The income-adjusted cost of living in New York, Andrew Schiff edition

By Felix Salmon
March 7, 2012
wrote about Andrew Schiff on Monday, he called me up, and we talked about his statement that New York's middle class is dimishing, and that it's becoming increasingly difficult to afford a middle-class lifestyle here.

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After I wrote about Andrew Schiff on Monday, he called me up, and we talked about his statement that New York’s middle class is diminishing, and that it’s becoming increasingly difficult to afford a middle-class* lifestyle here. Pretty quickly, we managed to put our finger on an empirical question which, if it could be answered, would determine which of us is right and which is wrong.

First, take the top 5% of the New York population by income, then cream off the top 0.1%. So you’re going from the 99.9th percentile down to the 95th percentile. The question is, how has that group’s income compared to their cost of living over the past 25 years?

Schiff’s thesis is that 25 years ago, in 1987, the cost of living was lower, in income-adjusted terms, than it is now. Whereas my thesis is that income for that group has outpaced their cost of living, even after taking into account the fact that lots of things in New York have gotten more expensive.

I asked Ben Walsh to look into this, and sadly it isn’t very easy; it seems that we’re going to have to make a few kludgy adjustments to the original question. For one thing, getting detailed information for historical New York City income distribution is not easy. Here’s a CBO paper which says that nationally, income at the 96th percentile rose 42% in real terms from $96,583 in 1987 to $137,578 in 2007 — that’s in 2007 dollars. Which means that nominal incomes rose 160% from $52,916 to $137,578 over the course of 20 years.

And here’s a paper looking at New York State, showing real income for the top 5% of the population growing 70% from $154,567 between 1987 and 1989, to $262,679 between 2004 and 2006. That’s in 2005 dollars. In nominal terms, we’re talking a 180% rise in 25 years.

It’s certain that the income of the top 5% in New York City has been growing faster than the income of the top 5% in New York State or the country as a whole; a reasonable estimate is that it has doubled, in real terms, over the past 25 years. In nominal terms, that means someone earning $100,000 in 1987 would be earning $400,000 today. (Conveniently, nominal prices nationwide, according to the CPI Inflation Calculator, have almost exactly doubled over the past 25 years as well.)

So what has happened to the cost of living a middle-class lifestyle in New York City over that time? If prices have more than quadrupled in nominal terms, or more than doubled in real terms, then Schiff is right. If they haven’t, then I’m right.

This is harder to determine. Schiff talks a lot about the cost of health insurance, which has certainly been increasing in real terms; nationwide, healthcare costs have been increasing at 5.6% per year over the long term. That means they’ve trebled, in nominal terms, over the past 25 years — a very large increase, but not one which has outpaced income gains for the rich. The cost of private insurance might have gone up faster, but I don’t think that it’s going to make a huge difference.

What about house prices? They’re up too: the nominal median house price in the New York metropolitan area was $196,765 in 1987, and had risen to $387,429 by 2010. That means houses basically doubled in price, in nominal terms, over 23 years; in real terms, they went up by just 14%. Again, house prices for the top 5% might have gone up faster. But remember, first, that mortgage rates have come down a lot during this period, so the cost of buying has actually come down. More generally, at these levels, virtually everybody is buying rather than renting, and there’s a significant forced-savings component to mortgage payments. As Walsh notes, the cost of living, when you’re talking about a mortgage, blurs into savings, investment, and wealth creation.

As for private schools, there you see a much bigger increase. Again, reliable statistics are hard to find, but this NYT story from 1987 cites a cost of $4,500 to send a third-grader to private school, compared to the $32,000 that Andrew Schiff is paying for his ten-year-old’s tuition*. That means private-school fees have increased roughly sevenfold, in nominal terms, over the past 25 years — more than incomes have, even for the top 5%.

I’d very much welcome any empirical help here: if you have numbers on the cost of living in New York over the past 25 years, or better numbers for how much the income of New York City’s top 5% has increased over that time, do let me know and I’ll revisit. But my gut feeling is that insofar as things like house prices and private schools have increased in price, that’s a function of demand: the rich are getting so much richer that they’re increasingly able to compete to pay enormous sums for such things. In other words, any increase in the cost of living in New York is evidence — albeit circumstantial evidence — for the thesis that disposable incomes have been going up rather than down, and that the rich are richer now than they used to be. Even by New York City standards.

Update: First, apologies for using the term “middle-class” without snark quotes. Of course if you’re looking at the top 5% of the population, they’re not really in the middle of anything. I was simply adopting Schiff’s terms of debate, without (for these purposes) challenging them. But to be clear: as far as I’m concerned, anybody in the top 5% is rich.

And thanks to commenter TFF, who discovered that the school charging $4,500 a year in 1987 is charging $18,000 a year now. Conveniently, that’s exactly a 4X multiplier, which is also what I think has happened to nominal incomes — for the rich — during that time.

Update 2: Yves Smith has a smart take on how useful the comparison is that Schiff is making.


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