Kindleberger’s Last Bubble
Liveblogging World War II: January 12, 1941

On the Richness of the Rich Once Again

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Catherine Rampell writes a good article but accompanies it with the wrong graph. She should have graphed log income rather than the level of income: what matters for the Chicago Law School Professor making north of$250,000/year is not the absolute dollar but the relative percentage income gap between him and the people above him on the income scale.

Catherine Rampall:

Why So Many Rich People Don't Feel Very Rich: those who aspire to hop from the 30th percentile to the 35th percentile would need in increase their cash income by $4,000 annually (or by about 17 percent); those who aspire to hop from the 91st percentile to the 96th percentile would require an increase of $324,900 (or 171 percent).... [T]here is much greater inequality at the very top of the income scale than at the bottom or in the middle. Whether this translates to much greater differences in standards of living at the top is debatable, as an extra $1,000 for a poor family likely makes a much bigger impact on that family’s quality of life than an extra $1,000 for a wealthy family.

Still, when evaluating their own incomes, most families are trying to keep up with the Joneses: they envy the wealthier neighbor whose lifestyle they aim to match. And in dollar terms, the rich are falling far shorter of their respective Joneses than the middle-income and lower-income are.

So when the 95th-percentilers think of their incomes in the context of what their richer neighbors are earning, this cohort doesn’t feel very rich. (Indeed, the gap between the rich and the very rich has been growing in the last few decades. Exactly why the gap has been growing is unclear, but has likely been influenced by a combination of tax policy, deregulation and technological advances that allow people to control more capital.)

It is perhaps no wonder, then, that so many people who are statistically rich call themselves “upper middle” or even “middle class.” They are much, much richer than lots of poor people, but also much, much poorer than some very visibly rich people. From their perspective, they truly are in the middle. It’s the income version of China’s “Middle Kingdom” syndrome.