Happy Macro Monday!
Last week on the internet, #EconTwitter’s hot-takes-topic was centered around salary discourse, and primarily whether or not a yearly household income of $150,000 qualifies one’s household as rich or middle class.
I was immediately reminded of this past holiday season, when I was back in California with family, driving through the neighborhood talking about high home values and just who resided in them, when my father jokingly coined the term “California Middle Class.”
Why is such a term so perfectly accurate? Everything in economics can be traced back to the relativity of prices. So let’s start locally.
Living in Northern California
In general, the middle class and upper middle class have seen growth, not only in terms of size, but in terms of income. This is especially prevalent in places like Northern California that have benefited from the growth of the tech boom and a demand to live in highly concentrated metropolitan and coastal areas.
When people talk about the cost of living in NorCal, they’re likely referring to one of two areas; the Bay Area or Greater Sacramento.
Cost of living in the Bay Area, sourced via Bestplaces, OpenStreetMap, and CARTO
According to the U.S. Census Bureau, the median household income in San Francisco in 2019 was $112,449, while the adjusted median per capita income was $68,883. In Oakland, household median income fell at $73,692, far lower than that of San Francisco, but well over Sacramento’s household median income of $62,335.
Relative to the entire United States, San Francisco exhibits a much higher household median income and absurdly higher rental prices, as it is also experiencing a housing crisis. With tough restrictions on building, and the demand for housing exceeding the available supply, the market will simply raise the prices associated with living expenses until it arrives at an equilibrium point.
Below is a cost of living index for San Francisco and Sacramento, compared to California as a whole, and the United States:
Looking at the above figures, one can imagine, a typical family’s budget constraint with an income of $150,000 in San Francisco versus elsewhere in the United States will not afford them the upper echelon status that many seem to think it will. It’s not “rich parents” with mansions and yachts, it’s the cost of food, housing, and transportation, which are all substantially higher relative to the whole country. Those in this bracket will live a comfortable California Middle Class life, with a majority of their assets tied up in relatively illiquid classes.
I want to be clear; I am not saying that those making $150,000 in these areas have it rough, by any means. The point I am trying to make is that income is highly relevant to the cost of living, something I saw neglected in much discourse, and that in some areas high costs associated with housing, transportation, education, food, utilities, etc., will subsequently push those making low six-figures into the middle class, relative to what they could afford in other parts of the country.
When looking at the world through an economic lens, it is crucial to include as many pieces of the puzzle as possible, or our abstractions from reality become so confounded that they are no longer relevant.
Across the Country
In the Washington D.C. metro area, the cost of living is also ridiculously high, with household median income in the District falling at $86,420, and household median income in cities like Alexandria falling closer to those in San Francisco, at $100,939.
Using conventional income-class calculators for the Washington, D.C. and Northern Virginia area puts a family of three with a household income of $150,000 in the middle class, along with 49% of the population:
In San Francisco, the same household also falls in the middle class, along with 47% of the population:
And in Boise, Idaho, the same income level is categorized in the upper income class, along with a mere 17% of the population:
Moving past theoretical views on the goods and evils of taxation, this is chiefly why I, and many of my colleagues1, are against the idea of flat federal taxes that do not account for local discrepancies, often advocated for by a particular subset of the conventional polity.
A common rebuttal I saw was to simply dispel the argument, citing that relative to everyone in the United States, $150,000 is well over household median income of $68,703, and thus rich, so we should raise taxes on them all. This argument is frivolous to me, as it accounts for no associated changes in the relative prices and costs of living. Raising taxes on the middle class will only hurt the middle class.
Taxation is not theft, and as U.S. Supreme Court Justice Oliver Wendell Holmes, Jr. said, taxes are “what we pay for civilized society.” So if we must have them, which we must, they should be relative to the key demographics that account for standard of living and adjusted costs, and we should not deem an entire income group to be of a certain class uniformly across the United States, to counter another common argument.
And while I’ve only emphasized thus far that salaries are relative to other factors such as the cost and standard of living, I think that there is more to the argument than just that. There are restrictions that prevent easy labor mobility, not necessarily in terms of regulation or physical barriers, but in implicit costs often overlooked in factually deficient discourse.
“But they choose to live there…”
Another common rebuttal I saw to the “$150k doesn’t buy much in NYC or SF” camp was that people choose to live and work in high cost cities, and thus, the relativity of what they can afford is irrelevant, and they are still rich. This, to me, was the most mis-informed argument. Factor immobility and geographical immobility cannot be neglected.
Factor immobility refers to the general costs and hurdles associated with moving the actual factors of production; labor and capital. Perhaps an individual has a broad skillset in the field of economics, but for the past 10 years has focused on a specific subset of economics for a given company, and used specific and unique tools that they were trained to use by said company for work. While specialization is an optimal outcome, it can create disincentives to moving ones own factors of production (the self) to another company that they do not have the specific skillset for.
Geographical immobility, on the other hand, refers to costs and hurdles associated with individuals who need to move geographically to find work. It can prevent those in the middle class, or any socioeconomic class, who have established families from seeking employment elsewhere due to established school networks, family ties, or the general costs associated with moving, such as buying and selling a house or renting movers.
While geographical immobility mainly hurts the lower class, preventing individuals from seeking work elsewhere due to geographic constraints, occupational immobility as a whole can be more broadly applied to paint a better picture of why middle class and upper middle class Americans may get locked-in to jobs in relatively expensive areas.
Over the past year, however, this is a problem that we have begun to shift away from. With the world shutting down because of the COVID-19 pandemic, and much of work and school becoming remote, families have started to move to other areas of the country, such as the tech move from San Francisco to Austin, Texas, where the cost of living is relatively lower and income taxes are more desirable.
There are also the principles of lock-ins, search costs, and switching costs to consider. Rigidities cannot be ignored when questioning why individuals don’t simply pack up and move, and in metropolitan areas where the cost of living is high, and making an annual salary of $150,000 truly does categorize one as middle class, why would we seek to punish individuals for high prices?
Punishing the household for living in a costly area seems to defeat the purpose of aiding the middle class, and likely won’t encourage individuals to immediately pack up and move elsewhere. Everything boils down to supply and demand. Where demand for jobs is high, and there is an adequate supply of individuals seeking such jobs for reasons like income and location, the locations themselves are restricted in supply. Land is a finite resources, and scarce resources typically result in high prices, where the prices we see are likely an equilibrium result.
But when prices do get too high and the marginal cost of living in expensive areas exceeds the marginal cost of leaving, households will leave, as we have already started to see this year.
Thinking Rationally
The past week, I’ve seen an endless array of bad takes from a lot of smart minds. While this post doesn’t even cover the full extent to which income disparities can be measured, I wanted to target the general arguments I saw and address what I thought was the biggest issue — major ignorance of the concept of relativity.
A core praxis to the field, economists cannot ignore the principle of relativity. While I had the privilege of being in the late Walter Williams’ class for my first-year PhD micro course, I will never forget his emphasis on the relationship between prices and value; everything is relative to something else, or else the numbers are meaningless.
Past the Permanent Income Hypothesis and Ricardian Equivalence —
Value is subjective. Each person has their own perceived sense of the world, and as such, each person has their own perceived sense of wealth, their own definition of “rich,” and their own idea of where a $150,000 yearly salary falls on the socioeconomic scale, whether or not these perceptions are a mirror of reality.
These subjective views we adopt and uphold are also based on our own perceptions of relativity and our own construction of the world around us. It is a grave mistake to use our own intrinsic models to project our image of what we perceive to be true onto what actually is. One cannot simply say that $150k is rich or middle class across the aggregate of the entire United States without accounting for the differences we all find within succinct sections of the country, and of course distinguishing between the size of the household versus individuals. Nothing in economics is as simple and straight forward as “yes” or “no,” and you should be wary of those who try to convince you otherwise.
So all in all, there is no concrete answer to whether or not a household’s yearly income of $150k is rich or middle class in the United States — it varies. In some places, it is the California Middle Class, while in others, one might be afforded the luxuries of an upper class life.
As to whether or not I think the middle class (or any class) should be taxed more, I think you all know the answer to that.
See you Friday!
All opinions expressed here are my own.
Pretty cool that you've turned awful twitter discourse into a good essay. Really enjoyed this!
Great essay! My one pushback:
I worry that you treat the cost of living as if it were a calibration of prices rather than prices in their own right. Eating dinner and taking the bus in SF is simply a higher value (aka higher quality) of doing a lower quality version of these same things in Kansas.
To say that we should treat SF residents as if they weren't choosing to consume luxury versions of these goods seems off to me.