Fascinating Reading

I've just spent the past several hours reading a post by University of Chicago Law Professor Todd Henderson and several responses to it.  Professor Henderson't post "We are the Super Rich" has since been deleted, but thanks to the wonders of google, can still be found here.  The essence of his post is that despite having an income over $250,000, he and his wife -- who is a doctor -- are not really rich.  Here is how he puts it:

"The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)"

"Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time."

"We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be."

"Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive."

My initial reaction to this rant was dismay that this person is apparantly teaching law and economics at one of our most prestigious law schools.  I don't doubt that he does not feel rich.  However, just because you chose to put all of your money into a really high end house and several luxury cars does not suddenly mean you don't have any money to spend.  Not to mention that anyone who is putting money into stocks when they have such a high debt load is a financial idiot.  It is sad that this person does not understand how truly lucky he is and only dwells upon his shortcomings.

This view was strengthened when I read a blog posting by Michael O'Hare, who attempted to break down Professor Turners numbers in greater detail.  Click through the link to get the full breakdown, but Mr. O'Hare's well reasoned calculations conclude that based upon the taxes he pays, Professor Turner's family actually makes closer to $500,000 a year, lives in a million dollar house and is setting aside at least $33,000 a year towards retirement.  By any accounting, that is the provence of the rich.

However, the most fascinating reading stemming from the Professor Henderson's blog was a response post made by Cal Berkley Economic Professor J. Bradford DeLong.  This may be the single best comment discussion I have ever read on the internet, with surprisingly little in the way of personal attacks and lots of actual back and forth discussions.  It almost makes me cry for the mostly wasted potential of the internet.  I highly suggest you click through the link and read not only Professor DeLong's full post, but the many comments as well, but for those who are too lazy to surf, here's the conclusion:

"Professor Xxxx Xxxxxxxxx's problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that."

"But if he values the high-end consumption so much, why doesn't he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations--doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be."

"But why does he think that that is the way things should be?"

"And here is the dirty secret: Professor Xxxx Xxxxxxxxx thinks that that is the way things should be because he knows people for whom that is the way it is."

"Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America had an income equivalent in today's dollars $190,000 a year. They know of 1000 people--900 of them poorer than they are in income brackets 90-99% and 100 people richer than they are in the top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from $85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class who are not as successful as you. You don't look downward much. Instead, you look upward. Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they would have known of 1 person of that 100 who was seven times as rich as they were."

"Thus Professor Xxxx Xxxxxxxxx in 1980 would have known who the really rich were, and they would on average have had about four times his income--more, considerably more, but not a huge gulf. He would have known people who were truly rich, and he would have seen himself as one of them--or as almost one of them."

"Now fast forward to today. Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year--the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Xxxx Xxxxxxxxx's $455,000, they are barely middle class--"How can they afford cell phones?" Xxxxxxxxx sometimes wonders."

"But he wonders rarely. He doesn't say: "Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!" For he doesn't look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Xxxxxxxxx doesn't look down."

"Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world."

"And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them--widening income inequality over the past generation has excluded him from the rich who truly have money."

"And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at... Barack Obama, who dares to suggest that the U.S. government's funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations."

"Do I wish that Professor Xxxxxxxxx had a little more self-knowledge? Yes. Is it pathetic that somebody with nine times the median household income thinks of himself as just another average Joe, just another "working American"? Yes. Do I find it embarrassing that somebody whose income is in the top 1% of American households thinks that he is not rich? Yes."

"Do I hope to educate him so that he has a better grasp on reality and better understanding of America and of public policy? Yes."

Thank you Professor Delong.  You definitely just educated me.