10/21/10 7:50 PMWe *Are* the Rich - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchSeptember 20, 2010

We *Are* the Rich

Since the "We Are the Super Rich"post is gone from the "Truth on theMarket" weblog, I have grabbed itfrom the Google Cache and put ithere. Anyone who wants thecomments--which are remarkable,in many ways--should email me.

And having rescued it from GoogleCache, I cannot resist a Parthianshot. The post makes three points:

(1) Failing to extend the upper-

bracket Bush tax cuts will harm

aggregate demand because those

taxed are--like him--people who

are "just getting by." They will cut

back on their spending, and the

economy will suffer from

diminished aggregate demand. Iunderstand the "just getting by"problem, but it is "just getting by"in the sense of occasional cash-flow crises--which I understand: believe me, I am sothere too--it is not "just getting by" in the sense of not having the income to buy whatyou want. The answer to this is that he (and I) are atypical. Nearly all people in ourincome range are not "just getting by" in the sense that a small negative shock to our

Dashboard Blog Stats Edit Post

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income will produce a one-for-one fall in our spending. Indeed, that is not true formost people. Because it is not true, Doug Elmendorf and his CBO in the chart to theright rank income tax cuts as among the least effective ways to reduce unemploymentas far as bang-for-buck is concerned. To boost employment we would be much betteradvised to raise income tax rates and devote the extra money to boostingunemployment insurance, or giving employers a break on payroll taxes, or giving abreak on payroll taxes to employers who are hiring. The argument that we need torespond to the planned expiration of the Bush cut in the tax rate on the high bracket byrenewing it in order to keep unemployment from rising fails.

(2) His taxes should be cut because he can spend his money better than the

government can. This is an argument that I feel strongly about, but what I feel stronglyabout is that he has no standing to raise it. It may be true, it may be false, but themoment to raise it would have been in 1981, when Ronald Reagan pushed an unfundedincrease federal spending on defense, and in 2003, when George W. Bush rammed theunfunded Medicare Part D through the congress. As Milton Friedman liked to say, tospend is to tax: if you don't object to the spending, you cannot object to the taxes topay for them. Members of the Rubin wing of the Democratic Party like me--peoplewho have been fighting for decades for rational fiscal policy, for PAYGO, for balancingthe government's income and outgo--have standing to object when government is notright-sized, when it is either too big or too small. People who were deserters from thewar for fiscal sanity throughout George W. Bush's regime simply don't have standing.When he willed the spending, he willed the taxes to pay for them. No backsies.

If they want to stand up and say that he made a horrible mistake in supporting GeorgeW. Bush and all the other Republicans he has voted for who believe that you canincrease spending and never pay for it through increased taxes, then we can talk.

But until he does, he needs to remain silent.

And this is something I feel strongly about.

This brings us to his last argument:

(3) I am not rich. Other people can afford to pay higher taxes. But not me. You needto quote it at length in order to get the full flavor:

The rhetoric in Washington about taxes is about millionaires and the super rich,but the relevant dividing line between millionaires and the middle class is peggedat family income of $250,000. (I’m not a math professor, but last time I checked$250,000 is less than $1 million.) That makes me super rich and subject to a bigtax hike.... I’m the president’s neighbor in Chicago.... I would introduce him to myfamily and our lifestyle, one he believes is capable of financing the vast expansionof government he is planning.... [W]e are just getting by despite seeming to berich. We aren’t.... [T]he president plans on raising my taxes. After all, we canafford it, and the world we are now living in has that familiar Marxian tone ofthose who need take and those who can afford it pay.

The problem is, we can’t afford it.... $100,000 in federal and state taxes.... ourmortgage.... We chose to invest in the University community and renovate and oldproperty, but we did so at an inopportune time. We pay about $15,000 in propertytaxes.... My wife has school loans of nearly $250,000 and I do too.... Since we carethe education of our three children, this means we also have to pay to send themto private school... We try to invest in our retirement by putting some money inthe stock market, something that these days sounds like a patriotic act.... Like

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most working Americans, insurance, doctors’ bills, utilities, two cars, daycare,groceries, gasoline, cell phones, and cable TV (no movie channels) round out ourmonthly expenses. We also have someone who cuts our grass, cleans our house,and watches our new baby so we can both work outside the home. At the end ofall this, we have less than a few hundred dollars per month of discretionaryincome. We occasionally eat out but with a baby sitter, these nights take a toll onour budget....

[W]e can cut back.... The (legal) immigrant from Mexico who owns the lawnservice we employ... the (legal) immigrant from Poland who cleans our house...cancel our cell phones and some cable channels, as well as take our daughter fromher art class at the community art center, but these are only a few hundred dollarsper month in total.... If these cuts don’t work, we will sell our house – into analready spiraling market of declining asset values – and our cars, assumingsomeone will buy them. The irony here, of course, is that the government isworking to save both of these industries despite the impact that increasing taxeswill have.

The problem with the president’s plan is that the super rich don’t pay taxes – theyhide in the Cayman Islands or use fancy investment vehicles to shelter theirincome. We aren’t rich enough to afford this – I use Turbo Tax. But we are richenough to be hurt by the president’s plan. The next time the president comeshome to Chicago, he has a standing invitation to come to my house (two blocksfrom his) and judge for himself whether the Xxxxxxxxxs are as rich as he thinks.

On what appears to be roughly nine times American median household income...

Brad DeLong on September 20, 2010 at 07:03 PM in Economics, Economics: FiscalPolicy, Economics: Inequality, Obama Administration, Political Economy, Politics |Permalink

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howard said...prof, you're too nice to him wrt #2: it's not just an issue of standing.

he's a law professor, who asks the question "But more importantly, what is the theoryunder which collecting this money in taxes and deciding in Washington how to spendit is superior to our decisions?"

why it's almost as if he never noticed that the constitution provides taxing and

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spending authority to congress, which is, in fact, impossible for a qualified lawprofessor to have missed.

my belief, of course, is that if you sit around with these chicagoans all day listening totheir silly mutterings, you end up sounding pretty silly yourself....

but the point is, this isn't just a matter of standing....

Reply September 20, 2010 at 07:53 PMDrDick said...I'm sorry, but the rich (and if you are in the top 5-10% of the income distribution, youare objectively rich, no matter how you feel about it) have largely had a free ride forthe past 30 years and the time has come for them to pay the piper. At the same timemiddle class income has largely been flat, owing to the same policies that dramaticallyincreased the wealth of those at the top. So I say, yes give the middle classes a taxbreak and raise the taxes in the rich even more, to say Eisenhower's levels, to pay forthe policies they promoted and benefited from.

Reply September 20, 2010 at 08:12 PMTENNIS.com said...Checking in at truthonthemarket.com, Prof Henderson says "No mas."

I followed the comment thread from the first post (mostly sympathetic) to the secondand third posts (more critical, but still, for the most part, civil). I don't doubt that Profand Mrs Henderson have been taken aback by the controversy generated, and wish thatsome toothpaste could be pushed back into the tube. I have no doubt that nasty eMailswere sent: I'm sure Profs DeLong and Krugman are quite used to getting these kind ofeMails, too. Hard to know what to say. "I was right, but you're all mean" seems to bethe tone of the last post. I'm not sure a lot of self knowledge has been gained, but I'malso not convinced that piling on makes sense.

Reply September 20, 2010 at 08:14 PMase said...>>The problem with the president’s plan is that the super rich don’t pay taxes – theyhide in the Cayman Islands or use fancy investment vehicles to shelter their income.We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to behurt by the president’s plan. The next time the president comes home to Chicago, hehas a standing invitation to come to my house (two blocks from his) and judge forhimself whether the Hendersons are as rich as he thinks.

Prof. Henderson's argument is well founded. When considering those earning 250K+ -- those that earn from 250K to billions -- the president is proposing to put the largestburden on those earning close to 250K, rather than those earning close to a billion.This is due the lower taxes on investment income and carried interest tax of 15% onhedge funds.

There is no proposal to tax that unearned income at these higher 36 to 39% rates.

This lower taxes on the income of the super-rich, along with the FICA cap on dualincomes put the largest tax burden on those at the bottom of this 250K+ class.[*]

For a nicely argued version of what Henderson is complaining about, readhttp://www.newyorker.com/talk/financial/2010/08/16/100816ta_talk_surowiecki

[*] Which is why raising the FICA tax to fix SS is another racket. It will not touch thoseearning investment income or any income which is not wages. It will result in wageearners subsidizing taxes on investment income.

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Reply September 20, 2010 at 08:21 PMLP said...The other things he doesn't have the standing to complain about is personal attacks,given his post regarding Mr Krugman.

Reply September 20, 2010 at 08:21 PMTENNIS.com said...BTW, sorry about the moniker on the "Checking in" post. I help out with someTennis.com stuff, but typically post as "Andrew." Nothing I write should be taken asthe opinion of Tennis.com, although TypePad software seems to think that should bethe case.

Reply September 20, 2010 at 08:28 PMRichard said...TENNIS.com,

It makes sense, because someone peddling a dangerous (in the wrong hands)philosophy should be shown in the cold hard light and be caught when he isintellectually dishonest and intellectually cowardly.

Reply September 20, 2010 at 08:40 PMDrDick said in reply to TENNIS.com...He is clearly a libertarian, so I am pretty sure that he has absolutely no capacity forself knowledge.

Reply September 20, 2010 at 08:54 PMRichard said...Of course, the fact that his house is 2 blocks from that of the President of these UnitedStates - but that he in no way sees this as an amazing luxury (rather an investment incrumbling infrastructure) says at least as much about his myopia as anything else hemight have written.

"Let them eat cake," indeed.

Reply September 20, 2010 at 09:19 PMsave_the_rustbelt said...A competent financial planner would have told them that even if the student loans areat a reasonable interest rate, it would be best to pay the loans down before buying veryexpensive real estate and etc.

He should have called Suze Orman - even a celebrity book-peddling financial plannerwould know better.

Reply September 20, 2010 at 09:41 PMDrDick said in reply to save_the_rustbelt...Hell, I know better and I am an idiot when it comes to managing money (but Irecognize that and do not whine about it).

Reply September 20, 2010 at 10:09 PMJCD said...Some random thoughts:

1) There is a chance that his household pays more in interest every year than themedian household income. Specifically, if he is paying 5% interest on a 1 mil house and500k in student loans then that comes out to 75k a year in interest, before taking intoaccount any car financing (which is admittedly likely nominal comparatively). Are wesupposed to assume that he is okay with paying 75k in interest a year but is frustrated

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with paying slightly more in taxes?

3) In some ways, the majority of his income is going towards investments in the future.The education loans were an investment for the future that now must be paid off. Thehouse was at one time, I suspect, viewed as an investment, but also represents entryinto an elite neighborhood and community, which is an investment for networking. Theretirement funds are obvious. The nice cars project an image of success, which begetsmore success. The expenses on childhood education are clearly an investment in thefuture of his children. I don't necessarily have any more thoughts or analysis on thispoint, I just find it interesting.

4) Related to the last point, I note that, based on the hypothetical breakdowns of hisspending that I have seen, he appears to spend a fair amount on services that thegovernment, in theory, provides. He clearly feels the Chicago public schools have failedhim, and feels that he needs to save for his own retirement. Generally, these areprobably both rational beliefs, but he does fail to account for the many other publicservices his taxes pay for.

Reply September 20, 2010 at 10:18 PMurban legend said..."His taxes should be cut because he can spend his money better than the governmentcan."

Has there ever been a stupider statement than this? And by a law professor no less?It's hard to know where to begin to express its utter vapidity. How about justrecognizing that we have a government that, theoretically representing the collectivewill of the people, is the only entity capable of making decisions for the public good? Ifhe wants to use his money to send his kids to expensive private schools, on the otherhand, the government -- that is, we the people -- leaves that decision to him.

I wonder what Washington, Adams, Jefferson or Hamilton would have thought of thisstatement.

Reply September 20, 2010 at 10:19 PMOther Peter T said...

I must admit I was somewhat taken aback by Prof Henderson (in comments) likeningthe US government to a thief, and comparing taxation to robbery. They are hardly thesentiments of a citizen of a democratic country. How does he reconcile this with beinga professor of law - that is, of the enforced will of the community enacted throughgovernmental processes? Does he teach his students that the law derives merely fromsuperior force?

Reply September 20, 2010 at 10:20 PMDrDick said in reply to urban legend..."I wonder what Washington, Adams, Jefferson or Hamilton would have thought of thisstatement."

Something between shocked disbelief and rolling on the floor in hysterical laughter.

Reply September 20, 2010 at 10:28 PMDrDick said in reply to JCD...Given that he lives on the southside of Chicago (in an enclave surrounded by seriouslybad ghettos), I think police are a pretty big issue for him and should point out he gets ahell of a lot more police protection than the poor black neighborhoods surrounding hisprivileged enclave.

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Reply September 20, 2010 at 10:32 PMRC said...What is always interesting to me is when the libertarian or wealthy complain aboutpaying taxes when it is only by the full faith and backing of the federal government thatgives there dollars any real value.

When will they break and create their own currency or trade in non-dollar basedcurrencies if they are so truly disdainful of the Federal tax system and government?I'm certain that their knowledge of things will create a vastly superior system ofcurrency and trade.

Reply September 20, 2010 at 11:24 PMendorendil said...Thanks for saving it from the rubbish bin. I have heard similar rants from theobjectively rich (although not quite this preposterous) and it makes my skin crawl. Ieven have a hard time with "middle class" households that make twice the averagehousehold income that complain about having to cut back. People seem to have lost allperspective when it comes to satisfying their own "needs" and whims.

Reply September 21, 2010 at 12:11 AMpurple said...My wife has school loans of nearly $250,000 and I do too.

Wow on the student loans.

Reply September 21, 2010 at 01:17 AMtchupvskja said...> http://delong.typepad.com/sdj/2010/09/Xxxx-Xxxxxxxxx-we-are-the-super-rich.html

Am I the only one who can't see this link? Not that I need to, I suppose, since the olderposts seem to be pretty self-explanatory.

Reply September 21, 2010 at 03:10 AMSimon van Norden said..."The problem with the president’s plan is that the super rich don’t pay taxes – theyhide in the Cayman Islands or use fancy investment vehicles to shelter their income.We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to behurt by the president’s plan. "

Will no one else call bullshit on this? Hello?

Major portions of his income are dedicated to 1) 401(k) and other tax-protect retirement savings plans2) highly leveraged real estate investment, protected by mortgage-interest deductabilityProf. Henderson is using investment vehicles to shelter his income to a substantialdegree.

Reply September 21, 2010 at 04:51 AMCapeCodSkeptic said...Most rational people of my acquaintance limit their reproductive output so they don'thave to work the rest of their lives to pay for child care bills and college tuition.

Reply September 21, 2010 at 05:25 AMaimai said...The whole thing is disgusting and Brad has quite rightly responded vigorously. The guymakes various completely incoherent arguments--its practically Althousian in its un-

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legal-reasoninglike dopiness. One of his main arguments is that if his taxes are raisedthen he and his wife will have to choose between paying for something they want(retirement, dinners out, babysitting) or paying for something else they want(employing servants). He offers this as a threat in the form of "nice working classyou've got there, be a shame if my housecleaner/yard worker were to lose his or herjob." Raise his taxes, he is saying, and some worker gets hurt. But that is to presupposethat the taxes we pay go straight into a wood chipper. Actually, his taxes pay for police,fire, schools, teachers, road repair, wars, soldiers' pay, soldiers' medical, researchgrants for his wife, disaster relief and a whole lot of other stuff that actually employspeople. So, no, as a matter of fact, if he cuts back on his housecleaner that won't be ajob lost to the economy, it may be a job saved somewhere else.

Here's another argument that he makes: if he is taxed more he will have less to spend.But perhaps he might consider working harder? And putting his money to more use?Isn't that what "less money" means to the rest of America? People who lose one job(income, you know) generally try to find a better paying one, or take two jobs and workharder. Is there some reason why he should be exempt from this cold hard fact ofAmerican life? Perhaps they can put the kids to work? From the perspective of theeconomy and society as a whole its actually better for us if his family spends more oftheir income on stuff, rather than saving it for their retirement. If they have to takeriskier investments, or more of them, to make back the money they "lost" in highertaxes doesn't that make the economy grow more than if they can reliably salt theirmoney away in real estate?

Brad gets, delicately, to the heart of the matter. The guy lives in Obama's oldneighborhood and can't get over the fact that another college professor, no better thanthe writer himself !, made some kind of mad leap out of middle class mediocrity and isnow President. The guy wrote two best selling books, and worked his ass off in thepolitical sphere to be elected President. Only a geographical accident and formeremployer connect these two. And Henderson is jealous. He aspires to more wealth, andmore security, than the American upper middle class can enjoy at this time. He looksup, instead of around and down, and he's nervous. Instead of blaming the Bushadministration and the rising inequality of income and the fragility of the economy helooks down and imagines that its the ravening hordes of lower class people unlawfullywanting police, fire, and schools. But he ought to know better. Its a shame that hedoesn't.

aimai

Reply September 21, 2010 at 06:06 AMBarbara said...The Randian universe that is the U of C is sometimes a really crazy place. I dated a Uof C medical student and spent a month staying with him, in the family residence(actually, palatial family residence) that was operated as an extra-legal boarding houseby the soon to be divorced wife of a professor who, everyone assured me, was a BIGCHEESE. A Randian BIG CHEESE.

So anyway, my friend was, like prof, utterly dismissive of the government's ability toallocate money (even though his own parents worked for the government and lived ingovernment provided housing). I asked him about the most basic of governmentfunctions, like roads and bridges. He harumphed that committees (!!!) of citizens werebetter placed to know what roads and bridges were necessary and how to fund them.

So I asked him how much of his (not very plentiful) free time he planned to devote to

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serving on such committees and it was like it had never even occurred to him that suchcommittees take TIME, and that the absence of civil engineers might make them lessthan EFFECTIVE for their intended purpose. (If you want to know what the tyranny ofliving under those with free time is like, look no further than the average housingassociation.) I mean, it was a joke. But the best joke was when I was sitting in thekitchen drinking coffee and soon to be ex-Mrs. BIG CHEESE was informed thatCongress was thinking about abolishing some kind of preferred tax status for somekind of family trust instrument, and she was encouraged to contact her Congressman(smile, those of you who have personal knowledge of Hyde Park), except that shedidn't actually know who her Congressman was because she never bothered to vote(voting is a waste of time in the world of Rand). I don't come from the kind of familythat has any kind of trust instrument, but I do know how to use a phone book, so Ihelped her navigate the phone book to find the government services section, where herCongressman's name and phone number were duly listed.

It struck me as a fantasy bubble play world where people really don't have anyunderstanding, because they are paid not to, of what government can do better, what itcan't, and the limits of a free market, including the limits of whether a market canreally be called free. It makes political views tend toward completely irrational policies,like mounting wars and refusing to pay for them. It's just too bad that they have asmuch influence on policy as they do.

Reply September 21, 2010 at 06:49 AMNeal said...The fact is that both he and and his wife life their life of relative wealth through thegrace of a federal government that freely spends on health care. If the biggest endconsumer (at least the biggest conduit)of education and health care, also known as theUS government, stepped away from the table, which direction ere do you think pricesand salaries in those fields will go?

Mr. Free Markets would find himself out of a job or in a much less remunerative jobwithout government subsidies of education and federal backing of student loans. Mrs.Free Market would find herself in the same situation in a field without their largestpurchaser of services. The Free Market family wouldn't really like the result all thatmuch.

"It's mine, all mine!!"

Reply September 21, 2010 at 06:58 AMNeal said...

The fact is that both he and and his wife life their life of relative wealth through thegrace of a federal government that freely spends on education and health care. If thebiggest end consumer (at least the biggest conduit)of education and health care, alsoknown as the US government, stepped away from the table, which direction ere do youthink prices and salaries in those fields will go?

Mr. Free Markets would find himself out of a job or in a much less remunerative jobwithout government subsidies of education and federal backing of student loans. Mrs.Free Market would find herself in the same situation in a field without their largestpurchaser of services. The Free Market family wouldn't really like the result all thatmuch.

"It's mine, all mine!!"

Reply September 21, 2010 at 06:59 AM

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Daniel said...The very heart of class warfare here. Nice blog, Brad. Sorry, mister smarty pantsprofessor Henderson, your own decisions about what part of your income isdiscretionary and which you 'must' spend cannot be scaled up to make amacroeconomic argument about the effect of tax policy. Big fallacy of compositionthere. There are many families that do not have the option of putting three childrenthrough private school and owning two cars. Pretty slick how you laid it out though.The very fact that you have a choice between scaling back on the lawn service *instead*of private schooling is the essence of being rich - you have choices that those withmedian income do not have. You do not want to lose that power, which is natural. Youcloak that desire behind layers of misleading intellectual masturbation. That isobnoxious.

Like most people from U of C that I have met, Henderson is a pompous ass.Sometimes stereotypes are true.

Reply September 21, 2010 at 08:32 AMMike the Mad Biologist said..."His taxes should be cut because he can spend his money better than the governmentcan."

With $500,000 of student debt, the Henderson household bought a million dollarhouse.

Mr. Potato Head could spend Henderson's money better than he could, never mind thegovernment.

Reply September 21, 2010 at 09:57 AMjrm said in reply to tchupvskja...You are right that he is sheltering his income, but he does have one valid point - thesuper rich do exactly as he complains, and as a result will pay less than he does perevery $ of income (Salary/capital gains, what have you). This is fairly well known incongress, but nobody seems to care much. The flip side of this is that this professor'sadditional tax liability might be $50. My wife just got a raise that might throw us intothe AMT and our YTY damage will be a lot worse than $50... while we make less thanhalf what he does.

Reply September 21, 2010 at 10:14 AMtoadysmom said...As someone who is also at the bottom of the top, I too have often not felt rich. Here inthe Boston suburbs, I mow my own lawn and vac my own house (and watch the cellphone bills like a hawk), and I do know my share of folks who run hedge funds and/orhave benefit of inherited wealth. But what I also know is that I am incredibly fortunateto have landed where I am and know that I have choices most people do not (likepaying for private educations for my kids - Go Stanford! - and laughing out loud whenour richer friends assume we qualify for financial aid -- we don't). We were frugal andsaved, and yes it is a bummer to be lumped in with the hedge fund guys with respect tofinancial aid decisions and taxes, but I prefer it to the alternative. I am happy to pay abit more to fix our crumbling infrastructure and take care of our communities. Whatsurprises me is how little emphasis has been placed on the fact that the increase intaxes for those of us in the low six figures is not a large dollar amount -- we will all getthe same advantage for the first 250K of income. Besides, many of us paying the AMTnever really felt the Bush tax cuts in the first place. Sadly most of our super-wealthyfriends don't see it this way, let alone the Hendersons of the world. And don't get me

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started on all of my tea partying relatives who make much less than 250K who stillthink Obama will raise their taxes -- we could start a whole new discussion about whypeople who have enjoyed 20+ years of retirement thanks to state and federalgovernment spending feel threatened.

Reply September 21, 2010 at 10:58 AMjfxgillis said...Wow. The lack of either self-knowledge or blogosperic tradition on Professor XxxxXxxxxxxx'x part has gone from ruthlessly mockable to patholgically pitiable.

He's not only deleted the posts, he's now resigned from the internet. I think he wantsthat mean Michael O'Hare to feel guilty about that.

Reply September 21, 2010 at 11:17 AMAnne said...You know, if this guy does his own taxes, you'd think he'd be able to figure out that he'sprobably not going to have to give up his cell phone and his cable TV just because histax levels are being rolled back to what they were ten years ago. He *might* have tohave the housekeeper in a little less often, or whatever, but he's not going to have tosell his house -- or he shouldn't, if he wasn't one of those morons who bought morehouse than he could reasonably afford. And if he was, well, ain't that just too bad. Jointhe club. I, for one, live within my means.

Reply September 21, 2010 at 11:38 AMFrank said...I am in a similar financial situation as Prof Henderson and probably think similarly tohim - I just would have argued it a little differently so as to avoid the firestorm thatoccurred. I can't speak for him but my feeling is that he is happy to pay taxes on a fewconditions -- 1) it is spent well, and 2) it is fairly collected. Re: the "spent well", hethinks it is NOT spent well, which is a valid argument. I doubt he is complaining aboutthe government paying for education, health care, policemen, and firemen - it seemsmuch more likely he is complaining about all the other less obviously good stuff thegovernment pays for, like people who game the welfare, Medicaid, and unemploymentsystems, various ridiculous defense projects that are obviously bad ideas etc, bridges tonowhere etc. Re: the "fairly collected", it seems his strongest argument is that thesuper-rich are not fairly taxed - which by any account is true, whether because of theunearned income loophole-like taxation or because of offshore shelters, tax lawyers,etc.. His complaint seems to be that the reason the government is going after him isbecause he CAN afford it but is not rich enough to avoid it -- which amounts to thegovernment is taxing him because it can, not because it should. There would never be afirestorm about someone making 50K wanting to avoid tax re-increases because, well,they really NEED that money. And while there HAS been a firestorm about hedge fundmanagers paying lower tax rates than their gardeners, doing away with that loopholeseems unrealistic considering Congress is in their pockets. So who's going to get taxedand then shamed if they don't agree to it? The upper middle-class and the lower-upperclass. I think THAT's his argument.

And just a pet peeve of mine -- I'm no economist, but "median household income" issuch a useless statistic, one that is used like a club to bash anyone who makes morethan it. If you went to school that put you 250K in debt over 4 years (say, like medschool) while also not making, say, 60K/year (60K x 4 years = 240K) during that time(so-called opportunity cost), you are in the hole 490K before you even start. Let's saythen that you get underpaid for the next 6 years of your life (like as a resident and then

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fellow) and make 50K per year as opposed to making 70K/year (the 60K/year job +annual small raises), then you are another (20K x 6 years) 120K in the hole before youstart your actual working life. Meanwhile the juice is still on so you are paying studentloans etc. So when it is all said and done you might be 600K+ in the hole compared toaverage Joe who had been making the median income since coming out of college.Then let's say what you really want to do is to teach (law, medicine, whatever) and thatthe best place to teach is in NYC. You are thankful to get a job paying 180K/year whichis what, 3x-ish the median income. But of course to pay for renting a 2BR 900 sqftapartment you are paying 4K/month as opposed to Median Income Man in Texaspaying $1000 (probably less) for a 3BR condo, so you are paying 3K x 12 mo =36K/year more in post-tax money = ~60K in pre-tax money just for rent, so really youare making 120K/year. And then you have to pay for your student loans. Then youhave to pay the state taxes that don't exist in Texas. Then you have to pay city taxes inNYC which don't exist in Texas. Then you have to pay $6 for a box of cereal forbreakfast that cost $3 in Texas. Soon you make exactly what Median Income Man inTexas makes, only with all the added guilt of not wanting to have your taxes go backup. Except you are still 600K in the hole compared with Median Income Man whowent to work at Median Income Company right out of Median college. And you stillowe $250K in student loans. And the juice is still flowing.

Reply September 21, 2010 at 11:48 AMAB said...also, this person's tax amounts don't make a ton of sense. I ran some figures through atax calculator, which is rough approximation, I realize, but if he paid 100,000 in taxes,that puts his income up around 330,000 a year, not 250,000. Which leaves 230,000 tocover his expenses.

Also, having "only" a few hundred left in extra money each month? that's way better offthan many people :)

Reply September 21, 2010 at 11:51 AMMichaelT said in reply to Frank..."I'm no economist, but 'median household income' is such a useless statistic."

Shouldn't this read: "I'm no economist, so 'median household income' is such a uselessstatistic to me"? After all, your comments bear this out. It's fascinating to see that youhave discovered that people who earn above the median generally have higher costs ofliving than those below it, however. I can't imagine how that could be. More money,perhaps?

"And then you have to pay for your student loans."

Which is money that you were given to go to school. It's strange how that works:having to give back money that you borrowed. What a country!

Reply September 21, 2010 at 12:14 PMMichael said in reply to urban legend...I wonder what Washington, Adams, Jefferson or Hamilton would have thought of thisstatement.

Undoubtedly, they would have agreed, to an extent. What Adams, Washington,Jefferson, and Hamilton all recognized was that there were certain things that had tobe relegated to government for a variety of reasons, and those things have to be paidfor. But I'm fairly sure they would have maintained that anything that didn't, for

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reasons of propriety or national welfare, have to be the province of the governmentshould not be. Indeed, both sides of that equation still exist. The major question forgovernment forthcoming is what absolutely has to be the province of government andwhat doesn't, and it is certain to be the most partisan issue we have seen yet, and theloudest voices are almost certain to be wrong in their extremes.

Reply September 21, 2010 at 12:46 PMFrank said in reply to MichaelT..."It's fascinating to see that you have discovered that people who earn above the mediangenerally have higher costs of living than those below it, however. I can't imagine howthat could be. More money, perhaps?"

-- Well, my actual point was that what you make relative to "median income" may havevery little relevance to individual situations, and that even someone who makes wellabove the "median income" could actually be poorer than someone making the actualmedian income. And my point in saying that is that educated people like Krugman(who I actually agree with most of the time) and DeLong who use "median income" asan "AHA! you can't be complaining about anything you rich person" should at leastqualify their AHAness.-- Secondly - in the example above, the extra costs of living had only to do with whereyou live and the costs associated with that. Has nothing to do with "more money". Butpoint taken - I should have said that median household income is an oftenMISLEADING statistic. Like so many other statistics used for sound-bite, blog-styleattacks.

"Which is money that you were given to go to school. It's strange how that works:having to give back money that you borrowed. What a country!"- again - my point here was that high incomes may come with significant costs that arenot accounted for in the "you make 2x the median income so you are rich so stopcomplaining" semi-argument. For many people who make well above the "medianincome" there is an opportunity cost which may equal 10 years or more of "medianincome". Obviously if you borrow money you should pay it back. I believe you aredoing what Karl Rove loves to do, which is create a straw man to attack, obscuring theactual point.

Reply September 21, 2010 at 12:50 PMFrank said in reply to Frank...I find myself replying to myself so please bear with me -- it seems obvious but my ownargument only extends so far -- clearly if you make 8x the median income or morethan 500K/year (numbers arbitrarily picked out of the air), it probably doesn't matterhow much student loan you are holding or where you live - if you live a reasonablyfiscally responsible lifestyle you'll be fine regardless of a 3.6% increase in marginal taxrate. But if you are closer to 3-4x the median income like in the example above andyou have a lot of loan payments and need or want to live in an expensive city like NYCor SF, then the situation is much less clear.

Reply September 21, 2010 at 01:03 PManon said...Both he and his wife have benefited from government protectionism/welfare. TheUniversity of Chicago, a playpen for the young, budding Neocon elite, sits on a nice$5.5 billion endowment that it pays no tax on. Additionally, it receives subsidies fromthe federal government in the form of Pell Grants and federal student loans that 1)allows it to raise its already high tuition even higher and 2) gives them no-strings-

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attached money that they get to keep regardless of the employability of the graduates itproduces and their ability to repay their loans. With student loan forgiveness, this willeffectively become free taxpayer money for the UoC, Harvard, Columbia and otheralready-rich, obscenely-expensive private universities.

His wife, as a doctor, enjoys legally protected artificial scarcity thanks to the AAMCand AMA, which work to limit the accreditation of medical schools to ensure that thereis always a market shortage of doctors so they can charge top dollar for their services:http://www.worldsalaries.org/generalphysician.shtml

That is partly why medical care in this country is so expensive; no other nation onearth guarantees its physicians the lavish existence the United States does.

Simply put, their money is dirty.

Reply September 21, 2010 at 01:17 PMMichaelT said in reply to Frank...Well, it's not a "misleading" statistic, either: or, more precisely, it depends on whereyou want it to lead you. If you don't like that place, of course it seems misleading.People who live in NYC pay through the nose for the privilege of living in a verydesirable place, which (as the rule of positional goods tells us) costs more than living inan undesirable place. That is why people well above the median tend to live there, andnot in, say, rural Texas. They can afford to. Cost of living is here virtually correlativewith standard of living. You seem to want to have it both ways: no one is forcing thewell off to move to NYC or LA; they move there at their discretion (there are plenty oflaw schools and hospitals in Texas, after all). You imagine a similar scenario withstudent loans, which you confuse with need rather than with choice. Economics is thescience of choice in a realm of scarcity, and while the world may need doctors (the juryis out on lawyers), no one "needs" to be a doctor. This is a choice for which people pay.I am not creating a straw man, as you suggest; I am merely pointing out what getswholly lost in debates about who counts as privileged and who is "really" privileged.People who take out loans may have a raw deal in having to pay them back, but theyare actually buying an enormous privilege in the first place. It is their own or, perhaps,the labor market's fault, not the government's, if they are unable to realize as much of areturn on their investment as they would like.

Reply September 21, 2010 at 01:28 PMFrank said in reply to anon...Physician income is part of why medical care is so expensive but certainly not thewhole story. That's a whole other topic unto itself. What I will say is that while MDsmay make more in this country, there are other factors you did not consider. First, inmany countries where doctors make less comparatively than US MDs do, medicalschool is free or at least heavily subsidized. Secondly, in many countries where doctorsmake less, they also work MUCH less. I think it is very reasonable to say that mostgeneral practitioners work 60 hours/week or more whereas, in many other countrieswith socialized medicine, they work 40 hours or less. Third, US doctors have to put upwith a lot more pain in the butt patients than other countries. I just made that last oneup.

Reply September 21, 2010 at 01:44 PMRussell L. Carter said...Where is it written that one *must* take on $250K of student loans? I understand thisproblem clearly, as I've got one of THOSE kids who get all of the private schoolrecruiting mail, and believe me, the marketing has gotten great. Probably the best of all

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is UoC, with NYU not far behind. We're a bit below $100K/yr, so guess what, ourdaughter's dreams depend on us (that's all of us) going into debt a minimum of $30K ayear. And you know what the rule is, the hard hard rule we decided on? NO LOANS.For the most important person in my life. Because my unfortunate daughter has twoengineer parents who know what an ROI calculation is, know what a present valuecalculation is, and have taught it to the daughter.

No more whining about school loans. No more whining about how much NYC costs. Ifthe debt situation bothers you, go to a state school and then move to Texas. Otherwise,STFU, and live the life *you* chose.

Reply September 21, 2010 at 01:45 PMFrank said in reply to MichaelT...Fair points...But then we are in a situation where our two characters, Mr. Median Income in Texasand Mr. 3x Median Income in NYC, each made choices that landed them where theyare. If we can sort of believe my figures above, their actual disposable income is aboutthe same. Yet only one of them gets grief and shame for complaining about taxes orhas to justify to Krugman and Delong why they don't feel rich.

Reply September 21, 2010 at 01:50 PMFrank said in reply to Russell L. Carter...point taken. again, the purpose of that whole paragraph was to show that what youmake relative to median income may not actually reflect "wealth" or being "rich" if youhave not taken into account how one got to that income and what costs were associatedwith it, and what current cost of living is.

I for one agree with your rules and live completely within my means. I will not allowcredit card debt in my family and have no extravagant expenses other than my Iphoneand my iPad. what i ACTUALLY think is much closer to what i wrote in the firstparagraph (about Henderson) - the second was just a pet peeve. I have no problempaying taxes - I have no problem paying HIGHER taxes either, as long as thetreatment is fair across the spectrum, including removing ridiculous loopholes for thetruly rich and some sort of entitlement reform/watchdog for those that are gaming thesystem on the other side.

Reply September 21, 2010 at 01:59 PMColin Danby said...Frank, Prof. X tried to base a policy argument on his own family budget. The argumentwas crap even without the family budget (as Krugman and DeLong have shown). Butthe family budget turned out to make things worse, because Prof. X had mortgagedhimself to the gills to attain the Hyde Park lifestyle a few years out of law school. Bradactually went to some pains to *sympathize* with how the guy felt. You have a lot ofnerve complaining about straw men while going after a straw-man version of thearguments BdeL and PK have made.

Reply September 21, 2010 at 02:02 PMBarbara said...I actually have some sympathy over the student loan situation. I feel that beginningaround 1950 and ending shortly after I graduated (the prof is, I calculate, one decadeyounger than I am) students received the generosity of our parents and grandparentsand that there has been huge disinvestment in education ever since, at all levels. This isclearly manifest in the price of public university tuition, but funding for all kinds ofeducational programs have suffered. As I said in some other thread on this subject,

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outsize medical school loans are not only a burden on doctors, increasingly, they are aburden on society by pushing doctors out of desperately needed primary care fields andinto more lucrative, but frankly less beneficial, specialty areas.

I am not going to go on too much about this -- I graduated with many fewer loans, butI also received much less income than the professor, and I managed to pay them offquickly. And my husband and I have assiduously lived below our means so that ourchildren could avoid ruinous student loan debt (believe me, I feel all kinds of gratitudeto have a choice in this matter). But still, I do think that student loan burdens arescandalous, and reflect a real betrayal of the social compact between the generations.

Reply September 21, 2010 at 02:04 PMMichaelT said in reply to Frank...their actual disposable income is about the same.

It's really not. Just because someone doesn't feel "rich," doesn't mean he isn't rich.That's the point Delong was making. There is a difference between objective reality andhow one perceives that reality, and while none of us can help confusing the two, it's nota great idea to let the latter take precedence over the former. This is what Hendersondoes. It's even more shocking, from my point of view, that he does so while teaching ata prestigious university. If I believe that witches are turning my cows' milk sour, I can'tvery well go out and burn them at the stake, no matter how powerful my conviction is.Just for this reason, the argument that one feels poor doesn't really count as a goodreason to exempt one from paying taxes (anymore than Henderson's argument that hewould spend his tax dollars more efficiently than the government has ever had a strongeffect on policymakers). I would say fair share of taxes, but that seems a dangeroustangent I don't want to embark upon. This isn't really an argument about givingHenderson grief or making him feel shame (though he would very much like to rotatethe argument onto those terms--or would have, before he threw in the towel and quitthe internet). It's really about the fact that how one feels (rich or not) is finallyirrelevant to one's OBJECTIVE position in an economically stratified social world.Henderson may feel he is not rich; he would like that feeling to exempt him from thereturn of the Clinton-era marginal tax rates. This is a very shabby argument. And it isso because he is rich, to the extent that he has a wide range of "choices" available tohim (where to live, what to drive, where to send his kids to school, what to put awayfor retirement, and so forth) that your Mr. Median objectively lacks. Taxation isdesigned to give the government a chance to fund a good society for everyone, whichmeans increasing everyone's opportunities. To deny that Henderson has a much moredesirable set of choices that "landed" him where he is than Joe Median is franklyperverse.

Reply September 21, 2010 at 02:12 PMJ said in reply to toadysmom...What an eminently reasonable attitude!

Reply September 21, 2010 at 02:54 PMRussell L. Carter said...Frank,That's a reasonable take. Barbara, when I started at Ga Tech in 1980, my out-of-statetuition was $688 a quarter. My wife's in-state tuition was something like $225. Weboth paid for our undergraduate degrees primarily through co-oping, which admittedlyis unavailable in many fields. We also both got masters, and this was paid for by eitherteaching or stipend (a scholarship I suppose). I still managed to end up with $12K in

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student loans, and had never done the total interest calculation until about a year afterstarting working, and was completely shocked at what I had actually signed up for. Ipaid off my loans in something like 6 months after that. Note that Todd Hendersontotally fails this basic home economics question.

My point is that the fundamental ideas of return on investment and time value ofmoney are apparently broadly misunderstood or worse, unintelligible by broad swathsof the population. Doesn't matter how smart/well educated you are, I made themistake myself (of fortunately trivial magnitude). I think a large part of this is thewidespread belief in the prosperity gospel--no matter who you are, if you work hardyou will succeed. So no amount of debt to get the tools you need to work the smartestyou can work is too much. Hence lots of people admitting they've got $100K, $200K,families with $500K of student loan debt. What I think that people like ToddHenderson are reacting against is the fact that their prosperity gospel is a chimera formost. Only a small fraction take that $250K of debt and get a return that makes senseof the whole exercise. But you can put your blame many places, and it's clear that theTodd Henderson's of the world are going to blame the evil gubmint for stealing theirotherwise surplus ROI.

Reply September 21, 2010 at 02:55 PMnilso said...Why can't we REALLY tax those REALLY rich investment bankers, and plough it backinto subsidized student loans? Just a thought.

Reply September 21, 2010 at 03:22 PMCawley said...If I may, one last little correction for the good professor:

"I’m not a math professor, but last time I checked $250,000 is less than $1 million."

A millionaire is determined by net worth, not income. True, making 250K/year doesnot necessarily mean you are a millionaire, however, if you are not after a period ofseveral years with that income, your proposition that you can spend money morewisely than the gov't is somewhat suspect.

Reply September 21, 2010 at 03:54 PMB said...So what's with all the X's: has TH sicced the lawyers on Deling?

Reply September 21, 2010 at 04:33 PMRobert Deckert said...The prof can afford lawn service? can afford a house cleaning service? can afford (withloans, but still, can think about affording) private school for three kids?

And he thinks he's not rich?

Other people also have morgages. Other people also hold down full time jobs - payingconsiderably less than his quarter million income a year - and they manage to cut theirown grass, clean their own houses, and get their children educated somehow or other. Iwonder what he would think, that professor, if he were to find out that the regularannual income for my household - the money that comes in every month and coversthe monthly bills - comes to probably ONE MONTH's income in his household. Yes,there's other money that comes in from the side. Occasionally. Infrequently. Neverenough. And yes, we still pay taxes.

Welcome to planet Earth, Professor. Welcome to America. Where people survive andflourish on ten times less than what you make... and are far too tired and exhausted

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and wrung out from that struggle to complain about it.

Reply September 21, 2010 at 06:13 PMmythago said in reply to Frank...The professor is not being criticized for 'complaining about taxes'. He is being criticizedfor complaining that after an enormous mortgage, private-school tuition, a nanny,daycare, leisure activities for the children, servants, market investments and eveningsout, he and his physician wife are "just getting by" such that removal of existing taxcuts would shatter their way of life. And, of course, for comments that are such howlersthat one would expect them in a Colbert-like parody, not presented straight up.

Reply September 21, 2010 at 10:21 PM250k_but_not_super_rich said...His point might be that $250,000 is too low of a threshold to be considered super rich.Super rich is not working anymore and living on your investments and net worth. At$250,000, people still have long commutes to their full-time job trying to pay offcredit cards, student loans, car payments, alimony, etc ...

Also, with out the extra help around the house and the kids, he and his wife probablycouldn't be a successful professor/doctor. So while they might seem like a luxury,they're a necessity to maintain their jobs. Unless you're a successful professor ordoctor, don't assume to know what his needs are.

Anyway, I wish people would stop hating him for being successful and wanting to bebetter. It's just jealousy, like when people complain about runway models doing hardwork, or thin people saying they're fat. They're successful and better than you at life.Do something about it instead of complain about it.

Reply September 22, 2010 at 03:48 AMMichaelT said in reply to 250k_but_not_super_rich...You're not very bright, are you? Student loans are debt, of course, but they're alsopurchases. You use them to buy education, for example. And that education is a luxuryitem. You know, the sort of luxury rich people can afford. Just like cars--the fancier thecar, the more expensive it is. The difference between Todd and other rich people is thatyou don't often hear them buying a luxury car and then claiming that they are poorbecause they used their money to . . . buy an expensive car. "I'm not rich, see, I have tospend so much money on my kids' private school." This is, as you must be able to seeout of your tiny corner of the world, a very shabby argument.

As to whether or not this is just a hysterical effusion of jealousy: no. It's simply not.Though Todd and his supporters would like to believe that he is being attacked byresentful haters who envy his lifestyle. But no. Wrong. Fail. And so forth.

Todd makes a terrible set of arguments that don't stand up to reason: namely, that histax rates should not be affected by the repeal of the Bush tax cuts, because he carries alot of expenses and doesn't "feel" wealthy. Feelings are not facts; and those expensesthemselves confirm not that he is "not rich" but that he is rich. To critique the claimshe makes as such is not to betray a fit of envy.

Reply September 22, 2010 at 10:10 AMAppalled said...The Hendersons could move to Lakeview, where the houses are a little cheaper (notmuch, but a little) than in Kenwood and many of the public schools are excellent. Ofcourse, then they'd have to be neighbors with Rahm Emanuel instead of BarackObama, and that's not as impressive. Also, they'd have to deal with the fact that not all

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of his neighbors were committed to Lofty Ideas the way that people are down in HydePark-Kenwood. On the other hand, some of my neighbors here in Lakeview areteachers and firefighters, so the Hendersons would find people with whom they couldcommiserate about their pitiful incomes.

I'm a U of C alum, and like MichaelT, I'm surprised that anyone associated with the Uof C would make an argument based on feelings. Let's hope Todd Henderson hastenure if he's going to take that tack.

Reply September 22, 2010 at 01:35 PMCbowen said...What really amazes me is how there is this belief among otherwise intelligent peoplethat Obama's plan will raise taxes on couples making $250,000. If the plan is put inplace, the taxes on a couple with a $250,000 adjusted gross income (which is less thantheir actual income) will increase by $0! Nothing, nada! It's a tax increase on theamount of income ABOVE $250,000. Henderson disputes the $455,000 numbersomeone has posted as way too high. So, supposed it was only $350,000. His taxeswould increase by $3,000 (3% of 100,000). That's it. He says he pays $100,000 intaxes a year. He's going to pay $103,000 or likely even less. We're talking a numberthat's probably less than a 2% hit on his monthly paychecks. If he's even closer to thatmagical $250,000, it will be even less. I don't think people really understand howmarginal tax rates work.

Reply September 23, 2010 at 06:48 PMBruce said in reply to JCD...In re: #3. If he's such a libertarian, he should be thankful that he is allowed to eat thecosts of his failed real estate investment. After all, the free market rules and he boughtinto a speculative bubble. Investors deserve great rewards because they take greatrisks, right? Well sometimes the risks have to come home to roost.

If he really wants to save money it sounds like he should declare bankruptcy or letthem foreclose on the house. That would save him most of the house payment, which isfar higher than what he pays in taxes. Some credit to him for honoring his debt.

Reply September 24, 2010 at 03:33 PMComments on this post are closed.

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