The Parable of the poor little rich people

Last September,  Chicago Law Professor and neighbor of the Obama family Todd Henderson complained that he just couldn’t make ends meet on a combined family income estimated to be about $400,000 a year.  In February, CNN Morning News Anchor Kiran Chetry interviewed then-White House budget director Peter Orszag.  She seemed flummoxed that 1/4 of a million dollars wasn’t  a modest family income for civilized parts of the country.

“You also talk about letting taxes expire for families that make over $250,000. Some would argue that in some parts of the country that is middle class.” Back in reality, more than 98 percent of U.S. households make less than $250,000.

What is it with all these rich people who continue to whine about not having enough money to exist when they clearly are very wealthy when compared to the vast majority (98%)  of Americans?  What kind of warped perspective on life leads them to shed incessant tears during this kind of economy?  Why-oh-why do we have such a  candy ass batch of plutocrats? Don’t we at least deserve a few that are sincerely rugged?

This is wonky, but there’s a very simple narrative underlying the numbers and analysis.

Catherine Rampell–writing for Economix–offered up an answer in an article called ‘Why So Many Rich People Don’t Feel Very Rich’.  It involves a nifty graph. (You know me and nifty graphs.)  I actually got a better nifty graph from Brad Delong’s page in a thread called On the Richness of the Rich Once Again. But, I would have never found either nifty graph without the help of ‘Why Does Inequality Make the Rich Feel Poorer?‘ over at Paul Krugman’s blog.  I’m going to discuss all of that and harken back to Robert Reich’s thing at Alternet called The Problem Is That America’s Richest 1% Are Raking It in.   You should be able to grok the theme of the parable of the poor little rich people by now.

Now what I have to do is explain why the rate of change along the slope of a curve using log income levels by percentile translates into pearl clutching in mamby pamby plutocracts.  I know you hate math and it makes your stomach turn.  I promise not to use the numbers.  We’re going to just talk about the picture and the lines.    Over on your right is Brad’s nifty graph. You can see that the curve is upward sloping but the slope varies depending on where you are on the curve.

You can see, however, it is positive at all points.  This indicates a direct or positive relationship between two things.  If one goes up, the other does too.  Because the curve isn’t a straight line, the rate at which the curve goes up is different depending on where you are.  This is reflected by the steepness or the flatness of the curve.   Think of it as a hill. You have to slog up a steep hill, but a flat hill makes it easier to go forward.

One of the things of interests shown by this graph is the Log of Annual Income and the other is the percentile of tax units.  The difference between Rampell’s graph and Delong’s graph is the log calculation.   Brad explains why she needs to use the log of annual income compared to the level.  Basically, the log turns the comparison in to a growth rate of annual income.  A level is simply a level.  The log means that we’re using the rate of change happening in incomes as we go up and down the curve.  That rate of change is radically different at the richest levels.  You can see that the slope almost goes vertical there compared to the middle levels where the curve is less steep and somewhat more horizontal.  There’s a story that explains that.   Krugman explains it well so I’m going to start with his explanation.

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