Why do Americans making $140,000 feel poor?

An accelerating trend

Photo by Steve Knutson on Unsplash

The provocatively titled article, “The Valley of Death: Why $100,000 Is the New Poverty,” has been rocketing across the internet over the last few weeks. In it, portfolio manager Michael W. Green asserts that “the crisis threshold—the floor below which families cannot function” is roughly $140,000 for a family. Families making less than that are living in poverty. The article quickly went viral, as one might expect. For some reason, telling people they are poor in America is one of the best ways to get clicks. More surprisingly, it’s an easy way to get people to agree with you.

The article itself has already spawned numerous rebuttals. A few of the best ones are from Noah Smith, Tyler Cowen, and Scott Winship. I’m not going to dive into the details, but I should mention I completely agree with the rebuttals. The idea that a family of four with an income of $120,000 is living in poverty is complete and utter bunk. You can read the above posts to see detailed explanations of the flaws Green uses in his calculations, but you can also use common sense. The typical American family makes less than $140,000 a year. Does anyone really think more than half of all American families are living in poverty? It’s total nonsense. The United States is one of the richest countries in the world. To say most are living in poverty is, frankly, an insult to those who are actually poor. Not only that, but the US has made tremendous strides since the “War on Poverty” began in the 1960s. After accounting for government aid and other transfers, the poverty rate has dropped from 19.5% of the population to 1.6%. In other words, from one in every five people to one in every 62 people. That’s a tremendous achievement.

The more interesting question, however, is why Green’s article resonated with so many people. There are plenty who are willing to concede that maybe his $140,000 poverty level is exaggerated, but that there are plenty of Americans around that income level who are barely treading water. That maybe Green’s facts are exaggerated, but the narrative is correct. The typical American family may not be in poverty, but they are definitely struggling.

This is just a repackaging of a central problem in American society: people have lost track of their status in life. As I wrote about two years ago, almost everyone sees themselves as “middle class”. Lower class has become consubstantial with poor. Upper class has become consubstantial with rich. This is not good. Households making triple the median, or about $250,000 a year are emphatically not part of the middle class. They aren’t rich either. They are, however, firmly in the upper class. They might not feel upper class because they have four children, live in Manhattan, or own a boat that constantly needs maintenance, but welcome to life. Things cost money. If you want to feel rich, get a remote job, buy a small house in the rural Midwest, never travel or eat out, and watch your bank balance soar.

How have so many people convinced themselves their lot in life is worse than it actually is? There are a few causes. One is that a large segment of Americans has spent the last decade-plus extolling victimhood. This leads people to want to see themselves as victims. Another is social media. People used to compare themselves to celebrities and models in beauty magazines. That had its own problems, but at least people recognized they were looking at outliers. Now people see everyone they know on social media supposedly living these fulfilling, abundant lives. Meanwhile their furnace just broke and it’s going to cost $7,000 to replace. A third cause is an incorrect viewing of the past. Many millennials grew up being told they were middle class, or the mysterious “upper middle class,” when they were actually in the true upper class. Again, not rich, but their parents made enough to have a nice house, multiple cars, designer clothes, and take one to two vacations every year. Many of these millennials are now middle-class for the first time, so their consumption ability has declined. Since they incorrectly view their childhoods as also being middle-class, they believe living standards have declined, when in reality, they are downwardly mobile.

Finally, there is a disconnect between needs and wants. Most Americans recognize that being unable to afford the newest luxury SUV isn’t a big deal. It’s a want. Many of the same Americans, however, don’t understand that being able to afford the nicest anything is a want. A privilege. Those who can’t afford to live in the nicest neighborhoods or send their kids to the nicest schools (or both) often act as if their needs aren’t being met. These are, of course, wants. I think this dovetails with the problems generated by social media. We see some friends traveling the world and some friends with nice cars and some friends with fancy houses and forget that it’s rarely all the same people. Some of my friends with fancy houses take very normal vacations. Other friends are traveling the world but don’t have any kids. We all have tradeoffs.

Beyond the whys and hows of people mistakenly thinking they are middle class or poor, it’s beginning to cause other problems. As Josh Barro recently pointed out on an episode of the “Central Air” podcast, these misjudgments are having real-life policy implications. As Barro points out, in 2015 Barack Obama wanted to reform 529 Savings Accounts. These are tax-advantaged accounts meant to be used for educational expenses, mainly for children to attend college. As such, they mainly benefit the upper class, who are disproportionately likely to send their kids to college. Obama wanted to limit 529s and give more money to low-income students. The proposal went nowhere. The same people who claim to want increased redistribution of wealth don’t understand that to redistribute wealth, those richer than the average have to give to those poorer than average. Not just the rich, but from anyone in the top third of the income distribution. That means giving up tax-advantaged accounts whose benefits mainly accrue to those making $200,000+ a year.

That’s a relatively small potatoes example, but the trend is going to have large implications in the coming decades. The United States is currently running an unsustainable budget deficit. Sooner or later, we are going to have to decide to either lower spending or raise taxes. There is nowhere close to the political will to cut entitlement programs, so that means raising taxes. But who should taxes be raised on? The upper class, of course. The problem is, no one thinks they are upper class. So they always say, “Well, my taxes shouldn’t go up. I’m middle-class. Only those who make 50% more than me should have higher taxes.” When 95% of the population thinks that way, it means taxes don’t go up and we continue to overspend, setting up a tougher reckoning in the future.

Americans need to get their heads on straight. Life here is not Shangri-La. But it also isn’t, as Thomas Hobbes said, “solitary, poor, nasty, brutish, and short”. The typical American family has a roof over its head, a car in the driveway, too much food, and access to technological innovations previous generations could only dream of. The types of poverty that defined the 20th century have almost been eliminated. Most families have all their needs and many of their wants met. Let’s maintain some perspective.