Poor Little Rich Folks

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

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

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

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

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

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

[Cross-posted at The Reality-Based Community]

Mark Kleiman

Mark Kleiman is a professor of public policy at the New York University Marron Institute.