drum’s definition of “rich.”  Rich means a family income of more than 125% of the median family income of a metro area.  Here are the highest and lowest metro median household incomes, and also the 125% cutoff:

San Francisco:  Median income $63,024,  “rich” cutoff:  $78,780

McAllen Texas:  Median income $24,863,  “rich” cutoff:  $31,079.

(BTW, a city about half way down the chart is Buffalo, with a $38,488 median income.)

So a husband and wife who both worked at McDonald’s in McAllen, right at the legal minimum wage, would each make $14,500/year, for a total of $29,000.  If the couple worked another 10% at overtime pay, they’d easily fall into Kevin Drum’s “rich” category.  A whole neighborhood full of these lucky duckies would be a “rich” neighborhood.

At first glance the San Francisco cutoff seems a bit more plausible.  But I challenge Drum or anyone else to go to San Francisco, find a couple who each make $40,000 per year, and convince that couple that they are “rich” compared to the typical San Francisco family.  Here’s my claim.  Imagine a poll was done of all two-income families in San Francisco where the husband and wife (or husband and husband, since this is San Francisco) worked full time and each person made between $40,000 and $50,000 per year.  If the poll asked that group if they were “rich,” I believe it would be the first opinion poll in all of human history with a 100%/0% breakdown.  And guess which answer would get 0%?

My point is not that the changes people talk about in income inequality are not occurring, but rather that the data they use are complete garbage.  And I find it hard to believe that the debate in the media and blogosphere is not in some way impoverished by the utter worthlessness of income data, no matter how much people insist “they are right” even if all the numbers they use don’t show what they claim.  Maybe they are right, but how can we tell?

And these are not just small problems.  Sorry, but if family incomes of $32,000 in McAllen or $48,500 in Buffalo were “rich” we would not have health insurance subsidies for “low income” people earning up to $94,000/year.  I’m not nitpicking here; these numbers are not even in the right ballpark.  The debate should not be whether $32,000 a year is rich, that doesn’t even pass the laugh text.  The debate should be about whether it is more properly called “poor” or “middle class.”  In fact, income is not a good way to characterize families.  I’ve been in the poor, middle class and rich income classes at various times in my life, but in fact I’ve always been either middle or upper middle class in a cultural/socioeconomic sense.

PS.  I’m not trying to pick on Kevin Drum here, he’s a talented blogger and these sorts of errors are made by almost everyone in the blogosphere.


Tags:

 
 
 

49 Responses to “What it means to be “rich” in America”

  1. Gravatar of Ram Ram
    3. November 2013 at 10:33

    I haven’t read the Drum piece, and your points are well taken, but it is possible to imagine economic segregation into relatively wealthy and relatively poor neighborhoods within a region, even if the relatively wealthy in one region would be relatively poor if transported to a different region. Indeed, it seems intuitive to me that this does happen: residents of nearly everywhere can probably identify the “sketchy” neighborhoods in their region, and the “elite” neighborhoods in their region, with most wanting to but not able to live in the elite neighborhoods, yielding a bimodal wealth-geographic distribution. I’m not sure what the implications of this are, and I agree that using household income data is a pretty bad way of sorting this out. It’s an interesting possibility in any case.

  2. Gravatar of Geoff Geoff
    3. November 2013 at 10:49

    It is necessarily arbitrary to define “rich” and “poor” in terms of an objective reference, because value is in fact subjective. Drum is trying to find an objective meaning for concepts that are in fact subjectively determined.

  3. Gravatar of David R. Henderson David R. Henderson
    3. November 2013 at 11:01

    Scott,
    You write, “Rich means a family income of more than 25% of the median family income of a metro area.”
    You misstated it. You should have written:
    “Rich means a family income of more than 25% more than the median family income of a metro area.”

  4. Gravatar of Jon Jon
    3. November 2013 at 11:54

    One place to start would be to levy a consumption tax on homeowners equivalent rent–then roll that tax data into income measures.

  5. Gravatar of Elwailly Elwailly
    3. November 2013 at 11:55

    It seems like you’re arguing with the naming of the categories rather than with the point Drum was making – i.e. the middle category has been in decline for a long time.
    Is your point that unless the problem definition is structured exactly right the problem does not exist?

  6. Gravatar of TravisV TravisV
    3. November 2013 at 13:42

    Interview:

    Michael Woodford Warns “By Blinking [On Taper], [The Fed] Has Made A Negative Reaction More Likely”

    http://www.zerohedge.com/news/2013-11-03/michael-woodford-warns-blinking-taper-fed-has-made-negative-reaction-more-likely

  7. Gravatar of ssumner ssumner
    3. November 2013 at 13:48

    Ram, My hunch is that the income data is usually bell shaped, not bi-modal, but even if I am wrong someone would have to show that, and Drum certainly does not.

    David, Thanks, I corrected it.

    Elwailly, What problem doesn’t exist? The problem of people living in rich and poor areas, or the problem of people living in areas above 125% and below 80% of median income? The second “problem” does exist, but of course it’s not a problem. And the first problem does not exist.

    I’d suggesting looking at my other post on incomes, it’s not just a question of names. We are interested in economic inequality and income inequality is a very poor proxy for economic inequality. For instance, the second poorest city in America (according to income) is Athens, Ohio, which is actually a college town for of white middle class college students.

    It’s absurd to say someone making 110% of median income is in a different class from someone making 130% of median income. Just absurd. So even if his numbers are correct, they tell us nothing of interest. It’s about much more than names.

    It would be slightly interesting if someone could show a bi-modal income distribution. It would be slightly more interesting if someone could show a bimodal consumption distribution. It would be slightly more interesting than that if someone could show an age-adjusted real consumption distribution that is bi-modal.

    I’m asking proponents of the increasing inequality hypothesis to give me data that is not completely worthless. Is that too much to ask? I favor income redistribution, but I’d like to have some data to support my policy preference.

  8. Gravatar of ssumner ssumner
    3. November 2013 at 13:54

    Thanks Travis.

  9. Gravatar of Steve Steve
    3. November 2013 at 14:46

    Unlike Kevin Drum, the original academic paper explained the driver of income segregation:

    “increases in the proportion of the population with a college degree are positively associated with increases in income segregation”

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    3. November 2013 at 15:07

    I wonder if public school monopolies and strict land use regulation might have something to do with the segregation by income?
    http://www.coyoteblog.com/coyote_blog/2013/11/progressives-lamenting-the-effects-of-progressive-policies.html

    But yes, really silly definition of “rich”. KD seems to just mean “flatter Bell curve” but trying to make that sound bad in a catchy way leads him there.

  11. Gravatar of Jim Glass Jim Glass
    3. November 2013 at 15:15

    “…associated with increases in income segregation”

    I hate the use of the word “segregation” in all these arguments. It is bogus rhetoric, that always seems to get a pass.

    “Segregation” — certainly in the context of American social politics — is something that is done to people, whether they like it or not, usually not. African-Americans were segregated into the back of the bus and separate-and-not-equal schools for generations.

    In all these arguments, the use of the word carries powerful connotations of force being used to victimize people.

    But people living in communities together are *voluntarily associating*. College grads like to live with college grads, early-generation immigrants from Germany and Italy *like* to live in Germantown and Little Italy, people with similar incomes and similar social concerns *like* to live with each other, and so on.

    Krugman in one of his geography papers shows that with even *very slight* preferences on the part of people to live with others like them with whom they share common interests and cultures to some degree, given freedom of movement, the unavoidable result is “segregated” communities all over the place, everywhere. It is the result of freedom.

    “increases in the proportion of the population with a college degree are positively associated with increases in the numbers of college grads choosing to live near one another”

    …doesn’t seem like quite the same problem as an “increase in segregated communities”, does it it?

    I say this junk rhetoric is just as bad as the junk data, and should be given no more of a free ride.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. November 2013 at 15:56

    Scott,
    Off topic.

    Yichuan Wang in his most recent Not Quite Noahpinion post:

    “…Furthermore, Fed’s purchases of long term treasuries are supposed to raise long rates, not lower them. Since the long term rate goes up with higher NGDP expectations, then Fed purchases of long term bonds should raise long term rates. And as Michael Darda has repeatedly shown, rates rose during every period of QE…”

    It seems obvious to me, and to many other people, but where are the academic studies confirming that this is true?

    Most highly publicized academic studies on QE seem to come in four flavors: 1) event studies on changes in security yields on the days of announcement (e.g. Krishnamurthy and Vissing-Jorgensen, 2011), 2) panel data studies on flow and stock effects of QE on daily security yields during the programs (e.g. D’Amico and King, 2010), 3) times series studies on the effect of open market operations during normal times (e.g. Hamilton and Wu, 2011) and 4) studies on the macroeconomic effects of QE using major models calibrated to normal times (e.g. Fuhrer and Olivei 2011). In short there’s nothing in the way of empirical studies on the macroeconomic effects of QE, and the underlying assumption of nearly all these studies is that the primary Monetary Transmission Mechanism (MTM) channel is the Traditional Real Interest Rate Channel, which is almost certainly not the case at the zero lower bound (ZLB).

    That’s not to say there are no academic studies confirming what is obvious to the eye. There’s “An Injection of Base Money at Zero Interest Rates: Empirical Evidence from the Japanese Experience 2001-2006” by Yuzo Honda, Yoshihiro Kuroki, and Minoru Tachibana (March 2007):

    http://www2.econ.osaka-u.ac.jp/library/global/dp/0708.pdf

    Figure 3 shows that Honda et al finds the original Japanese QE raised the yields of 5, 7 and 10 year bonds by a statistically significant amount. But to my knowledge this is the only academic study with this result.

    Honda et al is a Vector Autoregression (VAR) study that uses reserve balances as a variable. By my reckoning there are only a dozen VAR studies that use either reserve balances or the monetary base as a variable. Of those, only two focus on a period of time when the policy rate was at the ZLB. (The other study is “Quantitative easing works: Lessons from the unique experience in Japan 2001-2006 by Eric Girardin and Zakaria Moussa (January 2010). Using rather more complicated methods it does not seem to find a statistically significant effect of QE on bond rates.)

    VAR studies on monetary policy used to be quite common in the 1980s and 1990s (e.g. Sims, Bernanke/Blinder, Christiano/Eichenbaum/Evans etc.). One would think with three recent reasonably long zero lower bound episodes with significant amounts of QE (Japan 2001-06, the US 2008-present and the UK 2009-present) that more VAR studies would have been done on these incidents. I’ve estimated a VAR similar to Honda et al for the US over the period since December 2008 using industrial production, the PCEPI, the monetary base and the 10-year T-Note as variables, and find QE increases 10-year T-Note yields by a statistically significant amount, but then our eyes already told us this was the case.

    P.S. I’ve also run Granger causality tests using the Toda and Yamamato technique on the US monetary base since December 2008, and I find the monetary base Granger causes 10-year T-Note yields, the real broad dollar index, the S&P 500, the DJIA, the PCEPI, 5-year inflation expectations using TIPS, commercial bank deposits and commercial bank loans and leases. The impulse responses are all consistent with what theory predicts. With the exception of the 10-year T-Note, these variables are important to the Exchange Rate Channel, the Tobin Q Channel, the Wealth Effects Channel, the Bank Lending Channel, the Balance Sheet Channel, the Unanticipated Price Level Channel and the Household Liquidity Effects Channel of the MTM. So speaking strictly empirically, QE is definitely not a “neutral event”.

  13. Gravatar of benjamin cole benjamin cole
    3. November 2013 at 16:14

    I am surprised there are any poor neighborhoods left in SF…In the past 30 years the poor have been getting pushed out and east of Los Angeles proper…except government-created poor zones (I am not making this up–there is a semi-official downtown homeless zone)..poverty will be absent from L.A. in 20 years…heavy inmigration of Asians and Hispanics displacing the poor and gentrification of many neighborhoods…crime has plummeted…

  14. Gravatar of ssumner ssumner
    3. November 2013 at 17:33

    Mark, You should do the study!

    FWIW, the effect should show up best in event studies. My hunch is that the effect of QE on long rates is pretty small.

    Lorenzo and Jim, Good points.

    Ben, I sort of agree, except it’s too strong a statement to say poverty will be pushed out in 20 years. South LA and parts of the valley will still be poor–but the trend toward gentrification is certainly real, as you say. But LA is a big city.

  15. Gravatar of Benjamin Cole Benjamin Cole
    3. November 2013 at 19:07

    Scott-

    Listen, I was born and raised in Los Angeles. And lived there for most of 58 years. Most recently, I lived a mile north of Dodger Stadium, near the middle of Los Angeles.

    In the late 1970s to mid-1980s I thought maybe L.A. would become Bronx with palm trees. But things changed.

    You think South Central is poor? Hispanization has resulted in huge swaths becoming lower middle class. Street commerce—auto repair shops, markets, clothing stores, hardware stores etc—have revived. An ordain guy like myself can walk around South Central and buy lunch at excellent places (for not much money). The area around USA has changed a lot. The San Fernando Valley never really had large very poor neighborhoods, and still does not.

    Of course, there are pockets of poverty yet. But I said 20 years–land values keep rising. Also, I mean the City of Los Angeles proper. The County is huge, a small nation.

    I hate to sound like a right-wing knee-jerk, but only bad state and local polices keep poverty in the City of L.A.. Job growth is weak as a result, and there are poverty-cult agencies, such as the ones that create “homeless communities” near downtown Los Angeles. Given what has happened to land values near downtown, there would be zero homeless there except for a plethora of agencies that house and feed them. As you probably know traditional urban economics is that that city cores become valuable and poverty pushed to outskirts.

    I did not say poverty has been banished from SoCal. It is being pushed into Bakersfield and Palmdale and east of the city and coast. I think some of it got pushed all the way to LV and Phoenix where living costs are lower. I saw poverty in Phoenix and LV (and outside Dallas) that made me think of Brazil.

  16. Gravatar of Colin Colin
    3. November 2013 at 19:11

    Please excuse me if I am off topic, but is there a percentage other than 125% that you believe accurately portrays rich households?

  17. Gravatar of ssumner ssumner
    3. November 2013 at 19:42

    Ben, Ok, I’ll defer to your expertise. I may move there in a few years, so I hope home prices don’t rise too much in the next 5 years . . .

    Colin, Yes, I’d say more like 1000%. So the median income is around $40,000 and I’d say rich is roughly $400,000 or above. I’d say upper middle class is around $100,000 to $400,000 and middle class is around $40,000 to $100,000 and lower middle class is around $20,000 to $40,000 and poor is below $20,000.

    Keep in mind it varies by family size, or where you live, or what age you are. A family making $25,000 in Newton MA feels poor, for instance. So these are obviously very rough estimates.

  18. Gravatar of Saturos Saturos
    4. November 2013 at 01:15

    Some good links from @noahpinion:
    Schiller vs. Fama on 1987: http://jpkoning.blogspot.ie/2013/10/fama-vs-shiller-on-1987-stock-market.html
    John C. Williams on bubbles: http://www.frbsf.org/economic-research/publications/economic-letter/2013/september/asset-price-bubbles-theory-models/

  19. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. November 2013 at 01:35

    Jim Glass: excellent point. Perhaps we should talk of income segmentation?

  20. Gravatar of philemon philemon
    4. November 2013 at 03:44

    @Lorenzo, Jim Grass

    +1

    I prefer “congregation”. Nasty rulers segregate the ‘undesirable elements’ from the general population in gettos. People who are alike congregate with each other.

  21. Gravatar of J.V. Dubois J.V. Dubois
    4. November 2013 at 03:47

    Jim: You are right. I immediately remembered a neat model from Samuel Bowles’s Microeconomics – and the relevant part is actually accessible via Google Scholar. It is just three pages but he makes a very succint point: http://books.google.sk/books?id=HAiMDU4qv0IC&lpg=PA66&vq=neighborhood&hl=sk&pg=PA66#v=onepage&q&f=false

  22. Gravatar of Negation of Ideology Negation of Ideology
    4. November 2013 at 05:17

    I’ve always thought of rich in terms of ownership of property, especially capital assets. Talking about income is more of a middle class thing. To me,

    Rich = Owns enough that they can don’t have to work and don’t worry about money.

    Middle Class = Makes enough money that they can meet basic needs easily.

    Poor = Doesn’t make enough to have anything left over after basic needs.

    So a rookie football player (income $400K) who spends all his money on cars is middle class, but a small business owner making $75K might be rich if he has saved a lot and paid down debt.

    So I think you need a measure that includes income and wealth.

  23. Gravatar of J.V. Dubois J.V. Dubois
    4. November 2013 at 05:28

    Negation: You are also speaking in relative terms. There is a blog from a guy about how he lives relatively comfortably in Thailand for just $300 a month!

    So if you own any condo or a house in US – even a relatively cheap one – you may just have it rented and go live in Thailand just from rent. You don’t have to “worry” about money in a sense of losing your house or not being able to pay for food.

    Of course if you want your kids to go to Ivy league school, live in 50,000 square foot house with own tenis court and pool and have 10 cars a garderner a personal chef a personal trainer and an army of servants to clean your house – and all of this in a rich neighborhood in USA – then earning only $400,000 year may is so very very low. You will never be able “not to worry” about money.

  24. Gravatar of StatsGuy StatsGuy
    4. November 2013 at 06:33

    Never understood why people feel compelled to overstate the case so much. There is abundant evidence of increasing wealth skew – the question is whether this is resulting in poverty, or simply increasing concentration of wealth as the bottom rungs do not advance and the top accrue the benefits of growth. The latter causes different problems – mostly political and social, but NOT necessarily poverty.

    Separately, this is an interesting interview to read (from michael woodford)

    http://www.zerohedge.com/news/2013-11-03/michael-woodford-warns-blinking-taper-fed-has-made-negative-reaction-more-likely

    I can’t find it anywhere except on ZH. One of Woodford’s points BTW is that forward guidance is less effective than contingent guidance (aka, a target). The issue is they have not expressed a target – but rather multiple targets – and are unable to express a weighting on those because they themselves don’t know what that weight is (and/or – something woodford doesn’t discuss and which should get more attention – the weight depends on who happens to have voting power in that year)

    Ok, nose going back to the grindstone…

  25. Gravatar of RAstudent RAstudent
    4. November 2013 at 09:02

    If your point is that Drum’s numbers were bad, ok fine, I can concede that. However, inequality is certainly increasing. Lets take a look at the except from Saez below. Seems to be a pretty strong case over the very short term at least. As well, Athens Ohio is not the college town you describe it to be. Ohio University is an island of relative wealth in a sea of poverty… thats a terrible example. Take a drive about 10 minutes southeast of campus and you will find houses with dirt floors. Thats why OU students talk of “townies” in the way they do. Those middle income white kids look rich in Athens… Isnt that indicative of the Drum’s point?

    =====

    Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover.

  26. Gravatar of Joe Joe
    4. November 2013 at 09:31

    RAstudent, you didn’t get the memo:

    Inequality statistics are useless here at “themoneyillusion”.

  27. Gravatar of ssumner ssumner
    4. November 2013 at 09:48

    Saturos, I agree with the second to the last sentence, but I’d modify the last sentence to “for the rest we don’t have a clue.”

    Statsguy, I agree with his view that contingent guidance is what matters.

    RA, First I’d encourage you to read my post more carefully, I did not say what you seem to think I said. I never denied inequality was increasing, I think it is, but much less than the income data shows. The post was discussing the fact that Drum and every other piece I’ve read on economic inequality useless completely worthless data, and that includes Saez. As for Athens, all I can say is you obviously didn’t read my post on Athens and don’t understand the point I was making. I agree the kids at Ohio University are not poor. My point was that the government wrongly calls them poor. Here’s the post:

    https://www.themoneyillusion.com/?p=24003

    As for the income data you provide, what good is income data if we are interested in economic inequality? Do you realize that income data combines capital and wage income?

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. November 2013 at 09:56

    Statistics aren’t useless at the Money Illusion, but my experience is that the Money Illusion tends to demand they be meaningfully accurate and not merely used for rhetorical purpose (even though Scott and I sometimes disagree on matters of arithmetic).

    In that regard, the following quote is a very good example of rhetoric:

    ” From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover.”

    I was curious about the use of the term “stagnated” as used above. It sounded rather fishy, particularly when coupled with “increased sharply”.

    So, here’s a brief summary of that same Saez report (which was my first Google hit):

    “Last year, the incomes of the top 1 percent rose 19.6 percent compared with a 1 percent increase for the remaining 99 percent.

    The richest Americans were hit hard by the financial crisis. Their incomes fell more than 36 percent in the Great Recession of 2007 to 2009 as stock prices plummeted. Incomes for the bottom 99 percent fell just 11.6 percent, according to the analysis.

    In the study, researchers defined income as consisting of all earnings plus profits from stocks or bonds.”

    (the report also mentions the “sharp increase” was due, in part, to tax selling ahead of the tax rate increase).

    http://america.aljazeera.com/articles/2013/9/10/top-1-percent-takehomerecordshareof2012usincome.html

    So, when incomes fall by 36 percent and 11.6 percent, respectively, it is a “stagnation” in either case; but, when “income” of one group subsequently rises by 19.6 percent, it’s a “sharp increase”.

    Here’s another relevant quote from that same AP article:

    “The income figures include wages, pension payments, dividends and capital gains from the sale of stocks and other assets. They do not include so-called transfer payments from government programs such as unemployment benefits and Social Security.”

    One of the big problems with poverty statistics and inequality claims is that a lot of stuff tends to get disregarded as “income”. To the above list, one might add Medicare and Medicaid subsidies, Make Work Pay credits, public housing, SNAP, etc. Measuring pre-assistance “income” is needed to determine whether assistance is needed in the first place; but, poverty rhetoric often excludes those items from “income” in order to justify even more.

    I believe that Scott was right when he drew the distinction between “income inequality” and “economic inequality”.

  29. Gravatar of Jeff Jeff
    4. November 2013 at 09:59

    Hi Scott,

    One of the things I find is that discussions about income inequality tend to end up getting muddied by several factors, which a few you’ve implicitly identified in your post. They are:

    – Actual income data
    – Points at which one demarcates the various categories under discussion (poor, lower income, working class, middle class, upper middle class, wealthy, rich, etc; there’s lots and they’re obviously quite fuzzy).
    – Individual self-identification
    – Locational adjustments

    One doesn’t need to say much about the first one; it’s useful. The second is a bit hairier; in terms of having a discussion it’s useful to be able to establish categories and create shorthand (“rich” as opposed to “individuals making more than $x annually, families of four making more than $cx annually,” etc. Of course this opens the door to familiar disputes: $cx isn’t really rich.

    The third is where things really get hairy. A lot goes into an individual’s self-identification of economic class, and I’d posit that “how much money I actually make” is only a small part of the whole mess. There will be elements of aspiration (poor people may not like to think of themselves as poor), romanticism (everyone likes middle class people), positioning (I’ve got a Porsche but my neighbor has a Ferrari, so I’m not rich), etc.

    Then there’s the sticky wicket of whether or not “rich” can be quantified for the entire nation. Do we define rich by income, or standard of living? Certainly someone making $x in BFE is going to be able to buy more “stuff” than someone living in Manhattan. The counter argument (which I first saw made by Matt Yglesias) is that dwellings in places like Manhattan and San Fransisco themselves need to be seen as luxury goods and that the couple who doesn’t feel “rich” on a $400k income because they live on the Upper East Side really ought to just get a grip.

    The point: it’s a fairly fraught area, so it’s not surprising that discussion ends up being quite muddied.

  30. Gravatar of MFFA MFFA
    4. November 2013 at 10:16

    Here is a funny illustration, from an onion-like website, of income data leading to strange conclusions:

    http://sniffpetrol.com/2013/11/04/shock-new-f1-poverty-study/

    A “poor” Formula 1 driver!! He hasn’t earned a single € for the whole year… Must be horrible to live in such poverty, having to travel in private jets all around the world using your savings and driving million dollar cars that a charitable organization lets you drive every few weeks for free!!

    background on the story: the team of that driver is having financial troubles and hasn’t paid him a single euro all year. They owe him something like €14M thanks to a “generous” perfomance based contract. But he allegedly made some €150M while driving for his previous team (ferrari), so he can afford to dip in his savings for a while

  31. Gravatar of Randy W Randy W
    4. November 2013 at 10:18

    Scott – the error is more Drum’s for classifying any family over the 125% threshold as “rich.” The paper also uses groups for 125-150% (high-middle)and over 150% (affluent). Still not very useful at all but less unreasonable than Drum’s definition of “rich.”

  32. Gravatar of Steve Steve
    4. November 2013 at 11:40

    My objection to this post is that Drum is just the messenger. The graphic he posted is cut and pasted from a paper by Kendra Bischoff and Sean Reardon: http://www.s4.brown.edu/us2010/Data/Report/report10162013.pdf

    Furthermore, the paper relies on a rank income metric to calculate “income segregation” rather than the percentage numbers that got Drum all hot and bothered.

    And the paper concludes that the strongest correlates of “income segregation” are: Gini index, high educational attainment, and lots of children. Basically, the first is consistent with inequality, and the last two are consistent with highly educated people trying to move into good school districts for their kids and isolate themselves from the unwashed masses.

    Also, the paper concludes that blacks have 4x the income segregation of whites.

  33. Gravatar of Floccina Floccina
    4. November 2013 at 11:44

    I think that $20k/year is rich, then again I lived in Honduras for a while.

    What I hate worse more than that is how people throw around the word “afford”. Someone will say they cannot afford $15k for health insurance but they are making $50k per year and yet obviously plenty of people and families live in the USA on less that $35k. So what does afford mean.

  34. Gravatar of RAstudent RAstudent
    4. November 2013 at 12:27

    Scott,

    I read your post carefully.

    1.) Look at figure 1 in the report (residential segregation by income 1970-2009) and tell me that the tails in the income distributions have not gotten fatter from 1970 to present. Imagine you were looking at a 3D version from a birds eye view and it jumps right out at you. There are more people in the poor category and in the rich category as time moves forward. It has nothing to do with the cut off at 125% (the correct cutoff was 150% for rich by the way). It has to do with the fact that the income distribution is getting fatter in the tails over time. Draw the line of whats rich wherever you like, it wont change the result, only the percentage that’s found in what you want to call the middle.

    2.) The government data does not say that the average ohio university student is poor. It says the average athens resident is poor… and they are. ohio university students are not average residents (if they are even classified as residents in that data in the first place, since a very small percentage are from athens). Drive around off campus and tell me the government income data is completely useless at distinguishing who is poor and who is rich.

    3.) You say income inequality is rising but less than economic inequality. I dont believe you and you have given no data suggesting otherwise. You have, however, completely misinterpreted the implications of figure 1 in that report if you think the 125% cutoff has anything to do with it. Go ahead and estimate the probability density functions using kernal densities or whatever and prove me wrong if you think so.

    Vivian, look at income data from 1970 to present and tell me it doesnt imply increasing income inequality. Is that economic inequaility? Not really sure, but I think its a better indicator than Scott’s intuition. Throw in transfer payments if you like and watch how little the result changes.

  35. Gravatar of TallDave TallDave
    4. November 2013 at 12:29

    http://paulgraham.com/gap.html

    Interesting point from that essay — by the original definition, Bill Gates is “middle class” because he is neither a coercer or a coercee.

    Also good: Drew Carey’s “Living Large” segment. http://www.youtube.com/watch?v=GvvuHREm5jg

  36. Gravatar of 10 Monday PM Reads | The Big Picture 10 Monday PM Reads | The Big Picture
    4. November 2013 at 13:03

    […] and more cuts could follow (Washington Post) see also What it means to be “rich” in America (The Money Illusion) – U.S. Set for Smallest Deficit in 5 Years (Real Time Economics) – MIT Wristband Could Make AC […]

  37. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. November 2013 at 13:57

    RA Student,

    Two things:

    First, you must have read that post so carefully that you started to read things into it that were not there. Where, exactly, do you get this:

    “You say income inequality is rising but less than economic inequality”.

    Maybe Scott thinks that is true, but you surely must have divined it.

    I would look at “income” statistics from 1970 and the present and draw conclusions; however, the very point is that “income” as Scott suggested is not a good measure. And, the definition of “income”, “poverty” etc are all over the board even if you think it would be a good measure. Before you want to start drawing conclusions, one should have a) appropriate and relevant definitions that are consistently used; and b) accurate measurements consistent with those definitions. The current discussion fails on both counts.

    My guess is that there is rising disparity between the top and the bottom cohorts, both in “income” terms and “economic terms” however those may be defined. The definitions are all over the board and used rhetorically to fit ideological needs.

    And, I’m concerned about inequality not because it is an inherent evil, but because it is the result of other things that are not working correctly in the economy and our society. Rarely will simply increasing transfer payments resolve these underlying problems. In fact, they often make them worse. But, more to the immediate point, skewing the argument with shifting rhetorical definitions combined with faulty facts does not bode well for good policy prescriptions.

  38. Gravatar of TallDave TallDave
    4. November 2013 at 14:09

    As Scott has pointed out before, income inequality is irrelevant (unless you really think Steve Jobs or Lebron James should earn only the median income).

    What people really care about is consumption. Consumption inequality has been falling everywhere since the dawn of the Industrial Age, and not because the rich are consuming less but because today’s poor live better than the rich of 100 years ago.

  39. Gravatar of JMG JMG
    4. November 2013 at 14:16

    My home town of Lexington, Mass. fits an informal definition of a “rich” community. Median housing price is like 450K. Median income is like close to 100K. I have lived here for 20 years. I have always been below the median income, often by a lot (not so much lately, but still below). And yet, I never felt “poor” because socially and culturally I fit. My lower income was the result of a career I valued that the market doe not. I cite this in support of the post’s contention that feelings about class are determined by many more things than income.

  40. Gravatar of benjamin cole benjamin cole
    4. November 2013 at 16:28

    Scott–I suspect prices will rise for a few more years…you may wish to consider renting and wait for next bust…they come along every 10 to 15 years…

  41. Gravatar of Derek Derek
    4. November 2013 at 17:34

    Here I am. Late to the party as always. I didn’t read all, many or most of the comments. However I can unequivocally tell you that there is a difference between “middle income” and “middle class.” Middle income is an economic datum with little value as you rightly point out. Middle *class*, however, is an attitude, a state of mind, and, most often, a delusion.

    This was proven by Norton & Ariely (2010, http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf) and, more directly, by The Institute for the Study of Labor. Can’t find the link to that one as I’m currently at 37,000 feet, but, believe me, it’s astonishing. Essentially, whether one makes little money or a lot of money, most identify themselves in a very tight range according to suggest that they are “middle class.”

    This is uniquely American, and traces its heritage to James Truslow Adams’s “Epic of America” (1931) in which he codified the so-called “American Dream” as an opportunity available to everyone for a “better, richer, fuller life” based on “talent and achievement.” Those last concepts have been conflated with “hard work and perseverance.”

    Think about that: if one is working their ass off, as most poor people are, then there’s no way that such a person can be “poor.” Sure, one can be less well-off, aka “Lower Middle Class,” but not *poor*. And folks with tons of money all believe themselves to be self-made which is rarely the case (see Warren Buffett’s “lucky sperm” theory), but, according again to that ISL survey, they identify themselves as “Upper Middle Class.”

    Middle class is not the same as middle income. And both terms are, in data terms, about as useful.

  42. Gravatar of william white william white
    4. November 2013 at 20:17

    What I find astonishing is that people don’t realize is that increasingly at both the upper and lower ends of income, wealth and asset control correlation breaks down. My favorite example is Jeff Bezos:

    Annual income claimed to be less than six figures

    Direct wealth of personal assets purportedly less than one million.

    Assets controlled by foundations, trusts and whatnot in the tens of billions.

    By two out of three metrics he is one of the great unwashed. But most lottery winners go broke rapidly.

  43. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. November 2013 at 23:32

    “As Scott has pointed out before, income inequality is irrelevant (unless you really think Steve Jobs or Lebron James should earn only the median income).”

    I’ve always thought that Lebron James was a good example of the inequality phenomenon and that he should be forced to wear ankle weights so that the rest of us can feel more equal. That would be a lot easier on the rest of the players than asking them to show up for practice.

    On the other hand, maybe LeBron just got lucky…

  44. Gravatar of ssumner ssumner
    5. November 2013 at 06:06

    Vivian, Good point.

    Jeff, Yes, those are some of the problems, but there are many more.

    Steve, How is that an objection to this post, I wasn’t even commenting on that paper?

    In any case income is the wrong variable to use when looking at economic inequality.

    RA, You said;

    “Look at figure 1 in the report (residential segregation by income 1970-2009) and tell me that the tails in the income distributions have not gotten fatter from 1970 to present.”

    There are so many problems here I hardly know where to begin. I never said that inequality was not increasing. And second, they use income data, which is worthless, as I’ve suggested numerous times. Income data lumps together wage and capital income, as if they both measure resources available to consumers. Please read my posts more carefully.

    You are completely wrong about Athens, and don’t seem to have read the post I provided:

    “The median income for a household in the city was $17,122, and the median income for a family was $53,391.”

    You said:

    You have, however, completely misinterpreted the implications of figure 1 in that report if you think the 125% cutoff has anything to do with it.”

    I never said it had anything to do with anything. Where did you get that idea?

    You said:

    “You say income inequality is rising but less than economic inequality. I don’t believe you and you have given no data suggesting otherwise.”

    That’s flat out wrong, I gave data just a few weeks ago:

    https://www.themoneyillusion.com/?p=24126

  45. Gravatar of RAstudent RAstudent
    5. November 2013 at 08:26

    There is nothing wrong with what I said. In terms of income data, there are more people in the tails (i.e. the low and high ends) of the income distribution than there were in 1970. That is increasing income inequality. I understand you acknowledge that income inequality is worsening.

    I find it extremely hard to believe that the poverty rate hit 0 in 2007. If thats what that data says that, it doesnt pass my laugh test. I saw to many homeless people on street corners on my way to work. I talked to too many people living in tents in the woods at the christmas dinner my son’s wrestling team put on at a local homeless shelter. There are to many kids in my wife’s classes that dont eat in the morning or have no school supplies because they are homeless to believe that. Maybe they are all liars and are hiding hordes of government money in the mattresses, but I seriously doubt that.

    Btw, you said in a comment “I agree the kids at Ohio University are not poor. My point was that the government wrongly calls them poor”. The government data does not call them poor, thats simply incorrect.

    You said in your post “Rich means a family income of more than 125% of the median family income of a metro area. Here are the highest and lowest metro median household incomes, and also the 125% cutoff”. First of all, rich was 150% of the median in that study and the cut off has nothing at all to do with the result.

  46. Gravatar of jj jj
    5. November 2013 at 11:18

    Here’s a really well-done little calculator called “How much money do people just like you make?” It uses Canadian data from 2010.
    http://blogs.vancouversun.com/2013/09/12/how-much-money-do-people-just-like-you-make-2/
    As with any tool, it can be used (interpreted) for good or evil. To head off some spurious correlations I wish that instead of ethnicity (although useful), it had immigrant status (1st-gen, 2nd-gen, or longer).
    Imagine you also could sort further by “ambition level”, “work/life balance preference”, etc. Then you’d have something worth blogging about, unlike the dozens of posts I see per week about “inequality”.

  47. Gravatar of ssumner ssumner
    6. November 2013 at 07:03

    RA, There is plenty wrong with what you said. You attributed all sorts of views to me that are not true. Doesn’t that embarrass you?

    You said;

    “I find it extremely hard to believe that the poverty rate hit 0 in 2007.”

    Now you are getting absurd. Who claimed this?

    And saying I am wrong about Ohio University won’t work unless you address the claims in my post on Athens. You have no argument, because I am obviously right. The majority of Athens residents are students who have low incomes (despite being middle class in a cultural sense.).

  48. Gravatar of RAstudent RAstudent
    11. November 2013 at 07:37

    Did you even look at the data you so kindly told me you posted a few weeks ago? By the consumption measure you prefer, poverty hit zero in 2007. If anyone should be embarrassed, it should be you. 1. For believing such nonsense data. 2. Pretending it never said what it obviously says. I like your work and you are the most convincing alternative to Keynesianism I have yet read, but this post is horrible and your defense seems to be accuse me of not reading your posts. Haha.

  49. Gravatar of ssumner ssumner
    11. November 2013 at 08:18

    RA, You said:

    “Haha”

    I generally find there is a strong correlation between being a jerk and leaving stupid comments. The graph shows poverty based on consumption bottoming out at 4% in 2008, not zero. Save your sarcasm for other blogs.

Leave a Reply