On Father’s Day weekend I spent a lot of time thinking about income inequality. We’ve touched on this topic in the past, and I’d like to spell out some thoughts a little more extensively. You and I are income inequal, as it happens, so this could be an interesting forum to have this conversation, even if you may be delayed in responding due to your technology hiatus.
What got me started on this were a couple articles in the NYT and in The Atlantic. They were highlighting a new book coming out by Richard Reeves called Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do about It. I’ll try to state his case as well as I can from the articles, although I have not yet read the full book. Any mistakes are my own.
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THE DREAM HOARDING THESIS
The upper middle class in the US, defined as the top 20% by income, is pulling away from the middle class and increasingly preventing upward social mobility for others. We all know about the top 1% — the ultra-rich — but the rest of the top 20% wields just as much influence, to the detriment of everyone else. You could even say they are rigging the system. They live in exclusive communities that middle class people can’t afford, and they are helped by deducting the interest on their huge mortgages; they send their kids to the best schools and colleges, the latter being paid for by tax exempt 529 plans; the kids then get the best internships (and jobs) due to the family’s affluent social network.
From start to finish, people in the upper middle class have the advantage, and they delude themselves in thinking they’ve earned it by merit. They don’t see their own luck and privilege, nor do they admit they’re rich. What’s worse, they support policies that will keep them elevated and oppose policies that might create a more even playing field for the lower classes. It’s time to raise awareness and rethink policies that only favor the rich. Most of all, it’s time for the rich to admit that they are the problem.
This thesis seems to be pointed directly at me. Am I really a problem within society? Am I a Dream Hoarder?
Before disputing this, there are certain facts that I’m happy to grant.
POINTS OF AGREEMENT: I’M RICH AND I’M LUCKY AND I’D LIKE TO KEEP IT THAT WAY
Fact 1: I’m in the upper middle class, and the US upper middle class is rich.
Here’s where my household ranks in the US.
- Income: $260,000. Within top 2%.
- Net Worth: $630,000 (and growing). Within top 15%.
By the measure of income, the top 20% starts at $112,000. One could argue that six figures goes further in Fargo than in Chicago, but by and large I won’t dispute that a person should be comfortable with this salary. I’ll also grant the more controversial claim that this makes a person RICH. One won’t “feel” rich on $112K in Chicago (or NYC, etc), but feeling rich is subject to lifestyle choices. Objectively speaking, to make more than $112K is to have one of the highest incomes in the richest country with the highest standard of living in the history of the world. It’s silly to deny that, so I won’t.
Fact 2: It takes some luck to get into the upper middle class.
I recently got into a virtual tussle with ThinkSaveRetire about luck. He was arguing that if a person doesn’t meet his/her goals (like early retirement), it’s all their fault. I disagree. Practically speaking, I don’t live my life as if it depends on luck. But, I acknowledge that everyone is lucky (or unlucky) to some degree by being born with a genetic inheritance in a particular time and place with a family / culture / society that supports (or doesn’t support) their ability to make choices. The reality is that anyone who is reading this blog has had an incredible amount of luck — living in the West in 2017 with internet access puts them almost automatically in the top 1% of human history in terms of wealth (hat tip to Make Wealth Simple’s article: “You are richer than you think.”)
My own luck can be seen in my origin story. I wasn’t born as rich as Ivanka Trump or as genetically gifted as Einstein or Michael Jordan, but there wasn’t anything holding me back, per se.
Fact 3: Mortgage interest deductions and 529 plans disproportionately favor the rich.
Agree. This is simple math. The rich take on bigger mortgages and have extra money to save for college, so these policies lean toward the wealthy. Also, it goes without saying that if one pays more taxes in a higher tax bracket, then any tax break will result in a bigger benefit. The progressive tax system by definition incentivizes the rich to be cognizant of tax breaks. This is easy to see when comparing our tax bills, Penny.
I should note there’s strange sort of circular reasoning for one to quibble with the upper middle class about taxes. According to Forbes, those who make over $100k pay 80% of all income taxes. So complaining about tax breaks for the people who pay most of the taxes is like complaining about frequent flyer miles for those who frequently fly. You can’t have one without the other.
Fact 4: Upper middle class advantages can be self-reinforcing across generations.
If a family’s income is high, it’s quite likely that the next generation in that family will have a financial advantage and be able to maintain higher levels of wealth. They are starting from a more secure place, more inoculated to tragedy or bad luck. Many rich families have financial security as a goal. I admit this. I want to build a family legacy through financial security, education, and smart estate planning.
I’ve ceded a lot of ground here. There are some basic facts that the Dream Hoarding thesis points to, even if I disagree with the implications. So where, exactly, do I disagree with this idea of Dream Hoarding?
IS THE AMERICAN DREAM AN OUTCOME OR AN OPPORTUNITY?
If I had to describe the American Dream to an alien life form, basically I would say that it’s about opportunity. Not exactly equal opportunity (ref. Michael Jordan — I don’t have the opportunity to dunk a basketball, I’m too short), but the opportunity for basic improvement. A person in America should have the opportunity to work toward a better situation in life. But opportunity doesn’t guarantee a particular outcome in a particular timeframe. It will always take a bit of luck to attain a favorable outcome. That’s life.
The system can’t control luck or genetics, but it should strive to be fair to most people most of the time. Over time, perhaps over generations, a person’s family should be able to increase their standard of living to a “middle class” existence, which, as I’ve mentioned, is pretty darn good in the richest country in the history of the world. A place to live, a job, food, and the freedom to pursue happiness. That’s the desired outcome. It’s not guaranteed, but as you’ve shown, Penny, you don’t need to make a lot of money to achieve this in the US. (And good news — your family income has been on an upward trajectory.)
But what shall we make of our inequality? Using rough data from our origin stories, check out our respective household incomes.
I know this is only a specific case of 2 cousins, but it’s worth asking: Was there some dream hoarding going on here? Is our inequality due to luck or choices or both?
The way I see it, a person is born with a certain amount of luck. You can’t change the circumstances of your birth or your genetic makeup. After that, your life outcome will be determined by 2 factors:
- More luck (health, key life events, etc).
- Choices (education, career choice, who you marry, etc).