Why don't rich people realize they're rich?

For starters, the costs of their lifestyles are often so high that they don't have much cash on hand

Feeling cash poor.
(Image credit: Illustrated | Gary Waters/Ikon Images/Corbis)

How can people earning $250,000 a year think of themselves as middle class? Half of all American households make $53,657 a year or less. Those that make $157,479 or more are in the top 10 percent, and those making $206,568 or more are in the top 5 percent.

Yet people making $50,000 to $100,000 say they'd need to make $260,000 to feel rich. People making over $100,000 say it's half a million. Only 28 percent of investors with $1 million to $5 million in assets consider themselves "wealthy." People in the top 10 percent, top 5 percent, or higher regularly say they're stressed about money. Major Democrats, including Hillary Clinton and Barack Obama, define "middle class" as anyone making $250,000, complete with a promise to not raise taxes on anyone below that threshold.

What's going on?

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The first clue can arguably be found in this 2014 Brookings report: At least one-third of American households live paycheck to paycheck, and two-thirds of that one-third extend into economic reaches myself and Brookings would consider wealthy or at least well-off. These are people who have assets, but often these assets come in forms that are very hard to change into cash: housing and retirement accounts and the like.

This relates to the way high costs of living in major cities eat into paychecks. There are rents or mortgage payments, car payments and maintenance, insurance, the costs of educating children, and payments for the student debt to get the degrees that offer access to high-income jobs. Both parents must now work to provide the same income as one parent did decades ago, so now childcare is a necessity. Even food is an issue: One of the more striking aspects of the modern American economy is that the more you earn the more hours you tend to work — often well above 40 hours a week. So people have no time to cook, and regularly eat out in the cities where eating out is more expensive than anywhere. Add it all up, and you can see how even a six-figure salary can go right back out the door very quickly, leaving even the rich "cash constrained."

Now, this absolutely doesn't mean the upper class deserves the same prioritization as people who live paycheck to paycheck and can't afford to live in nice urban centers and eat out and pay for private schools. I do think it's fair to scoff at these concerns as the ultimate first world problems, tell the upper class to suck it up and pay higher taxes, and move on.

But I'm not sure that alone is the most useful response.

Paul Krugman had a helpful article recently on the economics of cities, and the ways they've become hubs for inequality and high incomes. People who can flock to cities to earn high incomes. But because we can't increase the supply of land, and land becomes more valuable as more people want to live on it, this drives housing prices through the roof. Costs of other basic life amenities like food, transportation, and entertainment soon follow. Throw in the punishing nature of modern work hours and the desire to cut commute times, and you get a kind of ceaseless ratchet effect: Higher incomes drive higher costs.

At the very top, inequality becomes truly vertiginous: The top one percent make vastly more than the top 5 percent. The top 0.1 percent make vastly more than the top 1 percent. And so on. This creates status anxieties and a perceived need to "keep up with the Joneses" that's just in people's heads. But it also has very concrete economic effects: It determines where jobs that can provide a decent living are and are not available. It also yanks up costs and price points. A median family spends far more on mortgages, health care, car expenses, and childcare than back in the 1970s.

Everyone would like to make more money. But in the modern American economy, actually doing so really does present a kind of Faustian bargain: Good pay in exchange for joining a never-ending and heavily gilded rat race.

Some of this could be alleviated if members of the upper class showed more self-discipline and less concern for how their car or house or lifestyle looks compared to their neighbors'. But demanding this sort of asceticism is not so different from saying the solution to poverty is stronger families and better work ethics. The left correctly realizes that we shouldn't be demanding greater virtue from the poor. Human beings are naturally flawed creatures. Instead, we should be changing the economic systems and structures in which they live their lives. Applying the demand for greater virtue to the rich may be less morally ugly, since it punches up rather than down. But it's no less silly as a basis for political action.

So how do we change the economic systems in which the upper class live?

Well, if the extreme inequality at the top is an issue, starting with tax increases on just the top 0.1 or 0.01 percent is not such a bad idea. The point of taxes is to drive the flow of money and resources into more jobs and higher wages as much as to raise revenue. Mid-century income taxes at the very top were so high they effectively created a maximum income. We should bring that back. Alter the economy from the top down first, which will make higher taxes further down the income ladder more politically palatable.

We should also make necessities like health care, child care, education, and public transportation free and easily accessible to every American, rich or poor, either through cash transfer programs or by having the government provide the service directly. We can help bring housing costs down by doing what we can to deregulate zoning laws. But this isn't a solution in itself, so we should build far more public housing to bring up supply.

Finally, since all that initial spending won't be paid for with taxes just on the tippy top, we need an all-out political battle in favor of higher deficit spending. We can afford it, and the economy needs it anyway.

A more just and equitable economy won't be all things to all people. It certainly won't offer the upper class a bigger paycheck than they enjoy now. But it can offer them a less hectic lifestyle, freer from anxiety, where a smaller paycheck actually goes further in buying the concrete things that actually make for a happy life.

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Jeff Spross

Jeff Spross was the economics and business correspondent at TheWeek.com. He was previously a reporter at ThinkProgress.