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Where Are You in the Economic Strata?

Posted By Barry Ritholtz On August 17, 2012 @ 7:30 am In Economy,Psychology,Wages & Income | Comments Disabled

Its a summer Friday, which means that not a lot is going on. Indulge me while I go off on a bit of a digression.

Why? I have been thinking about various groups of people and how they benefit (or not) from society. What their participation levels are in government, the economy, and local communities. It is something I think about from time to time from a macro perspective. Perhaps its the Paul Ryan VEEP selection and all the insufferable Ayn Rand chatter that dredged this up.

Regardless, I have come to a few conclusions about this, and perhaps you might find my contextualization and random connections of interest.

When thinking about economic strata in the United States, I find it helps to break it down to six different levels. Broad classifications like Rich, Poor and Middle Class simply don’t cut it any more. From top to bottom, I find it looks something like this:

Top 0.1% — The mega wealthy, billionaires and 100 millionaires. They are small in actual number, but attract disproportionate mind share from public & media. Money simply does not restrict any activity or desire of this group (Sorry, top 1%, but you simply don’t have the goods for this strata).

Wealthy: Yes, the ordinary traditional wealthy. These folks who have a net worth north of $5-10 million dollars. They typically accumulate their money by owning their own businesses, or by being senior in public companies. Finances are a responsibility, not a burden to this class.

Comfortable Middle Class (formerly known as Upper Middle Class) are professionals in various field who make a good living, own their own homes (often outright) have savings, retirement accounts, good health insurance, etc.

Stressed Out Middle Class (formerly known as “Middle Class”): are the people may be making a decent to pretty good living, but no longer feel financially secure. Perhaps their jobs are at risk. They constantly stress about losing their health care insurance. They have little in the way of savings or retirement accounts. They are one major health event or divorce away from bankruptcy.

Working Poor: Performing menial jobs for not enough money to make ends meet. Receiving some form of government assistance. Still believe in the American Dream, though somewhat less than a decade ago. Much less economic mobility than prior generations.

Impoverished: Dead broke, no hope, ignored by politicians and society at large. Almost zero economic mobility.

What do these various strata mean for the long run? To be blunt, I am not sure.

During my last trip to Europe, I was aware of how modest the stress levels were, despite the EU crisis, the looming recession, collapse of the Euro, etc. Their extensive safety net meant that there was not a  ”Stressed Out Middle Class” or even a “Working Poor.” If you have health care, retirement, education, unemployment and day care paid for by the state — and a 70+% tax rate — you don’t sweat minor issues like continental recessions.

In Helsinki, we got into a fascinating conversation within a small group of locals about that tax rate. The national and local income tax, real estate taxes, state sales tax, and then the VAT tax mean that a 70% tax rate (versus gross income) was pretty typical. That seemed astonishingly high to me. But someone pointed out that once you add in the costs of health care, student loans, retirement investments, etc. — all the things state pay for with that 70% rate — an American making less than $100k ended up with about the same 30% net as the Finns do.

The difference is we have more stress than they do.

There is a reason that the Nordic countries consistently rank as the happiest places in the world in annual surveys. Then again, the iPad — along with myriads other innovations — was invented in the US. Perhaps those stress levels have something to do with that . . .


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