Monday, April 14, 2014

How Big is the Middle?

Two recent Scott Sumner posts on inequality (this one and this one) got me thinking about this thing we like to call "middle class" as well as the two classes that bookend it, rich and poor.

The middle class has two interesting characteristics: just about everyone seems to think they themselves are in it, and no one seems to think a public policy action has a chance if it negatively affects it. As much as we might wish to dismiss these two bits of conventional wisdom, there are reasons to believe they are true. First off, they tend to be a bit self fulfilling as our self identification is a key factor to determine the groups to which we belong (you are who you think and say you are). Additionally, if most everyone thinks actions negative to the middle class will be defeated, then those actions will have a harder time finding support.

Second, most distributions that describe socioeconomic class tend to be shaped like the normal bell curve. In a standard normal distribution, just one standard deviation captures ~68% of the population. Two SD capture ~95% of the population. Just how much deviation from the mathematical average should we accept before we jump to the extreme categories truly rich and truly poor? To answer that we probably need a good definition of what are rich, middle class, and poor. Allow me to offer my suggestion.

My definition of socioeconomic class hinges on the scarcity of two good proxies for wealth: time and money. The rich are those who have no scarcity of money or of time. The poor are those who have a scarcity of both time and money. The middle class are those who have a scarcity of one or the other, but not both or neither. Obviously this casts most of American society in the middle class category. I believe that is a feature not a bug for reasons consistent with the arguments above among others.

Those in the middle class may and probable do vacillate between having money in relative surplus and having time in surplus. Consider this a bit of a middle-class trap. It takes a surge in one or the other to escape to the penthouse, but it likewise takes a dramatic turn of bad fortune to descend to poverty's doorstep. This coupled with the enormous absolute wealth America's middle class commands is a testament to just how good we have it.

To defend my definition I ask you to think about it from the standpoint of a person being asked to do something for a charity. A rich person will make time if the event is to their liking. Otherwise, they'll just write a check. A poor person has basically no options to offer help. A middle class person will tend toward doing for charity what they have the relative surplus in. Obviously as that changes over time, their charitable acts must change too. As an aside, this change presents a difficulty for the charities that grow accustom to a particular person's help. It also shows how poorly suited corporate charity initiatives are for large employee bases. A financial "suggestion" to donate to United Way or a plan for everyone to sing "If I Had a Hammer" with Habitat for Humanity are nice for the company PR ad but bad for the employees and by extension the charities they aim to support.