There Will Be Rich Always: Finding a New Way to Think About Income Inequality

On Monday, Aaron Edlin and I published a cri de coeur op-ed in the New York Times calling for a Brandeis tax, an automatic tax that would put the brakes on income inequality. In the next few days, Aaron and I will be publishing a series of posts explaining more about our rationale and providing more details on how a Brandeis tax might be implemented.

There Will Be Rich Always
By Ian Ayres & Aaron Edlin

In one of the more memorable lyrics from the musical Jesus Christ Superstar (based on Matthew 26:11), Jesus tells his disciples “There will be poor always.”

The same is true of the rich. There will always be a top 1 percent of income earners. But what it takes to be rich can change drastically over the course of even a single generation. In 1980, you would have had to earn at least $158,000 to be a one-percenter; but by 2006 the qualifying amount had more than doubled to $332,000. (You can produce an estimate of your own household income percentile – albeit using a different definition of income that produces a much higher 1 percent cutoff –  at this wsj.com site.) The rise is not due to inflation as both these numbers are expressed in inflation-adjusted, constant 2006 dollars. The rise is due to the simple fact that our richest Americans in real terms were earning much more money.

The economic changes in the past 30 years were a rising tide that did not lift all boats. Over the same period the median household income remained relatively constant, at roughly $50,000. While inequality has increased in most wealthy economies, the United States, according to the OECD, remains among the most unequal.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians. 

What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

Define Rich?

In August 2008, the Reverend Rick Warren asked each of the presidential candidates Barack Obama and John McCain to:

Define “Rich.”  Give me a specific number. Where do you move from middle class to rich?

The candidates’ answers, given at what might be the high-water mark of income inequality in our nation’s history, reveals the difficulties that both parties have talking about economic class. McCain was visibly uncomfortable in naming a number:

So I think if you’re just talking about income, how about $5 million? So, no, but seriously, I don’t think you can — I don’t think, seriously, that — the point is that I’m trying to make here, seriously — and I’m sure that comment will be distorted — but the point is, the point is, the point is that we want to keep people’s taxes low and increase revenues.

In part, McCain was reluctant to name a figure which might be used to construct a new bracket to raise taxes – so he picked a large number; very large in terms of “medians.” McCain suggested that you would have to earn an income that is 100 times the median household income in order to “move from middle class to rich.” 

Obama in contrast gave a much more reasonable answer:

Here’s how I think about it, and this is reflected in my tax plan. If you are making $150,000 a year or less as a family, then you’re middle class, or you may be poor. But 150 (thousand dollars) down, you’re basically middle class. Obviously, it depends on region and where you’re living. . . .  I would argue that if you’re making more than 250,000 (dollars) then you’re in the top 3, 4 percent of this country. You’re doing well. Now, these things are all relative, and I’m not suggesting that everybody who is making over 250,000 (dollars) is living on Easy Street.

Obama should be given points for easily relating his cutoff of $250,000 to those Americans who are “in the top 3, 4 percent of this country.” But we are a little troubled at Obama’s describing family incomes of $150,000 as still being in the middle class, when these families earn 3 times what the median households earn. Survey data reveals contested definitions of middle class, and there is evidence that Americans disagree with Obama. In a 2007 study conducted by NPR, the Kaiser Foundation, and the Harvard School of Public Health, 51 percent of respondents did not consider a family of four with an $80,000 income middle class – that consensus rose to 65 percent when the family income rose to $100,000.

We as a nation seem to have trouble facing up to the fact that most Americans earn far less than what it takes to be comfortably middle class. We would do well to give more emphasis in our definition of the middle class to incomes earned by average Americans. Our aspirational middle class is making it too easy for us to forget what is happening to our actual middle class. 

A larger goal of our op-ed is to spark a different kind of debate about income inequality. Rev. Warren was crafty in that he only asked the candidates the descriptive question: what is rich. But we want people of goodwill to ask a normative analog. In our op-ed, we claim that it “would be bad for our democracy if one-percenters started making 40 or 50 times as much as the median American.” 

Is there any Brandeis Ratio that would give concern to this year’s Republican candidates? We suspect they would be unwilling to express unease with any level of inequality produced by market forces. They would argue that any government attempts to lean against inequality by taxing job-creators would invariably produce distortions (including sending one-percenters abroad, beyond the reach of our tax laws) that would end up making things worse off for middle class Americans. This is a debate worth having, but we cannot begin unless we find a way to engage in normative debate about income and wealth inequality. Asking whether the government should be concerned about the rapid rise of the average o
ne-percent income from 12.5 to 36 median incomes is our way to provoke a more explicit debate.

Seeing Medians

Framing income inequality in terms of “medians” is also part of a larger goal of making the median household incomes more salient. As we said in our op-ed, “Part of our goal is to change the way politicians speak about income equality. Framing the income of the wealthy in relation to the median income will help us all keep in mind the relative success of the middle class.”

It might even be useful to describe other things in terms of medians. A new Cadillac Escalade will run you 1.4 medians. A  year’s tuition at Yale Law School is about .88 medians. We might even restructure government salaries so that they automatically adjust with the median. Paying a congressman 3.5 medians (instead of the current $174,000), might make it easier for our representatives to remember and even pursue the interests of their typical constituents.

To raise the prominence of the median measure, government could standardize a “mi” symbol. A stylized icon figure representing a median earner might even be more effective in letting us remember that to earn 36 median incomes is to earn as much as 36 actual households:

 


B.D. Warren

So, would employers (who are presumably controlled by 1%ers) then not have the incentive to increase cash salary while at the same time charging employees for a much greater share of their benefits, thus inflating nominal income while keeping real take-home pay unchanged?

human mathematics

By "employers" you must mean "large corporations".

dave

no, it is most certainly employers.

in order to balance or stack the deck, increase the median, employers who make enough to be close, could pay the employees more, but then offer no benefits.
if your average teacher who currently gets 80 thou plus 28 tho in medical and another 16 thou in pension and other bennies were told they were going to be paid 124k a year, but no bennies. they would make the same, the employer would not see any change, but the 50% increase in income would alter the median.

Clifton Griffin

The problem with this analysis is that it doesn't take into account the people who move income brackets (i.e., income mobility).

See this link: http://mises.org/daily/5799/The-Rich-Arent-Dispossessing-the-Rest

There will always be rich. There will always be poor. They won't be the same people year in year out.

rationalrevolution

Yeah, I mean who knows, next year Warren Buffet and John Pualson might be homeless....

Let's see Paulson is now 56 years old and took home $5 billion in 2010, so assuming that he just put all of it in cash under his.... well, under a mountain... using just his income from 1 year, with no new income, he could spend $100,000,000 a year every year for the next 50 years (assuming he lives to be 106 years old) before running out of money. Yeah, yer right, I doubt he'll "be rich again" next year...

Steve O

Not sure why you're bringing up the richest of the richest of the richest. All they do is skew the numbers--it's ridiculous and unfair to make policy decisions on, say, the top 50 richest Americans. It has little to do with Clifton's point, and, if you take into account the fact that Buffett is in the process of giving away as much as 99% of his wealth, I think it's pretty mean-spirited to disparage people just for having money.

K. Clark

I frankly don't understand or agree with high executive pay. Talent is plentiful in the world and there is no reason to pay a CEO multiple millions. But, the answer is to put all the power into the hands of the stockholders. All of it. If they continue to make stupid decisions then, live with it.

But, one of my concerns with this question is that it is asked by academics. We're smart - why do they earn more than us? Because you produce nothing anyone wants. You have abilities, they just have no value. So the obvious solution is to use the power of the police state to steal it from someone else. The reality is that most academics are already vastly over compensated. Want to earn more? Build something. Create something. Something that people value and are willing to pay for. Everything else is stealing.

Mike B

As much as you might be loathe to hear it most executives actually do earn their pay. Some are crooked, some are ineffective, but most of those that actually make a career of leadership have a set of skills that most people don't have. It is very very easy to sabotage a company through poor leadership. It is also difficult to succeed in a job where not taking risk is a recipe for failure, but taking the wrong risks is also a recipe for failure. The truth is that leaders so matter, just ask any professional sports team with a bad coach or general manager.

Also, modern information technology has made 'C' level executive far more valuable because they can be directly responsible for more decisions than was possible prior to the 1980's. Wherein a large mega-corporation like GM relied heavily on organizational unit managers back in the day, today the CEO is able to command the whole kit and kaboodle. All the pay that used to go to the Unit managers now accrues to the CEO. Look at Ford CEO Alan R. Mulally. He literally SAVED the company and prevented the loss of billions of dollars. Whatever the hell they are paying him it has been completely worth it. For the most part this isn't some conspiracy where a bunch of privileged insiders have found a way to scam the system. We simply live in a world where executive leadership skills have come to have a great deal of value. Today's large, highly complicated organizations simply wouldn't function without them.

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aepxc

It is indeed easy to destroy an organisation through poor leadership. It is however, all but impossible to drive an organisation to success through leadership alone. The farther one looks, the less detail one sees (and with lower certainty), and most of the value within the organisation is created through the detailed, day-to-day decisions. Since the people at the top are not in the best positions to make these decisions, much of effective leadership simply means passing authority down to the most appropriate level and not interfering with it from then on. In other words, a moderately successful CEO of a large corporation today is one that does not do much worse than a cardboard cutout of himself (or herself) would have done.

CEOs receive high salaries because they can – because we consider it natural that the commander must be more 'elite' and receive more money than the people he or she commands. There is certainly a need for people who see and react to 'the big picture', but the ability to see the big picture is mostly a function of one's position – it requires neither much toiling away, not some rare and unique talent.

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DaveyNC

One of the reasons the evil rich/CEOs earn so much is that back in the '70's, Jimmah Cahter decided that there were too many people who made $1M in salary one year, so a new tax rate was instituted on incomes over $1M. It prompted the executive compensation specialists to develop other ways to compensate executives. What they came up with was our current system of bonuses and stock options. Even now, if you look at the salaries of the Fortune 500 CEO's, you will see that most of their salaries are right around $1M per year, give or take, but by far the bulk of their compensation comes from bonuses and stock options. Note the base salary in this report on page 2: http://origin.library.constantcontact.com/download/get/file/1102561686275-61/GMI_CEOPay2011_122011.pdf

So, Mr. Ayers, I imagine that they would like to be tossed into the briar patch once again. No telling what they would come up with.

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human mathematics

This kind of objection could be raised against any law: if we start sending cops to patrol this corner, they'll just start dealing on another corner! It has to meet a limit somewhere.

rehajm

While this is yet another slice and dice of the income distribution statistics, the intended implications are the same- that because we can show 'growing' inequality that, despite the top earners acting legally, fairly and justly, their income is still somehow unfair and unjust, and a central planning government needs to intervene through taxation to 'restore' balance. I would propose it would be better outcome for all actors involved to recognize and accept that in a global marketplace for labor skills and scarcity of skills matters. Then, concentrate instead on those factors that contriblute class/income mobilty and work to improve them.

Sam_L

rehajm,

Enron was legal, fair, and just? TARP money lent back to the government at a profit to subsidize bonuses was legal, fair, and just? Jon Corzine's handling of MF global was legal, fair, and just?

When the US government (through both parties) because complicit in handing out public dollars to private elite, we moved away from fair and just. And perhaps away from legal, although since the cronies are making the laws, they have found some ways to massage things there.

There are a myriad of problems - not least of which are American's no longer willing to put in an honest day's work - but don't pretend that corruption and complicity between the federal government and large corporations isn't part of the problem.

rehajm

A false equivalency- You are equating all members of a particular income class with criminal behavior because you can name a company and an individual you believe to be associated with criminal behavior within that income class. Nice try, but we're not buying it. BTW, Corzine has not been convicted of any wrongdoing as of yet- rule of law, at least for the time being, still exists.

rationalrevolution

*Sigh* so wrong...

#1 It's not simply about the dollar amount of income, its also about HOW the income is derived. Is it capital gains income or wages? I'd say that someone with $100,000 a year in capital gains income "is rich", yet I'd also say that someone with $100,000 a year in wage income is middle-class.

But look at what you do, you keep talking about "earning": "The rise is due to the simple fact that our richest Americans in real terms were earning much more money."

Err... no, they aren't "EARNING" more, what has happened is that there has been a massive redistribution of wealth and income from the working class to the capital owners.

Here is my question: Do so many people really have no understanding of capitalism anymore or do you guys intentionally obfuscate the issue?

Here is the truth about income inequality: There are TWO forms of income inequality: natural inequality and engineered inequality. To claim that all inequality is natural or that the only form of inequality is natural is to expose yourself as an obvious apologist of thieves.

Look, if you live in a neighborhood where one person (Johnny) goes around robbing houses every night and that person becomes the richest person in the neighborhood, simply saying "Ahh well there will always be inequality. The fact that Johnny is richer than everyone else is nothing we should worry about or be upset over. The fact that's he's richer than us does us no harm..., black, blah, blah...."

This is what you folks and all of the inequality apologists try to do, you try to pretend that we are all too stupid to understand that ummm... yeah, there are cases where the wealth of some is a product of theft from others.

Here is a fact: The super-rich aren't "earning" more money today than they did 30 years ago, they are stealing it all. Rather, they've engineered a system of massive "legal" redistribution, and over the past 30 years a larger and larger portion of the value created by workers around the world is being redistributed to the super-rich through capital ownership.

This is totally obvious of course. Capital ownership has become increasing consolidated over the past 30 years, that's a fact. The rise in incomes of the super-rich is a product of capital ownership consolidation, not of some small segment of the population becoming exponentially more productive. Capital has become consolidated and capital owners are getting a larger and larger cut of all value produced. That's what's happening, its obvious.

Yes, there is natural inequality, some people are naturally more capable, intelligent, hard working, and productive than others. However, the truth is that the "best" people are only naturally 2 to 5 times more capable or productive than average, so this doesn't account for situations where individuals have incomes hundreds of thousands of times greater than the average. No one is exponentially smarter, stronger, faster, or harder working than the average. If the average person works 40 hours a week, no one is working 40,000,000 hours a week obviously...

If the average person can chop down 5 trees in a day, a really productive person may be able to chop down 10 trees in a day, heck maybe even 15, but they aren't going to be able to chop down 500,000 trees in a day. Yet when we look at the income differences between someone like John Paulson and the average American worker, that's the kind of income differences that we see.

Those income differences are not a product of John Paulson creating 100,000 times more value than the average person, they are a product of billions of dollars of value created by average workers being redistributed to John Paulson, and yes, that means that we all have an interest in putting an end to his theft.

Calls to accept the levels of economic inequality we see in America today are akin to saying "We'll always have thieves, so just live with it and let people steal from you."

The super-rich ARE THIEVES, their incomes are NOT a product of value created by them, they are products of value created by everyone else (the working class). This has always been true and is remains true today. Exponential wealth concentration HAS ALWAYS BEEN AND ALWAYS WILL BE a product of exploitation. It was true of the Egyptians, true in Imperial China, true in feudal Europe, and it remains true today. The big lie is that the rise of democratic market economies" somehow magically changed all this, but of course it never did, think about how idiotic it is to believe that!

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JBP

No, the rich are not thieves.

But many are opportunists who profit mightily from progressive government program. Do you know how most of the wealth is transferred from the lower classes to the rich? By inflation. Inflation transfers wealth from those without investments to those with investments—with bankers being an exception. Now which class of people do you suppose have a lot of investments?

What causes inflation? Monetary expansion—this is simple supply and demand. What is the biggest cause of monetary expansion? The deficit. Debt increases the money supply. The biggest cause of the deficit is social programs.

Sure, you can raise taxes on the rich. And assuming they don't change their tax planning, you can raise enough money to fund the deficit for maybe two months. Now what?

Another factor that favors the rich is the massive increase in government regulations. The fact remains that regulations always contain loopholes. It is unavoidable. Now, who do you suppose is going to be able to take advantage of these loopholes? How about someone who can pay a tax lawyer $10,000 to set up a tax shelter? Society needs some rules, but when the rules get too complicated, those with resources are the ones who can afford to hire people to navigate the system.

Regulation favors the rich.

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rationalrevolution

You're somewhat confused, but a little bit right. Inflation favors borrowers and hurts savers. But inflation has been low for the past 20 years, basically since the big end of stagflation in the early 80s, so really inflation has little to do with anything. Actually right now we would be better off with higher inflation to devalue debts.

The biggest cause of the deficit is not "social programs", whatever that means. The biggest cause of the deficit is not bringing in as much revenue as is spent, duh. The biggest components of the nation's debt aren't even government, its the financial sector and businesses:

http://en.wikipedia.org/wiki/File:Components-of-total-US-debt.jpg

Of government debt, you can't assign it to any specific program. If you are talking about the federal budget, the majority of federal spending does not go to "social programs":

http://en.wikipedia.org/wiki/United_States_federal_budget

"Defense spending" accounts for 20% of the budget, but really total military spending is almost 30% of the budget if you count other military spending that doesn't fall under the defense department plus the interest on debt as a result of the unpaid for wars.

Social Security is 20% of the budget, but this has never incurred any debt, indeed the Social Security program is a massive creditor to the general fund to the tune of $2.5 trillion.

At any rate, its irrelevant, because inflation isn't the issue.

"Do you know how most of the wealth is transferred from the lower classes to the rich?"

Yeah, via profits, duh. Let's see, over the past century profits have consistently outpaced inflation. Take a look:

http://observationsandnotes.blogspot.com/2011/03/stock-market-100-year-inflation-history.html

"Regulation favors the rich."

Yes this is true, generally speaking, though not always. It's also the case that a large part of the economic regulations in America have been put into place at the request of the rich and powerful, which is no surprise.

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Mike B

While there will always be rich and poor, if the former does not at least make some modest effort to improve the lives of the latter there may be temporary periods where the number of rich may plummet dramatically due to the dual factors of needing spending a large part of their fortunes on security services and, when that proves insufficient, by being killed.

Brian

You lost me at "cri de coeur" .... when your discussion begins with a phrase that let's say, only "1%" of people might understand - well, that is when I know the rest of the piece will be filled with high minded, self important babble.

I love Freakonomics. I have learned more here about how econmics works in the real world than my college classes. But this is nothing more than - dare I say it - class warfare.

Keep tilting at those windmills!

Kris

Here's a tip: Next time you come across a phrase you don't understand, highlight, copy, paste in the Google search field, press enter. You'll be part of the 1% in no time. #FirstWorldProblems

MrAtoZ

I found the NY Times "cri" to be problematic on several levels, but here are three:
First, how is the IRS supposed to determine this ratio in a real-time basis if the most recent data available to make the case of the op-ed is 5 years old?
Second, if this is really how it's supposed to work -- "a tax that would limit the after-tax incomes of this club to 36 times the median household income" - are we really going to institute a varying marginal rate that could be 90%, or 99%, or 99.999% of income at that level?
And lastly, regardless of how the Brandies ratio is flattened, how does a confiscatory tax rate really help the median household?

Travis

First, it isn't difficult for the IRS to determine the ratio, and at worst they could use the previous year's economic statistics on actual income to determine it.

Second, yes, it would vary the marginal rate above roughly 1.5 million dollars.

Third, this is an economics blog. Certainly you have thought abour incentives before. CEO's are in a unique position to increase the median household income. If CEO's want to increase their marginal income by reducing their actual tax rate, they are given an incentive to increase the median income in general.

MrAtoZ

Travis -
To your third point: So you're saying that these incentivized CEO's, being all powerful, will collaborate on raising the income of everyone they possible can, even those not in their employ, as well as those who are retired, so the median household income rises to the point where the 99.99% tax on them is reduced?
Okay, you are right that I thought this was an economics blog. I didn't realize it was the magic elves workshop at the North Pole.

Artie Gold

On so many occasions things published under the greater Freakonomics banner, while certainly both thoughtful and thought provoking, tend to just tick me off. Fre

chris

Why the focus on income? Income isn't wealth. Is it better to inherit a million dollars and work at the counter in fast food or be a doctor with a massive student loan?

John B

Chris is completely right.

Wealth is the proper measurement, not income. Unfortunately these writers and many government programs confuse the two.

Apply for student aid from a college; the forms ask about income, but not wealth.

Apply for food stamps (like the Michigan lottery winner)--if you have $ in the bank, but low income--you qualify.

Ridicuopous--just like this article.

Artie Gold

On so many occasions things published under the greater Freakonomics banner, while certainly both thoughtful and thought provoking, tend to just tick me off. Frequently there's a tacit acceptance of "just the way things are", when it's really a specific human construct that they are -- for now -- that way. Sometimes I find a correlation/causation fallacy running just under the surface.

Not this time.

For once (well, more than once; after all I *do* read this stuff more than occasionally) there is an appropriately normative dimension surfacing here. I've often said that in our current situation *even it you're a true believer in the rightness of capitalism* (which, I'm not; on a good day I can at least subscribe to the "well, better than the others, when all is said and done" camp) you can't believe that the current level of inequality of wealth is a reasonable thing, if only because it makes the entire system unsustainable. As wealth concentrates, more demand is funneled into assets, and specifically into assets whose value is not related to productive capacity, exactly the kinds of assets whose valuation is the most brittle. And, when things get off track, large amounts of wealth goes "pfffft", those losses tend to be socialized, and we are where we are...

Of course, I would argue that 36mis is probably too much, I would also argue that the shape of the curve matters, and matters a lot (not to mention its fractal nature). Of course, were there "mi"-based taxation, ways would be found to raise the "mi" without raising the actual meaningful median income...but that's another issue entirely.

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Eric M. Jones.

See: http://www.periheliondesign.com/downloads/Wealth%20Distribution%202007%20update.pdf

Here is the bad news…when the wealthy have all the power and the poor suffer, the economy spirals into undernourished diseased children on one end and overfed gout-afflicted plutocrats on the other.

Lest conservatives zombies chime in with their preprogrammed “You can’t penalize the job creators…” let me say, we all make the decision whether we are our brother’s keepers or not. If not, then prepare to reap the whirlwind bubela.

Arthur B. Kennickell of the Federal Reserve will (if allowed!) publish the real figures in the Spring of next year (I am told) and we may see that 50% of the wealth of the US is held by 1% of the people, and 50% of the people have 1% of the wealth.

But, what the Hell, the jails are full.

The way France solved this problem was to build a guillotine in every village square and chop the heads off 50,000 aristocrats. Let's hope we can do better.

Most people have NO IDEA what a Billion dollars is: What could one do with a billion dollars? A billion dollars is more than all the Alaskan gold mined in 2010—more than a cubic stack of gold bars 1 METER on a side. Just five percent of that billion dollars ($50 million) would get you: A lifetime lease on a Gulfstream jet at your beck and call. A home, condo or apartment in ten major exotic destinations, with a (leased) luxury fleet of cars at each, a coterie of servants to follow you around, memberships in every exclusive club, all you could possibly eat, wear, play with and see for the rest of you life. And Hell, throw in a yacht. Then you could sail around sipping expensive wines imagining ways to spend the other $950-million dollars.

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Enter your name...

This seems to have completely ignored two major issues, which are the variations in household characteristics and the regional variations.

The "median household" is an adult with a $50K income. The "median family of four" has a $70K income and two children. Do we really want to tell that family that they're relatively well off, because they're supporting four people 140% of the income that someone else is supporting only one person (and with no childcare bills)?

If you're worrying about social issues, it makes more sense to compare the income of multi-person families against other multi-person families, and single adults against other single adults. It also makes more sense to compare people of similar ages. That's what we do in the real world. We don't look around at age 20 and say life is unfair because we're making only $40K a year and a worker with 30 years more experience is making $60K. We don't look at other families at school and say how great it is that most of us make more money than the single guy at the coffee shop. We're more nuanced than that.

Related to that, we compare against people in our actual social environment, not the whole country. It's a big country, and the regional differences are substantial. In my town, the median household income is more than $90K. In my grandmother's town, it's $40K. An income that puts you at the 85th percentile in my grandmother's town (and therefore relatively high-income) is barely middle of the pack in my town.

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Enter your name...

"We as a nation seem to have trouble facing up to the fact that most Americans earn far less than what it takes to be comfortably middle class."

This is illogical. It is not *possible* for more than half of a population to earn less than the median, just like it is not possible for all of the children to be above average, even in Lake Wobegon.

The middle is the middle. Perhaps what you mean to say is that we as a nation seem to have trouble facing up to the fact that most Americans want a lifestyle that greatly exceeds what most Americans can pay for, and that we like to call that extravagant, television-fueled lifestyle "middle class" even though it is actually a more luxurious lifestyle than even wealthy people had before WWI.

Wm_Adams

There's a real fallacy in your logic when you try to compare overall medians with the mean of the top 1%. I would argue that the mean of that 1% is greatly distorted by the top 0.1%. Why not use the median of the top one percent?

Your exception to the President's definition of 150k as middle class sounds logical, but I doubt that many who make sun a sum think of themselves as upper class or even upper middle class. While they certainly make more than the median, how people self-identify is a greater measure. Perhaps you should consider that the middle is the old lower class, the 3-4% is all that's left of the middle class, and the 0.1% is the upper class.

MrAtoZ

Oh, and I forgot to include another critique of this proposal: if we are to be concerned about "medians" (which is the apparent purpose of this exercise), why wouldn't you take the median income of the top 1% to determine the Brandeis ratio, rather than the average of the top 1%?
I am going out on a short limb here in assuming that the average income of those in the top1% is skewed upward by the billionaires in that cohort, while using the median will reflect that there are more earning somewhere closer to $332k, as opposed to those few making billions at the top end of the bracket.

The reason median vs. average is a relevant critique is that themedian income of the top 1% will result in a Brandeis ratio far lower than the 36 to 1 expressed above.

Tim

I would love to see a longer-term graph of Brandeis ratio, because this is really a utilitarian, macroeconomic question: what ratio, over a given economic window, has returned the greatest growth in GDP or GNP? Answering that would allow us to reverse engineer tax codes to that effect. Over-focusing on the sociological concept of "fairness" (whatever that means- "the fair is in September", as my father used to say), causes us to lose sight of the fact that this is a fundamentally economic problem, with secondary social baggage. Income inequality isn't bad because it's unfair, in a capitalist system: it's only bad if it causes the economy to function poorly!

James

I can only wonder at a standard that defines "middle class" as $150K/year, then states that most aren't earning that much. Isn't middle class, by definition, what the middle earns? Since I manage to live quite comfortably by spending only a fraction of that, I can only suppose that those $150K-earning "middle class" folks are actually spending most of that money on consumer debt, gambling, or something similar.

One point I think needs to be addressed. Many of the previous posters bewail the fact that - in their opinion, anyway - most of the top 1% are corporate CEOs and the like. So how about some actual data? What fraction of the wealth goes to the executives, what to financial services people, what to tech types, what to entrepreneurs, and so forth.

Jim...

$150K can be rich or poor, depending largely on (1) where you live and (2) the size and composition of the household. A single person making that in Spokane might be well off, but a family of 5 in Manhattan would not.

As to the CEO vs. entrepreneurs etc.:

"Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?" by Steven N. Kaplan and Joshua Rauh from the Review of Financial Studies http://faculty.chicagobooth.edu/steven.kaplan/research/krauh.pdf

EB Hansen

At some level though, people choose to live in those more expensive places - higher cost of living often coincides with a more desirable place to live.

150k gets you a much smaller living space in New York than Scranton, but you get your family access to one of the most in demand locations in the country.

Household size is also - generally - based around the preferences of the heads of household. Some couples may decide that having a nice car is a good way to spend their income, some may prefer children.

Jim

A careful analysis of this issue is beyond the scope of a newspaper column or a blog post.

Apart from playing fast and loose with terms (salary is not the same as income, which is not the same as wealth) and cherry picking statistics (2007 was the peak for inequality), there are important confounding econometric issues.

Household size and composition are extremely important -- consider four couples where each spouse makes $100K. The maximum household income ($200K) equals the median which also equals the minimum. Two of the couples get divorced The maximum remains $200K, but the median is now $100K.

Demographics are also important, as retirees often have very little income, but are spending down their earlier excess spending.

Tax policy is important as well -- for business owners, the relative level of corporate versus individual tax rates has significant bearing on how taxes are paid. What may look like dramatic increases in individual income may only represent similar earnings, but a change in tax policy.

And finally as others have pointed out this also ignores income mobility.

There may be a problem, but this is op-ed masquerading as economics.

Read more...

rehajm

...Passive income like dividends and capital gains are included in the income numbers while passive income like government subsides for food, housing, medical care, etc., and receipt of private charity, are not....