Tuesday, June 26, 2012

Daily Policy Digest: Who Are the Rich and How Do we Know?

Verne Strickland Blogmaster
Article by Daily Policy Digest
June 26, 2012

Does Obama play fast and loose with figures on wealth?

It is often a little difficult for rational economists and policy analysts to understand President Obama's near-obsession with certain arbitrary and self-imposed standards like his definition of the "rich." The basis for numerous policy stances and delineations, the president's classification between rich and non-rich is grossly misleading and myopic, says Merrill Matthews, a resident scholar at the Institute for Policy Innovation.
President Obama has repeatedly claimed that in the current economy, an individual is rich if they are making more than $200,000 a year (for families, the figure is $250,000). This grouping is incomprehensive and misleading.
  • These classifications that are based entirely on incomes fail to take into account assets, which can tell us much more about the comfort in which one lives than incomes.
  • One person, for example, may have $10 million in assets that offer an annual 1.5 percent return, thereby providing that person with $150,000 in income.
  • The abovementioned individual is, by the president's standard, not rich, while a person with no savings, no house and no other real asset but with $200,000 in annual income is defined as rich.
The president's seemingly arbitrary distinction also fails to consider the relative expense of living in a given area. An income of $200,000 would amount to far less if the worker is in a place like New York or San Francisco, where it is not uncommon for a third of pretax income to be lost on rent.
But even if you accept that accounting for assets and cost of living are unnecessary, we are still left with the arbitrary choice of $200,000 as the bright line between rich and poor, when by all rights there are more appropriate delineations.
  • The U.S. Census Bureau looks at income in quintiles, which makes for convenient analysis and a more comprehensive understanding of incomes in the United States than "rich" and "not rich."
  • In 2010, the average pretax income in the lowest quintile was $9,906 -- clearly poor.
  • But if everyone agrees that the lowest quintile is poor, then why isn't everyone in the highest quintile, with an average income of $157,369, considered rich?
This speaks to the arbitrariness of the president's income based policies.
Source: Merrill Matthews, "Who Are the Rich and How Do We Know?" Institute for Policy Innovation, June 12, 2012
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