A little blogosphere controversy has erupted in America over University of Chicago law professor Todd Henderson claiming that he is the working middle class. He objected to having to pay more taxes on the basis that he ‘like most americans’ is just getting by. The discussion on Henderson has raised some interesting issues and resulted in some interesting posts which I will share with you. First from Brad DeLong, where I first came across the controversy (Professor Xxxx Xxxxxxxxx = Todd Henderson, DeLong seems to have Xed out his name this morning):

the Xxxxxxxxx annual family budget is this:

$455,000 a year of income, of which:

  • $60,000 in student loan payments
  • $40,000 is employer contributions to 401(k) and similar retirement savings vehicles
  • $15,000 is employer contributions to health insurance
  • $60,000 is untaxed employee contributions to tax-favored retirement savings vehicles
  • $25,000 building equity in their house
  • $80,000 in state and federal income taxes
  • $15,000 in property taxes
  • $10,000 for automobiles
  • $55,000 in housing costs for a $1M house (three times the average price in the Hyde Park neighborhood
  • $60,000 in private school costs for three children
  • $35,000 in other living expenses

And of this budget, Professor Xxxx Xxxxxxxxx (or whoever) writes:

Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby…. [W]e have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive. If our taxes rise significantly… the (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center…

Now it is time for a reality check on this “most working Americans.” The median household income in the United States today is $50,000. Half of all households make more than this. Half of all households make less. The big expenses in the Xxxxxxxxx family budget–their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing, their $60,000 in private school costs, even their $10,000 a year for new cars–are simply out of reach for the overwhelming majority of Americans. Half of all households make less than $50,000 a year–the Xxxxxxxxxs make nine times that. 90% of households make less than $100,000 a year–the Xxxxxxxxx’s make 4.5 times that. The Xxxxxxxxx’s are solidly in the top 1% of American households, in the select 1% group that receives more than $350,000 a year.

By any standard, they are really rich.

But they don’t feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone–and they feel that they have to scrimp.

I know how they feel. My household income is of the same order of magnitude than theirs (although somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College’s housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs) where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don’t think that I am not rich.

Professor Xxxx Xxxxxxxxx’s problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that.

But if he values the high-end consumption so much, why doesn’t he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations–doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be.

But why does he think that that is the way things should be?

And here is the dirty secret: Professor Xxxx Xxxxxxxxx thinks that that is the way things should be because he knows people for whom that is the way it is.

Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America had an income equivalent in today’s dollars $190,000 a year. They know of 1000 people–900 of them poorer than they are in income brackets 90-99% and 100 people richer than they are in the top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from $85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class who are not as successful as you. You don’t look downward much. Instead, you look upward. Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they would have known of 1 person of that 100 who was seven times as rich as they were.

Thus Professor Xxxx Xxxxxxxxx in 1980 would have known who the really rich were, and they would on average have had about four times his income–more, considerably more, but not a huge gulf. He would have known people who were truly rich, and he would have seen himself as one of them–or as almost one of them.

Now fast forward to today. Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year–the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Xxxx Xxxxxxxxx’s $455,000, they are barely middle class–“How can they afford cell phones?” Xxxxxxxxx sometimes wonders.

But he wonders rarely. He doesn’t say: “Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!” For he doesn’t look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Xxxxxxxxx doesn’t look down.

Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them–widening income inequality over the past generation has excluded him from the rich who truly have money.

And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at… Barack Obama, who dares to suggest that the U.S. government’s funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations.

Do I wish that Professor Xxxxxxxxx had a little more self-knowledge? Yes. Is it pathetic that somebody with nine times the median household income thinks of himself as just another average Joe, just another “working American”? Yes. Do I find it embarrassing that somebody whose income is in the top 1% of American households thinks that he is not rich? Yes.

Do I hope to educate him so that he has a better grasp on reality and better understanding of America and of public policy? Yes.

This raises the question who is poor in America, who is poor elsewhere and why does public policy discussion focus so much on the rich and sol little on the poor.

John Scalzi notes what it is to be poor in America:

Being poor is knowing exactly how much everything costs.

Being poor is getting angry at your kids for asking for all the crap they see on TV.

Being poor is having to keep buying $800 cars because they’re what you can afford, and then having the cars break down on you, because there’s not an $800 car in America that’s worth a damn.

Being poor is hoping the toothache goes away.

Being poor is knowing your kid goes to friends’ houses but never has friends over to yours.

Being poor is going to the restroom before you get in the school lunch line so your friends will be ahead of you and won’t hear you say ‘I get free lunch’ when you get to the cashier.

Being poor is living next to the freeway.

Being poor is coming back to the car with your children in the back seat, clutching that box of Raisin Bran you just bought and trying to think of a way to make the kids understand that the box has to last.

Being poor is wondering if your well-off sibling is lying when he says he doesn’t mind when you ask for help.

Being poor is off-brand toys.

Being poor is a heater in only one room of the house.

Being poor is knowing you can’t leave $5 on the coffee table when your friends are around.

Being poor is hoping your kids don’t have a growth spurt.

Being poor is stealing meat from the store, frying it up before your mom gets home and then telling her she doesn’t have make dinner tonight because you’re not hungry anyway.

Being poor is Goodwill underwear.

Being poor is not enough space for everyone who lives with you.

Being poor is feeling the glued soles tear off your supermarket shoes when you run around the playground.

Being poor is your kid’s school being the one with the 15-year-old textbooks and no air conditioning.

Being poor is thinking $8 an hour is a really good deal.

Being poor is relying on people who don’t give a damn about you.

Being poor is an overnight shift under florescent lights.

Being poor is finding the letter your mom wrote to your dad, begging him for the child support.

Being poor is a bathtub you have to empty into the toilet.

Being poor is stopping the car to take a lamp from a stranger’s trash.

Being poor is making lunch for your kid when a cockroach skitters over the bread, and you looking over to see if your kid saw.

Being poor is believing a GED actually makes a goddamned difference.

Being poor is people angry at you just for walking around in the mall.

Being poor is not taking the job because you can’t find someone you trust to watch your kids.

Being poor is the police busting into the apartment right next to yours.

Being poor is not talking to that girl because she’ll probably just laugh at your clothes.

Being poor is hoping you’ll be invited for dinner.

Being poor is a sidewalk with lots of brown glass on it.

Being poor is people thinking they know something about you by the way you talk.

Being poor is needing that 35-cent raise.

Being poor is your kid’s teacher assuming you don’t have any books in your home.

Being poor is six dollars short on the utility bill and no way to close the gap.

Being poor is crying when you drop the mac and cheese on the floor.

Being poor is knowing you work as hard as anyone, anywhere.

Being poor is people surprised to discover you’re not actually stupid.

Being poor is people surprised to discover you’re not actually lazy.

Being poor is a six-hour wait in an emergency room with a sick child asleep on your lap.

Being poor is never buying anything someone else hasn’t bought first.

Being poor is picking the 10 cent ramen instead of the 12 cent ramen because that’s two extra packages for every dollar.

Being poor is having to live with choices you didn’t know you made when you were 14 years old.

Being poor is getting tired of people wanting you to be grateful.

Being poor is knowing you’re being judged.

Being poor is a box of crayons and a $1 coloring book from a community center Santa.

Being poor is checking the coin return slot of every soda machine you go by.

Being poor is deciding that it’s all right to base a relationship on shelter.

Being poor is knowing you really shouldn’t spend that buck on a Lotto ticket.

Being poor is hoping the register lady will spot you the dime.

Being poor is feeling helpless when your child makes the same mistakes you did, and won’t listen to you beg them against doing so.

Being poor is a cough that doesn’t go away.

Being poor is making sure you don’t spill on the couch, just in case you have to give it back before the lease is up.

Being poor is a $200 paycheck advance from a company that takes $250 when the paycheck comes in.

Being poor is four years of night classes for an Associates of Art degree.

Being poor is a lumpy futon bed.

Being poor is knowing where the shelter is.

Being poor is people who have never been poor wondering why you choose to be so.

Being poor is knowing how hard it is to stop being poor.

Being poor is seeing how few options you have.

Being poor is running in place.

Being poor is people wondering why you didn’t leave.

It was mainly to share that post by Scalzi that I decided to write this blog post, but I want to note two other blog posts.

Firstly, how the rich currently feel entitled to talk as though they are poor. Paul Krugman:

Let me recommend, once again, Brad DeLong’s superb discussion of how it is that people at the 99th percentile, despite making twice what their counterparts made in 1980, feel poorer now than they did then. On reflection, however (and discussion with Robin), it seems to me that there’s something Brad didn’t say that’s worth mentioning — the change in social norms.

Even in 1980, there were surely many people at or near the 99th percentile who felt sorry for themselves, at least some of the time. It happens to everyone, after all: I lead a very privileged life (yes, I’m well into the range that will pay higher taxes under the Obama plan), yet even now I find myself experiencing occasional flashes of green-eyed envy. (What? You’re driving me back to the airport in Sao Paulo, in all that traffic? Don’t I rate a helicopter?)

But 30 years ago people with high but not super-high incomes generally felt ashamed of themselves for griping — or at least, felt that they would be ridiculed if they gave voice to their gripes. Today, all restraints are off. The fuss over Messrs. Henderson and Stein is the exception that proves the rule: they wouldn’t be providing this spectacle if they didn’t normally swim in social circles where complaining that you only have 9 or 10 times median family income is considered totally acceptable.

Pretty soon, we’ll be having serious, completely un-self-conscious discussions in major magazines about the servant problem.

Second, why they don’t care about the poor, and why we don’t care about the poor but do care about the rich. Chris Dillow:

There are 1.4 billion people who live on less than $1.25 a day. Name one of them. The fact that you can’t might be even more significant than generally supposed, as this new paper shows (pdf). The authors got subjects to play a simple dictator game, in which people were asked to split $10 between themselves and a partner. They found that when the dictator and the partner were not allowed to communicate with each other, dictators handed over an average of $1.53. However, when subjects could communicate, things changed. When the dictator was asked to provide an explanation to his partner for his decision, the average donation fell to 60 cents. But when his decision was preceded by a request from his partner, he gave an average of $2.40. And when there was two-way communication, donations were above $2.50. Communication triggers increased altruism. This chimes in with a point made by Robert Cialdini in Influence. He tells the story of a woman trying to jump a queue to use a photocopier in a university library. The simple request to jump in elicited 60% compliance. Not bad. But the question ‘May I use the Xerox machine because I have to make some copies?’ got a 93% compliance rate, even though no extra meaningful information was given. People, says Cialdini, like to have reasons for what they do. Even basic communication generates such reasons – a request gives us a reason to donate, but the opportunity to explain gives us a means of justifying our selfishness. All of which brings me to where I started. The world’s poorest do not communicate with us, which causes us to give less to them than we otherwise would. By contrast, we are bombarded with messages from the well-off, which – on its own – tends to dispose us to be altruistic towards them. In this sense, inequality perpetuates itself.



Continuing on from my last post, we hear figures like that given by Chris Dillow that 1.4 billion live on less than $1.25 a day all the time. Our response to this is very often to go oh god how terrible and then when we hear of poverty in the west to go oh but they aren’t really poor, bangladesh is poor, by global standards everyone in the west is rich. I think thats not entirely true. Comparing GDP per capita is tricky. Firstly, the ‘representative citizen of the world doesn’t  look all that far from the western middle class person and looks better off than some of the western poor. The world GDP per capita (PPP) according to the World Bank is $10,500, while GDP per capita in the UK is $35,200. The average citizen of the UK is 3 times richer than the average citizen of the world. That is not a huge multiple. Consider also the fact that the average citizen in Luxemburg, the worlds thrid richest country, but one that is not all that foreign to us, has a GDP per capita of $78,000. In other words that is more than a twice the GDP per capita of the UK.More over to state the obvious GDP per capita is actually a pretty poor measure of peoples income for a number of reasons. Most significantly, not everyone in an economy earns income (children for example). So for most of us if we think of average income we think of the average wage. So using GDP statistics the obvious way of calulating that would be to measure what the GDP per worker is, this gives us for the UK $72,218.56* however this more than double what mean income actually is $35,471.47**. And as every social science graduate should know median income is a better measure of average income because of the long tail to the right and bias to the left in the distribution of income. So the median income is $28,789.28***; very far from the UK GDP per worker figure $72,218.56 and even closer to the world GDP per capita figure of $10,500.

The point of all this is that it is important not to think of GDP per capita as clear indicators of the average income of workers in those countries and its important not lose sight of the fact that although the is huge differences income between countries, figures like the fact that 1.4 billion live on less than $1.25 a day can often confuse more than they clarify. Income is unequally distributed between countries, yes, but when we look at averages, we find that the average UK worker is not earning many multiples of the average citizen of the world. (I know I’m not comparing like with like here, but thats my point.)

*GDP/Labour Force=2,256,830,000,000/31,250,000=72,218.56

** Mean income at todays exhange rates

*** Median income at todays exhange rates


One of my regrets is that I did not make more of the fact that I was thought by Kevin O’Rourke in the final year of my undergraduate degree. He’s a great economist who, although not an anti-capitalist, has research interests that overlap heavily with mine. The ‘more’ in the title of this post refers to his latest post over at IrishEconomy:

The FT is full of depressing news stories this morning, none of which are surprising.

In the US, a Tea Party candidate won the Republican nomination for the Senate elections in Delaware.

In France, Sarkozy suggested that Luxembourg (home of the Commissioner who sharply criticized him for the Roma expulsions) would do well to welcome a few Roma itself.

In Sweden, the Sweden Democrats, a party with roots in the neo-Nazi movement, may be on the brink of an electoral breakthrough that might see it hold the balance of power after the elections there.

And the Japanese decision to weaken the yen is provoking tension with Europeans and Americans.

Lots of zero sum thinking out there this morning:history rhyming.