RELATIVE WEALTH AND RELATIVE DEPRIVATION

by Bruce Dunlavy
(My blog home page and index of other posts may be found here.)

There has been a lot of discussion lately about “wealth inequality,” by which is meant that a few people have a lot of money and a lot of people have very little money. These days, it is usually tied to the notion of a “disappearing middle class,” the result of rich people getting even richer and everyone else either staying the same or getting poorer. One recent study predicts that in a year or so the richest one percent of people in the world will have more wealth than the remaining 99 percent.

Yet, when people are asked if they are rich or poor, most people in America answer that they are middle class. No matter how much money they have, two things seem to resound with Americans: that almost everyone is middle class, and that anyone with pluck and luck can climb into or out of the middle class.

American theologian and political philosopher Reinhold Niebuhr, in works such as The Children of Light and the Children of Darkness, argued that a large, strong middle class is the basis of a democratic society. A country where almost everyone believes himself or herself to be middle class might then be a country that sees itself as democratic in ideal and in fact.

Do most Americans actually consider themselves middle class, irrespective of their actual wealth? In a general sense, the answer is yes, but when we try to find a common definition for who is middle class, the statistics get confusing. According to the Credit Suisse Global Wealth Databook, the mean net worth of Americans (add up all the wealth and divide by the population) is over $300,000, good for fourth place among the nations of the world. But the median wealth (half of the population above and half below) is $45,000, down at 19th place.

And wealth is only one way to define class. Annual income is another. The U.S. Census Bureau reports average annual income to be about $50,000, with the middle 20 percent (40th to 60th percentile) ranging from, appropriately enough, about $40,000 to about $60,000. Only about four percent make more than $200,000 a year.

In 2012, Pew Research reported, 49% of Americans self-identified as “middle class,” with another 42% calling themselves “lower middle class” (25%) or “upper middle class” (17%) leaving only nine percent to be “lower class” (7%), or “upper class” (2%).  That means that if you are in the eighth percentile of income, which is well below the poverty line, you still probably call yourself middle class. You also are probably going to identify with the middle class if you are in the 96th percentile, which is actually in the top five percent.  What makes this so? Are low-income people just trying to make themselves feel better while high-income people are just being modest? Or do they really believe it?

The answer seems to be that they really believe it. How can people in such disparate circumstances consider themselves to be pretty much in the same category? The answer has two parts: the first is the nebulous nature of what – and who – is middle class. Considering that it gets mentioned so much, the term is surprisingly ill-understood. The statistical bases mentioned above are one way to define it, but most people neither understand statistics nor care about them. The second part has to do with our own daily experiences and activities, and the minimal likelihood that we will interact with a wide chunk of the socioeconomic spectrum.  In other words, for most people, “middle class” means “typical of the people I hang out with.” So a person living in poverty who is surrounded by others living in poverty will think of himself/herself as middle class, as will a well-off suburbanite making ten times as much as the person in poverty.

Think of it this way: in America (where I hang out) I am solidly middle class, but in a world where billions of people survive on next to nothing, I am on a global scale very, very rich. If I lost half my wealth and income, I would consider myself deprived, but I would still be among the world’s richest 20 percent. There is not only relative wealth, but relative deprivation.

That’s part of the reason politicians bandy the term “middle class” about so loosely. They think they are middle class, too.

In 1996, North Carolina Congressman Fred Heineman lost his re-election bid, partly by suggesting that with a Congressional salary of $123,000 a year and a police pension of $50,000 a year (a total amount equivalent to about $280,000 in today’s dollars), he was “lower middle class.” He considered $750,000 the upper end of a middle class income. Of course, that cost him a lot of votes, because most of his constituents didn’t think his income was lower middle class. They didn’t hang out with people who made the kind of money Heineman made. But he hung out with other Congressmen, lobbyists, and big campaign donors – people who made at least as much as he did and often a good deal more.

During the 2012 presidential election, Mitt Romney and Barack Obama both put the upper end of a middle class income at $250,000 a year, which we have found out is actually well into the upper five percent. That year, Ann Romney drew laughs and jeers when she said her family had known deprivation because, back when she and Mitt went to Brigham Young University, they had to sell some of Mitt’s stock investments to pay for tuition, and then when he was at Harvard they had to take a loan from his father (George Romney, president of American Motors) to buy a house.  To most people, having to sell some of your stocks is not deprivation. To most people, no food on the table is deprivation. However, those who live in the circles in which the Romneys travel would find stock-selling not only evidence of hardship, but also something of a disgraceful embarrassment.

The very rich do not live off their wealth – their “capital.” They live off the income generated by investing their capital. A prime example might be another member of the automotive elite, Anna Thomson Dodge, widow of Horace Dodge, one of the founders of Dodge Motors. In 1926, she invested her proceeds from the sale of her late husband’s portion of the company in tax-free municipal bonds, which gave her a lifetime income of over $1,500,000 a year for which she did not even have to file an income tax return, let alone pay income taxes. Her capital was invested in the bonds, and she had that income every year from the interest on those bonds.

Among people with as much money as the Dodges and the Romneys have, it is very bad form to “dip into your capital.” If one has to sell some stock to pay for expenses, one probably cannot hold one’s head up at The Polo Players Club for at least a couple of years. In fact, for people of Mrs. Dodge’s generation (she died in 1970 at around 100 years old), working was beneath the dignity of the rich. They lived off the income from their inherited money.

Consider The Great Gatsby. Nick Carraway was, by the standards of most of us, very well-off. He had attended an eastern prep school and then Yale University, which was at that time almost exclusively an institution for the wealthy. He also had what we would consider an excellent job – Wall Street bond trader – and he could afford to rent a place on Long Island for the summer. Yet his rich cousin Daisy and her family considered Nick “the poor relation” because he had to work, while she and Tom and their friends spent their time going to parties, playing polo, and cashing dividend checks.

So, in the last analysis, what does it mean to be middle class? The answer, as is so often the case, is, “That depends.” It depends on whether you use statistics and empirical evidence to define the term, or base it on your own circumstances and your own experience.