On Being Rich

My blog entry about people on $250,000 a year being rich elicited a fair amount of response, both in the blogosphere and via email. One theme running through the responses was that it doesn’t matter how much money you make; what matters is how much money you spend. And if you’re spending almost as much as you’re making, well, then you can hardly be rich.

The main expense that most people have in mind when they make such arguments is location-related. "If you live in New York," says Tom Lindmark, "you might not be rich until you hit, say $450,000". One of my correspondents said that before you started counting up income, you should deduct $4,200 a month in rent, plus "another $1k for phone, water, electricity and heating oil". And Caveat Bettor goes even further with regards to being "middle class in Manhattan":

Of course, a 2 bedroom apartment will cost about $7,000 per month.

No! For one thing, most Manhattan 2-bedroom apartments do not cost $7,000 a month. But even assuming they did, then being able to afford $7,000 a month for a 2-bedroom apartment would make you rich.

BusinessWeek had one of its Debate Room debates on this subject in June. Carl Winfield gamely tried to say that "like everyone else, the estimated 2% of the population that makes more than $250,000 has been hit by a meteoric rise in grain prices that has pushed the cost of a loaf of bread from $1.28 in January to $1.37 in April." Er, no, Carl, if you’re making $250,000 a year you’re very unlikely to even notice an eight-cent rise in the cost of a loaf of bread, let alone be hit by it.

But the most revealing part of the debate came next:

Consumers at all economic levels have been hit by the higher cost of living, but saddling 2% of the population with higher taxes to lessen the tax burden on the remaining 98% caters to a populist myth that national crises have an impact only on the very poor and leave everyone else unscathed.

You see? It’s not that people earning more than $250,000 a year aren’t rich, it’s that anybody earning less than $250,000 a year is "very poor".

In response, Jacob Stokes talked about

the richest American households, or those who make more than $250,000 a year. These are America’s elite. The Mercedes-Benz-driving, Coach-bag-carrying set.

It’s a useful reality check. Are there middle-class people earning less than $200,000 a year who drive a Mercedes and who carry Coach bags? Yes, and there are lots of them. But such luxuries are still signifiers of being rich and elite; that’s one of the reasons that they are bought in the first place.

The point is that "rich", in terms of disposable income, kicks in well before you hit $250k: it kicks in when you start being able to buy a Mercedes or a Coach bag without such an action making any discernible impact in your standard of living elsewhere. These people might not like spending over $100 to fill up their GL450, but they’re not suffering the same pain at the pump as normal people for whom spending more money on gas means having less money left over for groceries.

A lot of the problem, I think, is one of visibility. If you live among people for whom spending $7,000 a month on rent is normal, and if you don’t live among people for whom the Olive Garden constitutes fine Italian cuisine, then it’s easy for your idea of middle-class to gravitate towards the former and away from the latter. Even I’ve made cheap cracks about how "you know it’s a recession when PF Chang’s is considered ‘aspirational’".

There’s a good reason why the overwhelming majority of Americans consider themselves to be middle-class — including a large number of the super-rich on seven-figure incomes with multiple houses and multi-million-dollar life insurance policies. Everybody looks around them and sees some people who have less and some people have more; they’re in the middle. Said my email correspondent, in high dudgeon:

Ranking me among the "rich" — among bankers plunking down $4m for condos, among hedge fund managers spending a $100m in art for their Bridgehampton pad, etc. — seems completely divorced from reality to me. But then I’m just one of the cigar-smoking, top hat wearing upper crust, so I probably don’t get it.

What he’s doing is looking at the behavior of people who have more money — a lot more money — than he does, and then using that behavior to define "rich". Are those people rich? Yes. Maybe it would be useful to reclassify them as the "very rich" — people who don’t know how many houses they own, or who don’t even think about checking commercial airline schedules when they need to fly back to New York for a vital board meeting.

Such individuals are useful from a wealth-porn perspective, but they’re not useful for setting a "rich" baseline. There’s a very long tail of wealth in this country, and all of it counts as rich, even when parts of it are orders of magnitude richer than other parts.

To get a more useful feeling for what counts as rich, don’t wonder at the excesses of billionaires, but rather look at what counts as poor. For a family of four in the US, the poverty level is a household income of $21,027. And yes, there are thousands of people even in Manhattan living below the poverty level. Once you start bearing that in mind, it becomes much harder to say with a straight face that people earning $250,000 — people who can spend $21,027 on a family holiday — aren’t rich.

Do such people feel rich? No, because they think that holiday is expensive. Because their life isn’t easy. Because they still worry about money. Just like all of us. They’ve reached the top 2% of the population, and they realize that it’s not all it’s cracked up to be. Well, that’s reality for you. Life’s very rarely a bed of roses, no matter how much money you have in the bank. But the reason that your life isn’t easy? Isn’t that you’re not rich. It’s that you’re human.