2 min read

Battle of the Bulging Middle Class

The mainstream media is starting to spread the narrative about rising income inequality in America:

[In 1915]King was somewhat troubled to find that the richest 1 percent possessed about 15 percent of the nation’s income. (A more authoritative subsequent calculation puts the figure slightly higher, at about 18 percent.) This was the era in which the accumulated wealth of America’s richest families — the Rockefellers, the Vanderbilts, the Carnegies — helped prompt creation of the modern income tax, lest disparities in wealth turn the United States into a European-style aristocracy. The socialist movement was at its historic peak, a wave of anarchist bombings was terrorizing the nation’s industrialists, and President Woodrow Wilson’s attorney general, Alexander Palmer, would soon stage brutal raids on radicals of every stripe. In American history, there has never been a time when class warfare seemed more imminent… Today, the richest 1 percent account for 24 percent of the nation’s income.

Via Introducing the Great Divergence

One thing that amazes me about America is that almost everyone considers themselves middle class. Well at least everyone in the top half of the income distribution. To put some numbers to this discussion, median household income in the US in 2008 was $52,175 and 33% of households made between $35,000 and $74,999. That said, President Obama defines the middle class’s upper bound at $250,000/year (which excludes ~2% of households, which is not near the middle by any definition of middle I’ve ever heard). Obama comes off as reasonable compared to Walter Kiechel III, author of Lords of Strategy:

One can make a decent living as a senior partner at a major consulting firm — these days… upward of $3 million to $4 million a year — but as a few of the breed complain privately, it’s no way to become wealthy. [Emphasis added]

A decent living?! That’s roughly 70 times median income (for a household, let alone an individual earner)!!! As a country, we have lost all sense of proportion about what middle class means. It’s defined by a images from TV sitcoms rather than reality. I understand that people anchor their expectations based on their peer group, but this is ridiculous. The American middle class is ballooning bigger than American middle sections!

As I’ve started to look into business school I’ve also started to do a lot of soul searching about my career goals and lifestyle expectations. I recently decided on a bottom line income I want to be earning by the time I’m 30, which has been extremely helpful in focusing my goals. I think we need to do same sort of thing as a country by deciding on what we consider a “fair” middle class.

Like it or not, government policy is an exercise in social engineering. We decide who gets extra help and who pays for it. When we set our goals about health care, welfare, social security, taxes, and deficit reduction we make tough choices. Can we make good choices with an unreasonable definition of middle class/average? Won’t bloated definitions lead to unrealistic expectations and overly generous, expensive polices? Doesn’t that sound a lot like the situation we are in today?

In the postwar era when the U.S. economy exploded to global dominance unlike anything ever before seen, we could afford to make unreasonable choices and count on growth to fix our mistakes. As we enter an era of slower growth, we need our expectations to come down from the clouds and or decision making to be calculated and error free. The time of tough choices is upon us, what do you think is fair?