Income Inequality and its Discontents

This weekend,  Todd Henderson attracted a great deal of attention when he published (originally posted here but subsequently removed and cached here) an extended complaint about how difficult it will be for he and his wife to make ends meet if the Bush tax cuts are not extended by the Congress.

What made these comments so striking was the fact that Todd Henderson is a Law Professor at the University of Chicago and his wife is a practicing physician.  Based on his declarations of his tax payments and other info Professor Henderson unwisely shared with his readers, Berkeley's Michael O'Hare estimates that the Hendersons earn an estimated household income of $450,000 a year.

Not surprisingly, Professor Henderson has been catching quite a beating for his kvetching from a number of observers (James Fallows provides an excellent summary here).   But it is Berkeley's Brad DeLong who, after reminding Professor Henderson that he is in fact rich, makes an observation that absolutely nails the real issue here.....that the gap between the top .01% of households and everybody else has widened so dramatically that even the rich feel deprived (albeit relatively).

As Professor DeLong puts it,

"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.

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 Henderson's $455,000, they are barely middle class--"How can they afford cell phones?" Henderson 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. Henderson doesn't look down.

Instead, Mr. Henderson 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. "

While relative deprivation has long been a sociological fact of life and is an interesting phenomenon in its own right, there is a larger lesson here that goes to the heart of some major economic and social challenges facing the United States. 

What Professor Henderson -- who no doubt now regrets ever opening his mouth on this subject -- reminds us, is how many different worlds we Americans live in, worlds whose boundaries appear to be increasingly divided by income.

In future posts I will discuss some of the social and economic implications of rising income inequality and the important role it may be playing in the current economic recovery.