The Percent of the Percent, or the Additional Percentage?
It’s good to see that the gatekeepers over at RI Future have allowed somebody actually to address the points that I’m making (as opposed to making distinct points and scoffing at whatever it was that some right-winger was saying elsewhere). That somebody turned out to be sometime Anchor Rising commenter Thomas Schmeling, and his argument is that my analysis of Rhode Island’s, Massachusetts’s, and Connecticut’s increases in $200,000-earners measures the wrong thing. I encourage readers interested in the debate to read Schmeling’s lucid post in its entirety before returning to my reply, below.
As well as Schmeling has illustrated the differences in approach between Crowley’s/the Poverty Institute’s/ITEP’s statistics and mine, when it comes to arguing that one or the other is more useful or applicable to RI’s current situation, it seems to me that he just swirls the water. He posits two identical states, both increasing the percentage of their populations earning over $200,00 per year at 10% annually, with one starting from a smaller proportion. He then states that the one’s “lag is because, and only because, its starting point was lower.” But the “only because” is the assumption under contention. I say again: when you’re talking about a number of anything that doesn’t self-multiply — households, in this case — it’s easier to double 1% than to double 2%.
Ask yourself this (answers may differ): If I were to say that an economic boom is coming that would benefit all states equally, which of the following circumstances would you believe me to be describing?
- The percentage of every state’s population earning over $200,000 per year would increase at exactly the same rate.
- An equal percentage of every state’s population would advance into the $200,000 per year category.
Admittedly, the question is contrived; in reality you’d probably expect the boom to raise every state’s average by the same percentage. In that case, according to the IRS data, Massachusetts’s average AGI increased 40.31% from 1997 to 2005, while Rhode Island’s increased only 34.94%.
But of the two options targeting the rich, I’d choose the latter, because (for the most part) rich people don’t multiply; rather, others join their ranks. The economic boom doesn’t cause the wealthy to bifurcate as might some chemical in a petri dish of amoebas; rather, it creates circumstances in which… umm… new amoebas can enter the petri dish.
Schmeling is correct that, “if RI’s growth rate is larger then MA’s, as it is in reality now, it must eventually catch up, even though in the early years MA appears to be pulling away.” But that requires Rhode Island to add an ever-larger number of people to the group each year, to keep up its percentage. Moreover, the formulation implies that both will eventually reach 100%, which isn’t a plausible percentage of the population for “The Rich” to reach.
Of course, it’s very plausible that everybody who works will eventually earn at least the specific dollar amount of $200,000, because of inflation. To illustrate how this new consideration works into the discussion, I’ll switch to U.S. Census data, because it breaks the population into narrower categories, although the relevant information is only available from 2002 to 2006.
According to InflationData.com, the inflation rate from 2002 through 2006 was 13.95%, which means that $200,000 in 2006 was equivalent to $175,515 in 2002. Assuming that households were spread evenly across the $150,000–$200,000 category, it’s reasonable to suggest that, as a pure matter of inflation, the number of households over $200,000 in 2006 should have been the number of households in that category in 2002 plus one-half of the households in the lower category in that year. The following figure illustrates how this result compares with the actual change:
The red column above “inflation only” is the percentage of the households earning over $200,000 in 2006 if nobody did anything to advance their income beyond inflation and if everybody who entered the state during that period had incomes below that amount. Any citizens sufficiently surpassing inflation and any immigrants above the $200,000 mark would have increased the column, and as you can see, the actual results were lower than the purely inflationary results.
It’s interesting to note — and indicative of this illustration’s lack of practical utility — that Massachusetts actually fared worse by this measure. Schmeling might want to claim that note as evidence for his argument — that it is in keeping with RI’s better growth rate in the highest-income category (the state came closer to matching inflation) — but I’d suggest that it ultimately supports just the opposite conclusion.
For one thing, using Schmeling’s preferred measure — the rate of growth — even the pure inflation result favors Rhode Island. Rhode Island’s wealthy group would have grown 70% to Massachusetts’s 57%.
For another, consider the Phoenix Marketing data recently introduced into the comment discussion on Anchor Rising. In 2006, 5.64% of Massachusetts households were millionaires, in the sense that they had $1 million readily available in liquid assets. Rhode Island’s percentage was 4.72. This difference brings to the fore the reality that Massachusetts’s wealthy class outstrips Rhode Island’s in ways beyond the reach of inflation. A state with a higher percentage of citizens over the $200,000 line has a smaller pool from which to draw improvement.
Which brings us back to dough.
Yes, obviously people can slip below the $200,000 line or withdraw themselves from the state altogether. The point is, however, that it’s more relevant (in my view) to observe the additional percentage of the population that crosses the line than to calculate the rate at which the category is growing.
I expect Schmeling to point out, with respect to the Phoenix Marketing data, that Rhode Island improved its nationwide rank on the millionaires list more than Massachusetts did in 2007. I’d respond with a whoop-dee-doo that RI climbed from 20th place to 17th when both of its neighbors have consistently been top 5, and then I’d promise that this finding will be incorporated into the post with which I intend to move on from the esoteric distraction of how to measure categorical increases.