Wednesday, March 14, 2012

Income Inequality: It's Hard Out There For the Rich (But Not the Very Rich)

Last week I highlighted a Chicago Fed report that, counterintuitively, found that in the wake of the Great Recession, people in higher income brackets are actually more pessimistic than anyone else about their expected future incomes.

I've been thinking about some logical reasons for this, and one basic one leaps to mind: bonus compensation. If a substantial part of your potential annual income is wrapped up in bonuses, it can vary substantially, particularly in the event of market shocks or contractions.

The same goes for investment income or stock options. In short, the incomes of the wealthy, in particular industries at least, are a lot more variable than that of the merely salaried. They still make a lot more money, but that income can fall by a substantial percentage, which normally isn't the case for salaried employees.

Today I came across a 2009 paper by Northwestern economist Robert Gordon, "Has the Rise in American Inequality Been Exaggerated?" (PDF), and it offers some other possibilities for the pessimism of the wealthy. (Though the very wealthy should come away from it with no reason to worry.)

One journalistic genre that's emerged in the New Gilded Age is profiles of the plaintively wealthy, brief looks into the economically stretched lives of high earners. One that got a lot of attention recently was "Wall Street Bonus Withdrawal Means Trading Aspen for Cheap Chex," a Bloomberg piece by Max Abelson:

Schiff, 46, is facing another kind of jam this year: Paid a lower bonus, he said the $350,000 he earns, enough to put him in the country’s top 1 percent by income, doesn’t cover his family’s private-school tuition, a Kent, Connecticut, summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex.

“I feel stuck,” Schiff said. “The New York that I wanted to have is still just beyond my reach.” Read More