Rich, but Poorer Than the Richest

Tuesday, 25 January 2011 09:03 By Paul Krugman, Krugman & Co. | Op-Ed | name.

Rich, but Poorer Than the Richest
A penthouse view of Central Park from an apartment in New York. The wealthiest Americans do not feel particularly wealthy anymore. (Photo: Michael Falco / The New York Times)

It seems that objectively rich people in the United States are feeling poor these days.

In an article published online on Jan. 11, Catherine Rampell, an economics editor at The New York Times, analyzed why Americans at or above the 90th percentile of income distribution do not feel particularly rich; many people in this group consider themselves to be, in fact, middle class. Ms. Rampell looked at data from the Tax Policy Center and found that for 95 percent of Americans, income distribution was relatively flat throughout 2010. At the top of the income scale, however, the inequality was much steeper.

Ms. Rampell’s answer as to why so many people in the top 10 percent don’t feel very wealthy: “Any Americans who are richer than this cohort are so much richer.”

I’d like to elaborate a bit here.

What Ms. Rampell has in mind is a vision of society that is like a long street running up a hill, in which altitude increases with income.

And each person along that street evaluates himself relative to the neighbors on either side, rather than the whole street.

Ms. Rampell seems to suggest that people compare themselves only to their uphill neighbors — and since the hill gets steeper as you move up the street, the rich feel worse because, increasingly, the guy to the right is much richer.

An alternative argument is that people compare themselves to neighbors on both sides, but it’s the convexity that changes.

Basically, if you’re in the middle of the income distribution, your uphill neighbor is about as much richer than you as your downhill neighbor is poorer, but in the upper reaches that is just no longer true.

Either way, the gap between the rich and the superrich in the United States has grown dramatically.

The net result is a society of winners as whiners. People who are not only doing fine but doing much better relative to the median nonetheless feel left behind.

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On a personal note: I’ve always found extreme inequality at the top rather relaxing — from my own point of view. My wife, Robin, and I are doing very well, of course, but others are much richer.

In New York, you always know that no matter how much you make, there are other people making so much that your earnings look trivial.

So what’s the point of evaluating yourself that way?

Backstory: Redefining Wealth

When White House press secretary Robert Gibbs announced earlier this month that he would be leaving his position, President Barack Obama, in an interview, described Mr. Gibbs’ $172,200 yearly salary as “relatively modest.”

At that income level, Mr. Gibbs is among the top 10 percent of earners in the United States, according to the Tax Policy Center. So his is hardly a modest salary at all, many commentators and bloggers countered — especially in a nation “where the average family income hovers around $55,000, unemployment is high, record foreclosures persist and wages for most folks are at best stagnant,” wrote The Atlantic’s James Warren on Jan. 6.

In response to the resulting debate, The Times asked the Tax Policy Center to calculate the income distribution for American households in 2010. The results were surprising: Compared to the salaries of Mr. Gibbs’ neighbors who have similar educations and professional backgrounds, his salary might be considered modest.

The reason is that the incremental differences between the merely rich and the superrich are very wide.

For 90 percent of Americans whose incomes fall below that of Mr. Gibbs, the absolute differences among annual salaries are not particularly dramatic. But for the top 10 percent, the differences in income rise sharply — as does the dissatisfaction of high earners.

It is not yet clear why such income disparities exist among the extremely wealthy. Some commentators speculate that the differences are the result of certain tax policies, deregulation or our age of rapid technological advancement. 

© 2010 The New York Times Company

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

Copyright 2010 The New York Times.

Last modified on Tuesday, 25 January 2011 09:35