Monday, September 20, 2010

Rich and Unhappy

An interesting story has been running around the economics blogs for the last day (summarised here on Marginal Revolution) about the reaction to an article by a Chicago Law Professor complaining about how difficult it is to live in America even on family incomes like his own in excess of 400 thousand dollars. We have had a few incidents like this in Ireland over the years, most famously when an EU Commissioner complained about his 6 figure salary on the main national talk show, inviting the audience to try living like him for a while and see how they would manage it. A lot of the reaction is the standard hysteria you expect when someone writes something like that though there is also quite a big reaction defending him in the comments on the article. There are also a lot of very interesting attempts to analyse why it would be the case that a guy earning this type of money would feel hard done by.

A number of the explanations focus on the idea that even a wealthy guy like the Professor may feel relatively poor in a society with so many extremely rich people. For me, deLong gives a great description of why, in general, the individual relationship between income and well-being is not as high as we would expect. An excerpt is below but the full post is really worth reading. DeLong emphasises habituation and reference effects as the two main reasons for why someone like the Professor is feeling hard done by. If I were to add anything to the analysis, it would be that loss aversion with respect to changes are at least partly at play. Also, he clearly doesn't like how the government spends money in the US. Perception that you are being unfairly taxed to fund activity of low-value is a potential driver of life satisfaction. Though, it is also a strategic emotion and hard to know whether it actually causes dissatisfaction or emerges from it.
By any standard, they are really rich.

But they don't feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone--and they feel that they have to scrimp.

I know how they feel. My household income is of the same order of magnitude than theirs (although somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College's housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs) where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don't think that I am not rich.

Professor Henderson's problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that.

But if he values the high-end consumption so much, why doesn't he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations--doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be.

But why does he think that that is the way things should be? And here is the dirty secret: Professor Henderson thinks that that is the way things should be because he knows people for whom that is the way it is.


Mark McG said...

“Standard hysteria?” It almost sounds like you’re dismissing the possibility that people have the right to be legitimately appalled at this kind of statement from someone who is clearly out of touch with reality.

No harm in reminding people in privileged positions in society (especially someone with his kind of job security) to look behind them once in a while. In fact according to the reference hypothesis it will even make them happier...

Liam Delaney said...

People have the right to be appalled by anything they want Mark. I would never want to place a law against being appalled. I certainly don't feel any sympathy for the guy and I think DeLong nails it head on. But its worth having some perspective. If a person is earning 30k a year perhaps they feel the right to be appalled at a Professor who is earning 300k and is not happy with it. But why can't guys breaking rocks for a euro per day in poor countries not feel appalled that the appalled person is earning 30k and is unhappy. In terms of the welfare consequence I would have thought they have more right to be appalled than most people have with the professor.