The Long Right Tail
Reading more about these differences of opinion as to who counts as “rich” it occurs to me that talking about the income distribution in terms of percentiles may not be the most enlightening way to think about this. according to the census the median household earns about $60,000 whereas a household earning $133,000 would be in the ninetieth percentile and $1.6 million would put you in the 99.9th percentile. Expressed in percentiles, the $133,000 household is closer to the $1.6 million household than it is to the $60,000 household — 90 is closer to 99.9 than it is to 50. But in another sense, of course, 133,000 minus 60,000 is 73,000 whereas 1,600,000 minus 133,000 is 1,467,000.
The income distribution, in other words, has a long right tail. That means that folks up in very high percentiles — like the ninetieth — in many ways really do have more in common financially with folks near the middle of the income distribution than they do with folks just a little further up the scale than they are.
44 Responses to “The Long Right Tail”
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August 18th, 2008 at 2:19 pm
exactly: i’ve made this point before. the very rich and the very high-income have a lot in common witih each other; the rest of us, whether we’re making minimum wage or the fabled $150K, have more in common with each other than we do with that elite group.
by the way, i think the better way to look at this is in terms of percentages: that is, although $133K is 2x $60K, $1.6M is 12x $133K….
August 18th, 2008 at 2:20 pm
Ah, the “portrait of Madison” that Raymond Chandler teases the reader with in The Long Goodbye.
August 18th, 2008 at 2:25 pm
That’s a good point.
Then again, don’t we really think of this as a matter of “how hard is it to buy some house, send children to college, afford health insurance”?
A family of four is in a very different place for middle-class-ness at $60,000 than at $150,000. Whereas, at $150,000, you might have a nice sailboat, but not a yacht.
August 18th, 2008 at 2:42 pm
Perhaps the definiton of wealth should not be based on income at all, but rather on whether or not you need to work. It could be defined something like this: if you have enough money that you could stop working today and maintain a middle-class lifestyle for the rest of your life, then you are rich.
The obvious weakness is that the definition of “rich” would change depending on the age and number of children the person has. An older childless person would need much less personal wealth to be rich under this definition as a younger person with children.
Still, I like it because it links “richness” to “idleness.” It doesn’t say you have to be idle to be rich, but that if you have the choice of being idle for the rest of your life, then you are certainly rich.
August 18th, 2008 at 2:52 pm
The problem with using percentages is most of us are unclear about where we really fall. Studies show we tend to overestimate our ranking (i.e. I think I’m in the top 20, when I’m really in the top 30), so we’re better off being specific about income, particularly when it comes to taxation.
August 18th, 2008 at 3:29 pm
Hell, yeah. I’m a software developer with 25 years experience, my wife is a college professor; together we must be in a pretty high percentile of the income distribution. But raising twin boys in an expensive city (Boston), our concerns are solidly middle-class: paying the mortgage, paying for childcare, saving for college and retirement, healthcare costs. We’re not buying yachts or fancy cars or taking exotic vacations.
We’re very fortunate, and as long as we keep our jobs we don’t have to worry about paying the bills. And I’m painfully aware that many – most – families are much worse off. But to call us “rich” would be vastly misleading if it lumped us in with the McCain’s of the world, with 6 or 7 homes, $10M+ income, and $100M+ in assets.
August 18th, 2008 at 3:44 pm
“If you have enough money that you could stop working today and maintain a middle-class lifestyle for the rest of your life, then you are rich.”
A while back I discussed this issue on intel-dump: some military folk there were ridiculing a story of a 40-ish Silicon Valley guy with about $3M in stock who was still working. I figured out that wasn’t unreasonable: unless he wanted to move to a cheaper region, then changing a $3M lump sum into an annuity was only going to yield about $50K or so, probably not enough to pay a mortgage in the Bay Area and run a couple of cars. Not to mention possible costs of raising kids and putting them through college at $40K/year …
It was also instructive to consider the equivalent lump sum value of an inflation-proofed military pension. An officer who manages to serve 20 years gets a very valuable pension -
a comparable annuity would cost well over $1M. And then there are health benefits as well.
Anyhow, while the criterion for “idle rich” has to depend on age and family commitments, for a family of four with parents in their forties, I reckon it’s somewhere above $5M these days. $2M is a nice cushion, but not enough to stop worrying for the rest of your life.
August 18th, 2008 at 4:11 pm
The point that pushes the other way is the decreasing marginal utility of money, so the first $25,000 is worth much more than the second etc etc, from which point of view the $133,000 is rather closer in many ways to the real millionaire than the median household, and certainly closer to the millionaire than to a poor household on $30,000 a year.
August 18th, 2008 at 4:21 pm
except that no one really believes that the “decreasing marginal utility of money” has much affect on people’s behavior or sense of prosperity, until maybe you get into your third or fourth trillion dollars.
if you think otherwise, just ask the people who have a few billion.
it’s true that having zero money sucks. but you can do a lot more with your tenth million than you can with your first. once you get to your tenth million, you can start buying politicians with ease. once you get to your hundredth, you can be the politician yourself. even if you did marry it instead of earning it.
August 18th, 2008 at 4:48 pm
Indeed percentiles mean nothing. One can imagine a country where practically everyone is rich so that people in the 20th percentile are still rich, and such countries exist. The United States is a country where a large percentage of the population is rich, thus leading to pandering politicians worried about not offending rich people by calling them rich.
August 18th, 2008 at 4:51 pm
Bullshit. Going from $25K a year to $50K a year has a much bigger effect on your standard of living than going from $250K a year to $275 a year. In the former, you go from food stamps and being forced to take public transportation to being able to buy a car and buy higher quality food. In the latter, you can afford an Aston Martin to drive you to Whole Foods instead of Lexus.
August 18th, 2008 at 5:08 pm
@kid bitzer – Priceless!
August 18th, 2008 at 5:41 pm
mo, look back at the context: otto claimed that someone earning $133K/year was closer to a real millionaire than to the median household.
now that’s bullshit. all kid bitzer did was point that out.
PS. in my time, i’ve worked for 2 of america’s 400 wealthiest (according to forbes), and i mean personally, not i’m a former microsoft employee (i can’t name them without violating confidentiality agreements). trust me: the rich are different, and the idea that someone making $133K without any net worth (and, of course, otto didn’t bother to specify, since that would have meant grappling with the issue) is anywhere close to wealthy is completely nonsensical.
August 18th, 2008 at 7:15 pm
The top 1% earns 133,000+
The top 0.1% earns 1.6 million+
The top 0.01% earns 5.5 million+
The disparity among the top 1% dwarfs that between them and the remaining 99%.
It’s like Bill Gates walks into a bar and average income of the patrons is into millions..
This has been well-documented, but still everyone screams about the top 1% should be taxed more and so on… which makes it harder to get a progressive tax.
Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000.
Tax rates increase with income, *except* for the top 0.1% – yes that’s 0.1 – thats only 145,000 households. And this is reported income on tax returns, leaving aside all the legal and illegal shelters.
This grand con – shifting the taxes onto the working “rich”, by the hyper-rich is one reason why tax cut kool-aid sells.
Source:
Richest Are Leaving Even the Rich Far Behind
August 18th, 2008 at 8:14 pm
bumble, your overall point is a good one and it’s not one that’s made often enough. It isn’t so much the rich as the super rich who have benefited the most from (and pushed the hardest for) Republican tax shifting policies. So in a sense, McCain’s definition of rich was probably better than Obama’s.
However, you’ve got your numbers a little bit off. $133,000 in household income puts you in the 90th percentile, not the 99th.
Also, the other points made here about wealth are right on. Being rich isn’t so much about income as about assets.
@Richard Crownie: I think your actuarial math might be off. An annuity that cost $3 million and only netted you $50K a year would be a pretty major ripoff. You could dump that $3 million into 1-year treasuries and earn $67,000 without ever drawing down your principle. An annuity that invested more aggressively and drew down the principle over a lifetime would probably yield more like $150K. Three million is surely enough to retire comfortably at any age.
August 18th, 2008 at 8:39 pm
> t’s true that having zero money sucks. but you can
> do a lot more with your tenth million than you
> can with your first. once you get to your tenth
> million, you can start buying politicians with ease.
> once you get to your hundredth, you can be the
> politician yourself. even if you did marry it instead of
> earning it.
Yeah, after Bill Gates’ McLaren F1 sat in a customs warehouse for 2 years he bought a law requiring the Transportation and Commerce Depts to allow importation of cars with production quantities of less than 100 per year with minimal paperwork – grandfathered to 2.5 years previous. It was actually a decent law and many thought it was long overdue but still: there are very few people who can just blatantly call up a Senator and order a custom law for themselves.
Cranky
August 18th, 2008 at 8:42 pm
> Bullshit. Going from $25K a year to $50K a year has a
> much bigger effect on your standard of living than going
> from $250K a year to $275 a year. In the former, you go from
> food stamps and being forced to take public transportation to
> being able to buy a car and buy higher quality food. In the
> latter, you can afford an Aston Martin to drive you to Whole
> Foods instead of Lexus.
If you believe the economists, utility is not (necessarily) equal to money or even to the satisfaction of Maslow’s first 2-3 needs. Larry Elison doesn’t _need_ that MiG-29 under the first or second level analysis but that doesn’t mean he doesn’t get as much or more utility from it than a poor immigrant gets from his $500 Chevy.
Cranky
August 18th, 2008 at 9:46 pm
“@Richard Crownie: I think your actuarial math might be off. An annuity that cost $3 million and only netted you $50K a year would be a pretty major ripoff. You could dump that $3 million into 1-year treasuries and earn $67,000 without ever drawing down your principle.”
But a flat nominal $67k/year doesn’t get you a constant standard of living: you need the payments to increase with the cost of living. I lived through 15%+ inflation in the UK in the 70s; but even if you make the vastly optimistic assumption that inflation will stay around 2%, then a 45 year old wanting to maintain his standard of living for life (very possibly to age 95 or more …) can’t hack it.
Beyond that, the private insurers selling inflation-proofed annuities have to charge a premium to cover the risks involved in guessing future inflation and mortality rates decades into the future. I think the $3M for 50K/year is probably optimistic.
August 18th, 2008 at 10:08 pm
It is rather amazing that most seem to consider anyone falling into the top 1% as rich. As a group, it has the widest disparity of any other income group expressed as a percentage. As noted, there is a wide difference between the income of the bottom of the top 1% (approximately $350K per year per 2006 Treasury Department statistics) and the highest part of that percentile (Bill Gates and Warren Buffet territory).
I think that most people with incomes falling in the bottom part of the top 1% consider themselves middle class and identify with middle class concerns – paying housenotes, the cost of health insurance, saving for retirement, etc. They are definitely not purchasing second, third and fourth homes across the world and flying in the private jets to get to them.
August 18th, 2008 at 11:51 pm
Gosh, you guys are in need of an actuary! And a decent portfolio manager. Depending on age and some other factors your 3 million would probably be good for a pre-tax income of 150K which would increase over time.
But this discussion highlights the problem with defining “rich.” You guys are what I have been calling the worried millionaires. Too much inflation and your 3M loses value. People are crazy worried about inflation right now (though I am a deflationista myself). But I can sympathize – a few double digit years in a row will halve your purchasing power leaving you with the equivalent of 75K a year. A couple more and you will be scraping by on 37.5K per year. It doesn’t make a person feel rich even though they may have some money. Now if you owned a beer distributorship…you will be selling beer whether it costs a dollar or ten dollars a bottle.
Private health care for two, provided you can get it, will run you some dough and less well-off people worry about being one diagnosis from bankruptcy. It is not inconceivable that 2 or 3 diagnoses put the worried millionaire under. That’s why health care is such a worry across the board.
Tho yes, I believe the worried millionaire has more in common with the two wage earners next door when it comes to a feeling of financial security than they do with the 9 people who have 747-800s being fitted with servants quarters between the bulkheads, or the guy who contracted with Lufthansa to turn an A380 into a flying palace. Or the Russian who just bought King Leopolds old Cote D’Azure place for 750 million bucks. This is where I think Dems can break the lock on the so-called rich who are thought to vote for the party of theft out of self interest all the time. But you can’t do that if you keep saying you are going to tax the rich to oblivion because people all over the blogosphere are calling the rich you and me.
And finally Matt, you are still equating income with wealth. It’s not the same. I earn a good income. I don’t feel wealthy.
Someone on Digby’s blog wrote “it’s the stupid economy.” YES! That’s what we should be talking about. It IS a stupid economy when we sell each other hamburgers and borrow each others money all day long. It’s a multi-year wait for a new SuperYacht. Somebody’s making big money and it sure isn’t us.
Regards.
August 19th, 2008 at 2:13 am
“Perhaps the definiton of wealth should not be based on income at all, but rather on whether or not you need to work.”
This is an old Marxist concept, and a good one. If you have to worried about what would happen if you got fired, you are not wealthy, you are a member of the proletariat. You might be a highly compensated skilled workers, but you are still a prole when it comes to anything important. Understand that and alot of what Marx wrote makes more sense.
What confuses people is thinking about money buying a better quality of life, instead of power. There is a huge difference in quality of life between living in a two bedroom heated home, with access to transportation, and being able to buy new clothes or entertain yourself without cutting into the food budget, and living out on the streets or in a rat infested hovel. Once you get to a basic middle class lifestyle, the luxuries that the wealthy have access to may not add all that much. But in terms of power, the middle class person doesn’t have much more than the person living in the hovel.
August 19th, 2008 at 2:41 am
Larry Elison doesn’t _need_ that MiG-29 under the first or second level analysis but that doesn’t mean he doesn’t get as much or more utility from it than a poor immigrant gets from his $500 Chevy.
Did he buy that MiG for $500? How much more did the MiG cost? $5 million? $50 million? I’m not really sure, but that would make it cost 10,000 to 100,000 as much as the old beater that the immigrant dude uses to get to work and the store. Did Ellison get 10,000 to 100,00 times as much utility out of the MiG? Somehow I doubt it. That’s the whole point. The rich guy has to spend more for each extra unit of utility.
I can see this in my own life. Ten years ago a $5,000-a-year raise would have meant the difference for me between barely scraping by and not having to worry about every last dollar in my checkbook. Last month I got a $5,000 raise and it just means I get to save a bit more each month.
August 19th, 2008 at 6:09 am
“Gosh, you guys are in need of an actuary! And a decent portfolio manager. Depending on age and some other factors your 3 million would probably be good for a pre-tax income of 150K which would increase over time.”
How ? Not from risk-free investment like Treasuries; not from US stocks, which are down over 1998-2008; not from a broad portfolio that tracks GDP growth. Yeah, if you’re lucky enough to pick winners, you’ll do fine; but in that case $10K and a nearby casino will do …
The only approach which guards against both market risk and longevity risk is to buy an inflation-proof annuity. And those are expensive, precisely because they transfer both those risks to the insurer.
August 19th, 2008 at 8:01 am
> Did he buy that MiG for $500? How much more did
> the MiG cost? $5 million? $50 million? I’m not
> really sure, but that would make it cost 10,000 to
> 100,000 as much as the old beater that the immigrant
> dude uses to get to work and the store. Did
> Ellison get 10,000 to 100,00 times as much utility
> out of the MiG?
Probably more like $50-$100 million when all the import duties, permitting, etc were said and done.
However, you are still confusing money, and even necessities of survival, with utility (the U function). They are not the same and not necessarily equal in the way you assume, which was the original poster’s point.
Cranky
August 19th, 2008 at 9:25 am
“Probably more like $50-$100 million when all the import duties, permitting, etc were said and done.”
No, you can purchase old military surplus stuff – even jets – pretty cheap, basically for scrap value. Maybe under $1M.
And that was especially true in the post-Soviet free-for-all. What’s fabulously expensive is taking that worn-out junk and keeping it in safe flying condition. That probably costs several million a year.
August 19th, 2008 at 1:03 pm
However, you are still confusing money, and even necessities of survival, with utility (the U function). They are not the same and not necessarily equal in the way you assume, which was the original poster’s point.
Huh? I’m not equating money with utility. Quite the opposite. I’m saying that the more money you have, the less utility you get for an equal amount of money. Or, conversely, the more money you need to spend for an equal amount of utility. Hence, the “decreasing marginal utility of money” that commenter #9 said nobody believed in.
Commenter #9 said that the marginal utility of money does *not* decrease, e.g., that the difference in your utility between making $50K a year and $25K a year is equal to the difference in your utility from making $750K a year and $725K a year. (The commenter took it all the way up to the trillions.) This is absurd, and I doubt any economist on the right or left with agree with it.
August 19th, 2008 at 8:25 pm
>> “Probably more like $50-$100 million when all the import
>> duties, permitting, etc were said and done.”
> No, you can purchase old military surplus stuff – even jets –
> pretty cheap, basically for scrap value. Maybe under $1M.
> And that was especially true in the post-Soviet free-for-all.
> What’s fabulously expensive is taking that worn-out junk and
> keeping it in safe flying condition.
Not in this case: this was a MiG-29, not an Aero L-39. I can’t remember if he got it from the (then) Czechoslovakian A or Polish Air Force, but was fairly new and capable of both supersonic flight and weapons carriage. Even in the post-Cold War era such things were not cheap, and the permits required for an individual to own an airplane with those capabilities aren’t cheap either.
BTW, the US stopped selling surplus jets to civilians around 1960 and the UK about that time too, so there aren’t that many out there except for the aformentioned Czech trainers.
Cranky
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