Sunday, April 27, 2008

What really defines the middle class these days?

During this presidential primary season, it is clear that the Democrats consider an income of $250,000 as marking the upper end of being "middle class." That seems high, but maybe it is not. I would have said something in the $85,000 to $150,000 range or say $100,000 or $125,000 to pick a single number. I suppose it depends on how you characterize the quality of life that comes with being middle class. Does it mean that you can afford to send three kids to "some" college, or send all three to the top ivy league universities?

To me, being middle class is more a matter of a sense of security than what you can technically afford. By my definition, very few people have truly secure streams of income. So many people who may have incomes above $100,000 today may be one pink slip away from falling a dozen rungs down the ladder.

I think we do need to distinguish at least lower-middle, middle-middle, and upper middle class. Sure, a couple of attorneys or professors might well be "struggling" on $200,000 per year, but that is an entirely different "class" of struggle than a household with an income of $35,000 and three kids. And each of these tiers probably has three sub-tiers. I would suggest that the middle-middle class ranges from $50,000 to $100,000, with some clear distinctions in lifestyle and choices between the $50,000 to $65, 000 range, the $65,000 to $85,000 range, and the $85,000 to $100,000 range. I freely admit that some people would insist that the $85,000 to $100,000 range should be considered upper-middle class.

Now, the question becomes whether the upper-middle class extends only from $100,000 to $125,000, to $150,000, to $175,000, to $200,000, to $225,000, to $250,000, or even beyond.

If we read the Wikipedia article on middle class, we find that the defining characteristics are no income or spending per se, but degree of economic independence and degree of social influence and power. The lower class has no economic independence and no social influence or power. The upper class has both economic independence and social influence and power. The middle class has a degree of economic independence but not a great deal of social influence or power.

I would draw the line between middle class and upper class as whether a household has to spend most (more than 75%) of its energy focusing on maintaining economic independence. If the household income is high enough, the household can spend most (more than 75%) of its energy either on other pursuits such as charity, social causes, etc. or pursuing additional income not because it is needed for economic independence but simply for the satisfaction or power that comes with it.

My 75% threshold is arbitrary. It could be 80% or 90% or 60% or even 50%. I would note that even households with very modest incomes manage to squeeze in some amount of non-economic social efforts such as volunteering, church, youth activities, charities, social organizations, etc. The issue is whether the household income is sufficient so that the household can choose to reduce income in favor of non-economic activities without feeling any significant financial pinch.

One could take the approach of defining upper class as a household than absolutely does not need to work to maintain its economic independence. So-called "trust babies" would fit this bill.

OTOH, there are plenty of households which have very high incomes but do not have the wealth to support a middle-class life style solely on income from wealth and investments. They may in fact be on a path to the upper class, but they have not yet arrived. I have argued that you need $50 million to be comfortably wealthy. Maybe we need another category called working wealthy which covers households which are clearly capable of living the lifestyle of the upper class, but only because they are working a very-high-paying jobs.

So, I am torn here by using the criteria of not needing to work for upper class while households with very-high incomes of $500,000 or more clearly do not have the same issues as the true middle class (e.g., whether they can afford to send their kids to top-tier universities or even private schools).

For now, I am going to suggest that my working wealthy should in fact be categorized as upper class.

Alas, that still does not finish the job. What about households earning between $150,000 and $500,000? Where do you draw the line? $250,000 seems rather arbitrary. I will suggest that the primary criteria is the extent to which the household shares the common middle class issues. I suggest that you are no longer even upper-middle class if you meet at least a few of these criteria:

  • You can afford to send your kinds to private school
  • You can afford to send three kids to top-tier universities without any financial strain
  • You never worry about the cost of health care
  • You can afford to own or at least rent a yacht
  • You can afford to give each of your kids a high-end automobile
  • You live comfortably enough on a single income that having significantly higher income from a second income in the household is not a significant incentive to do so

It is possible for investment bankers and hedge fund managers and high-end attorneys and doctors and professors to reach those levels of income that allow them to live a lifestyle comparable to those who are truly wealthy, but an average attorney or professor could well fail to meet more than one or two of my criteria for being working wealthy and hence on the bottom rungs of the upper class.

So, if we have a household with two attorneys or two professors earning over $150,000, the question is whether they really do need most of that income to maintain basic economic independence. There is a vast gray area since obviously they may "need" the income to afford a summer house and two high-end automobiles, but maybe they could live just as comfortably with a more modest summer cottage and mid-range automobiles. The extent to which they can freely choose to spend money on high-end luxuries gradually begins to phase the household from middle class to upper class. If they can only afford the luxuries with two earners, that says that maybe they are still middle class, but that they may simply be straddling the fence between middle class struggling to make ends meet for non-luxuries and upper class "struggling" to decide which luxuries to choose from.

In the end, I think it all comes down to degree of choice that a household feels that it has. The threshold for entering the middle class is that you have sufficient income to afford what a person with common sense would consider basic necessities for a modern household, such as not worrying how to pay for food, access to basic health care, can afford basic amenities such as cable TV, Internet access, annual vacation, etc. I would define the upper class as having the flexibility to take on a fair amount of non-financial activities without putting their financial independence at risk.

I am tempted to define yet another category that is not clearly middle class or upper class or even working wealthy. I will call it the working near-wealthy, where the households are clearly spending a lot of money on luxuries or other discretionary expenses or charities but not quite to the level of a truly wealthy household, and maybe they are only able to support this level of near-wealth by having two incomes.

Now the question becomes whether the working near-wealthy are in fact the highest rung of the middle class or the lowest rung of the upper class. Maybe they are in fact both, depending on the context of the question. I am tempted to define the working near-wealthy as the range $150,000 to $350,000. I do not think a household earning $125,000 would be considered "wealthy" by almost any metric and I think that a household earning close to $400,000 would clearly be considered in the working wealthy category. Again, these numbers are quite rough and arbitrary. It so happens that the midpoint of my working near-wealthy range is $250,000. That seems like a good compromise.

After all of this, I am still not sure where to draw the line between middle class and upper class, or between middle class and the working wealthy, other than that it is somewhere between $150,000 and $350,000. OTOH, this issue has only come up in the context of government tax policy. The issue seems to be that the lower tiers of the working wealthy, the working near-wealthy, very much resent being treated as if they were the same as those several rungs higher on the ladder. And the people at those higher rungs still have enough of a "work" mentality that they are happy to keep a few more of their bucks all because politicians want to salve the resentments of the lower rungs of the working wealthy (the working near-wealthy.)

The Democrats seem to understand the economics here and are using it as a wedge issue to separate the lower rungs of the working wealthy from the upper rungs. Giving a tax preference to those people earning $100,000 to $250,000 quiets most of the more intense resentment and assures that the Democrats can count on the support of those upper-middle class voters. Besides, those earning $100,000 to $250,000 are ideally positioned to make substantial campaign contributions. The "calculus" suggests that the number of people earning more than $250,000 is small enough to simply write them off and let them "go Republican."

Incidentally, $175,000 is the household threshold for the fiscal stimulus payments that are going out starting on Monday.

In short, I do not personally think that a household earning $150,000 to $250,000 is necessarily properly considered middle class or even upper middle class, but I can understand why the Democrats are targeting such households and labeling them as middle class.

-- Jack Krupansky


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