The typical rich family is a cop married to a nurse
Ryan Avent recently expressed surprise at the fact that a married couple each earning $75,000 were in the top 5% of the US income distribution.
To get into the top 5%, you need to earn less than $150,000. To me, it’s something of a wake-up-call to realise that a couple who make $75,000 each are in the top 5% of American households. I’m curious whether this is surprising to others, too? Would you, like me, have guessed the thresholds were higher? Does this change what you think about who is “rich” in America today?
In Boston, cops make about $110,000. I’m sure some of them are married to nurses making around $80,000, putting them well up into the top 5 percent. I don’t regard this sort of family as rich, but many people I talk to insist the top 5% are rich. If so, there are far more rich families that are a cop/nurse, or accountant/teacher, or engineer/secretary, then there are Donald Trumps.
Why do people find it surprising that so few families make more than $150,000? I think I know, because I used to be surprised myself. Then I realized my mistake. I was assuming “families” were people like me, a middle age guy with a working wife and kids. But then I realized a “family” is any adult household. My first 8 years as an adult I was living on my own, supporting myself with part time work will going to college and grad school. Definitely bottom quintile. I was probably technically “poor,” but not poor in a sociological sense. I was a proto-upper middle class guy. Then I spent one year in the second quintile, before shooting into the third quintile, where I stayed for a number of years. Then I got married, then I got lots of raises and promotions, and presto, I’m rich. (Although my neighbors would laugh, they look down on us plebs living in two-family houses.)
I’ll retire at 62, and live another 15 or 20 years if I’m lucky. During that stretch my “income” will drop sharply, although I am not quite sure how sharply. Probably at 70 it will bump up as I’m forced to take money from my 401k.
I think most people have this vague idea in their mind that if everyone was exactly like Scott Sumner, we’d have a fairly equal income distribution. Not so, it would be less unequal than today, but still highly unequal, as different versions of me would be at different stages of their (my?) life.
People are surprised that only 5% of families make more than $150,000, because they forget that even most upper-middle class people spend the vast majority of their time (between 18 and 80) making much less than $150,000.
Here’s my most recent contribution to The Economist: By Invitation, on the subject of inequality.
themoneyillusion.com
Focus on consumption, rather than income, disparities
Scott Sumner our guest wrote on Jan 24th 2011, 14:21 GMT
THERE are all sorts of economic inequality: documented vs. undocumented workers, capital vs. labour income, and differences in access to health care and a good education. Income inequality is not a very useful way to think about economic inequality.
I spent my first eight adult years in the bottom 20% of the income distribution. Now I’m in the top 10%, but will drop down sharply when I retire at 62. Longer periods in school and longer lifespans tend to lead to greater income inequality over time, without increasing economic inequality at all. Another example is immigration, by far the most effective anti-poverty programme of the US government. It reduces economic inequality at the world level, but increases income inequality in America.
The biggest problem with income is that it doesn’t measure what people think it measures: resources available to people for consumption. Consider identical twins who both earn $100,000/year for 40 years. One consumes all her income immediately, the other chooses to save half her income in order to defer consumption until later. In that case there is no meaningful economic inequality—both have identical resources, and identical lifetime consumption in present value terms. But the high-saving sibling will have vastly greater lifetime income, and will appear to be much more “fortunate”...
economist.com
Inequality is the result of technology amplifying talent
Hal Varian our guest wrote on Jan 24th 2011, 22:02 GMT
THE rise in individual inequality that we have seen is due in part to the rise in globalisation. When most businesses were local, the creation of wealth by a business was limited by the geographic range in which the business could operate. But nowadays even a relatively small business can go from local to national and then global operation in a short amount of time. Fortunes can be made by providing goods and services at a low price to a global market of 6 billion people.
Communication costs and computation costs will continue to drop for the foreseeable future, and we will continue to see new billionaires being created as an inevitable side effect of this technological trend. Ocean voyages, railroads and the telegraph, along with the businesses they enabled, created vast amounts of wealth, so we should expect the same from modern communications technologies.
Overall, I would say that this isn't a bad thing. The rich have gotten rich because they have provided something that everyone else valued, and the world as a whole has grown wealthier. Historically, wages have tended to reflect productivity growth in the long run, and the same will likely be true this time around.
economist.com |
