More money, less house.

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Where Rich Feels Less Fortunate

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Bloomberg View alumnus Josh Barro has some rather astringent words for people who make $200,000 a year and don't feel rich. Now, before I go on, I should say that I basically agree with Barro: If you make $200,000 a year, that's really a lot of money, and you can't really call yourself middle class. Yes, yes, I know: After paying for a home in a good school district, activities and maybe some tutoring for the kids, and a not-really-all-that-glamorous vacation, there's not much left. But that seems to put things like a nice home, educational opportunities for your kids and vacations in some basket other than "consumption," which shouldn't count against your income. But most people can't afford these things.

Most people do not live in an expensive coastal city with high-paying job opportunities for professionals, and also, most people are not professionals. Most people's kids don't get to go to school in a great district with an excellent college placement rate and, in fact, will not be able to attend a selective four-year college, if they go to college at all. Most of those children will not have their college applications "enriched" by expensive activities. And, believe it or not, many of them don't even go on an annual vacation beyond piling into the car to visit relatives. Those are things that are bought by a small number of Americans for their very lucky families, and if you can do the same, you should be very glad of your good fortune.

As I noted last week, one reason people with these advantages don't feel rich is that they compare themselves to the people they know -- and if you are a highly educated professional, things like "children attend a selective four-year school" do not feel like a great gift that they are, with rare good fortune, able to provide their children; they feel like the very barest baseline for a decent existence. Virtually everyone I know went to a selective college, and indeed, so did most of their parents. So it comes to seem as if preparing your children for the same must be the struggle of all people, rather than the province of a fairly privileged class ... and it therefore seems odd that you're having trouble paying for it all on what sounds like a very good income. It's easy to forget that without that income, you wouldn't even be thinking about it.

That said, I think there are some other reasons that 30- and 40-ish professionals in places like New York City don't feel as rich as they ought. For example, take this passage from Barro:

reader from Queens wrote: “My husband and I make a little less than $200,000 a year and I cannot consider myself affluent by any means.” The median income for a married couple in Queens is $74,248.

... It’s true that New York has a U-shaped income distribution, with disproportionate numbers of high- and low-income households. But there are parts of the New York area that are full of middle-class families — not Bethesda-middle-class, real middle class.

I read this and thought "Yes ... but."

The median married income in Queens is $74,248, but the median home price is over $500,000 and the average rent for a two-bedroom apartment is $2,500 a month (a one-bedroom averages a little under $2,000). After taxes, insurance contributions and the like, the median married family in Queens would seemingly be struggling to rent an apartment, especially if they have children.

And indeed, many people in New York City do pay a very high percentage of their income for rent. But there are also a lot of people in Queens who bought houses years ago, when house prices weren't so outlandish, or who enjoy rent-stabilized apartments. Unfortunately, your average 37-year-olds who are working on their second kid do not have the option of moving to Queens ... in 1988. Unless they grew up in the city, they also don't have the option of inheriting a home from their parents (which can't be that common, but nonetheless describes the situation of an actual majority of my city-born friends who are still living there). They have to buy or rent at today's market prices. So newcomer money doesn't go as far as many of those people who are contributing to that median.

A broader point can be made about age: Middle-aged people make more money than young people or retirees do. Your income rises sharply in your 20s, plateaus in your late 30s and drops off starting in your 50s. Conveniently, your peak earnings also coincide with the point at which your expenses are highest. Retirees are often rent-stabilized, or bought a long time ago, so they can still afford to live there. The young live at home or crowd into small apartments, effectively pooling many small incomes into something that may well be above the borough median. So the "median income of families with kids" is probably somewhat higher than the median income of the borough as a whole, or even "married couples."

The third thing worth noting is how progressivity plays with the perceptions of the median versus the top -- and especially in New York City. As Barro notes, New York City has a U-shaped income distribution: a lot at the top, a lot at the bottom, less than normal in the middle. It also has high marginal tax rates (both the city and the state impose a progressive income tax on residents) and an extremely progressive benefit structure -- even before Obamacare, a third of the city's population was on Medicaid.

If you're part of a married couple making $200,000 a year, almost everything has phased out -- except your Social Security taxes, if you're both working. There's no financial aid for college unless your kid is a genius or an athletic prodigy; you have to pay full freight. Your taxes are much higher than those of people at the median. You probably get your health insurance through work, but if you don't, there's no subsidy. We could run through all the means-tested programs and progressive taxes out there, but they all point to the same conclusion: In New York City, exactly the same consumption package costs the $200,000 family a lot more than it does for the family making $70,000 a year.

Note that I'm not saying that those people are worse off: Their marginal rates are certainly higher, but they're not 100 percent. What I am saying is that the apparent distance between the median and the affluent is not as large as it sounds -- especially in many coastal cities, where those medians can be extremely misleading because of things like rent control and the rapid run-up in home prices and rents that has taken place in recent years. The people in the bottom deciles are highly subsidized; the people in the middle are often heavily selected for people who bought years ago, or have a rent-controlled apartment, or have no kids to worry about schooling or a willingness to crowd many people to a room. The median-income folks who wanted to settle down in the old neighborhood and start a family but couldn't afford to all left, just like most of my friends. 

So when you look at those neighborhoods and think, "See, average people can afford to live there, so obviously you, rich person, could move there with money to spare," this may not actually be correct. My census tract, which is about 95 percent row homes, has a median income of $52,000 a year. The median income of a four-person family that could actually afford to move here today is at least three to four times that amount. So there's one answer to the puzzle of why affluent parents who feel strapped don't just move somewhere with a lower median income. The answer is "They did, and it's still not cheap."

Of course, there are places still farther out where they could move -- and indeed, friends with incomes similar to ours have done just that, since they are now priced out of our neighborhood. It's still true that affluent people are purchasing quite a lot with their money, such as proximity to high-paying jobs. But it's also worth remembering that they have to allocate quite a lot of their high incomes to buying something that their lower-income neighbors already have -- and that this is one big reason why they don't feel that much richer than those neighbors.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net