Income distribution charts of the day, middle-class edition

By Felix Salmon
December 20, 2011
Ian Ayres has an excellent post at Freakononomics today explaining some of the background thinking behind his inequality tax proposal:

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Ian Ayres has an excellent post at Freakononomics today, explaining some of the background thinking behind his inequality tax proposal:

An important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.

What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

brandeis-ratio.png

Ayres makes a strong case that there’s a real societal interest in capping this ratio somewhere — “it would be bad for our democracy,” he writes, “if 1-percenters started making 40 or 50 times as much as the median American.” So let’s not tax income; let’s instead tax inequality, and increase taxes on the 1% if and only if inequality is going up rather than down.

But here’s the thing: 36 times median income corresponds to an annual income of $1,780,020. I think we can agree that anybody earning over a million dollars a year is rich: that’s just 20 times median income. The 1% on average hasn’t earned that little since 1995.

Meanwhile, what does it mean to be middle class? Here, Ayres found a fascinating survey from 1997, which I’ve put into chart form:

md.png

What’s fascinating here is that in a survey of Americans, fewer people think that a household earning $100,000 a year is middle class than think that a household earning $40,000 a year is middle class. (The actual question was “Would you consider a family of four making (INSERT AMOUNT) a year to be middle class?”)

Most people agree — although not by an overwhelming margin — that households earning somewhere in the $50k-$60k range count as middle class. But once you get to $80k, the number of people considering that to be middle class becomes a minority, and once income hits six figures, only one American in three still thinks that the household in question is middle class.

Now I can assure you that, to a first approximation, every household in America with an annual income of $100,000 considers itself to be middle class. But already those households are earning twice as much as the median family. And it turns out that from the perspective of the bottom 60% or so, an annual income of $100,000 is so big that it’s not even middle class any more.

Why doesn’t the bottom 60% of the US population seem to have any real political voice any more? As Ayres points out, even Barack Obama says that anybody earning less than $150,000 is “basically middle class”, while “rich” doesn’t kick in until $250,000 or more.

What does seem pretty clear is that there’s a gap, in the popular imagination, between “middle class” and “rich”. What do you call people earning $200,000 a year? If they’re not rich, they’re not really middle class, either. “Affluent”, perhaps? No one wants to raise taxes on this group. But they’re still winners in the modern economy, and they’re not struggling in the way that most Americans are.

Here’s Tim Harford, on the situation in the UK:

The Joseph Rowntree Foundation, which uses a thoughtful and innovative methodology to estimate the minimum income necessary to achieve a “socially acceptable” standard of living, reckons that a family of five with one breadwinner – my situation today and my father’s at the time – needs £690 a week before tax. Since 80 per cent of employees earn less than that, it is easy to see why many families require two incomes, and why many struggle at Christmas.

I’m sure that the situation in the US is even worse, given that inequality here is greater than it is over there. But let’s say that it’s the same: we’ve reached the point at which 80% of workers don’t earn enough to support a good-sized family. How much further can that ratio rise, before we say “enough”?

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