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The Rich and Everyone Else

Class Matters

by correspondents of The New York Times, with an introduction by Bill Keller
Times Books, 268 pp., $14.00 (paper)

Forbes 400: The Richest People in America

2005 Edition
344 pp., $5.99

Individual Income Tax Returns

Internal Revenue Service
Publication 1304; available at www.irs.gov/taxstats

In their own ways, three of the books under review—Class Matters, Inequality Matters, and The Chosen—warn that social barriers in the US are higher and economic inequality is more pronounced than at any time in recent memory. All three books also frame this issue by asserting or implying that lines between classes are hardening. While the term is widely used, class has always resisted clear definition. We may talk of the rich and poor, of people in the middle, of blue- and white-collar workers, of haves and have-nots, yet attempts to place most people in an appropriate class have never been successful. There is no clear agreement on the number of classes, and how they should be defined. Indeed, attempts at precision inevitably create problems. For example, a 2004 study by the Annenberg Center at the University of Pennsylvania defined the middle class as everyone with incomes between $25,000 and $75,000.1 They make up half of all households, and include all families on both sides of the median family income of approximately $50,000. But has a family making, say, $28,000 really reached the middle class? One with $95,000 might be called upper middle class; but that would still seem to locate it in the middle. Any attempt to set a floor or ceiling is bound to raise questions like these.

In Inequality Matters, James Lardner speaks of America’s “growing class divide.” Yet he never identifies the classes that are being divided. If he means, as I think he does, those who are well-to-do and those who are not, then who and how many are in each group? The IRS reports, for example, that 356,140 taxpayers declared incomes of between $500,000 and $999,999 on their 2003 returns. Where should someone receiving, say, a $650,000 salary be assigned? Earning $12,500 a week before taxes should provide a lawyer a comfortable living, but does it place her with the rich? Then what about her nonworking cousin, who happens to have exactly the same income, but in his case it consists of the proceeds from a $12 million inheritance?

Problems like these are evident very early in Class Matters, which republishes a series of fourteen articles that appeared in The New York Times last year. They report on a broad range of men and women who were willing to talk candidly about themselves. We meet old and new millionaires on Nantucket, a laid-off manager and another who fears he may be fired, and a Chicago mother of five pulling herself out of poverty. No claims are made that they are a cross-section or random sample of Americans. Still, we are introduced to people most Times readers would probably never meet. Apart from the few at the top and the bottom, the reporters do not try to identify their subjects by class. Even so, the book shows how the lives they lead are shaped by where they stand in society.

The opening chapter skirts the issue by saying “class is rank, it is tribe, it is culture and taste.” Class is said to be expressed in varying “attitudes and assumptions,” and there are “dozens of microclasses, defined by occupations or lifestyles.” America’s class system, insofar as it has one, is a “ladder with lots and lots of rungs.” Here alone, I count nine words that supposedly define class, and we haven’t even got to income, wealth, or power. Elsewhere, we hear that class produces “different views of gift giving, vacations, food, child rearing.” Yet another chapter observes that we can no longer use dress to tell where people stand, since nearly everyone wears jeans.

While I find that assigning Americans to classes occasionally makes sense, other classifications often are more informative. For example, the gap between the rich and everyone else isn’t necessarily a class divide. And while we may talk about a middle class, or a working class, these strike me more as phrases people use casually in conversation then as rigorous categories. Thus we may hear debates over whether a truckdriver and a college librarian who both earn $65,000 should be put in the same class.

1.

In Inequality Matters, a collection of excellent papers from a conference held at New York University in 2004, a recurring thesis is that the welfare state has been turned on its head. Indeed, the meaning of the term “redistribution” has changed. It used to mean taxing the better-off to assist society’s less fortunate. Today the flow is in the reverse direction. David Williams and James Lardner, writing on health, show how Medicare beneficiaries get better treatment than those on Medicaid, for example. Tamara Draut reveals that more subsidized financial aid now goes to suburban students who can afford expensive SAT courses. And David Cay Johnston shows how tax rates have been lowered even for families with incomes of $200 million. For Bill Moyers, the central fact of our time is “a gap between rich and poor that is greater than it has been in half a century.”

There is no question that the rich have been getting richer, especially in recent years. Yet what wasn’t generally predicted is that the numbers of such people have been growing, with more of them better-off than in the recent past. Table A draws on several sources that highlight these changes. The most recent figures are from 2003 through 2005, and can be compared with similar data from the early 1980s.

More Billionaires. Each year, Forbes magazine lists the men and women it identifies as the 400 richest Americans. While no one can say for sure who has how much, Forbes has reliable informants and its estimates have a plausible ring. To get on its first list, which came out in 1982, one needed the equivalent of $200 million in current dollars. By 2005, it took $900 million to be listed, more than a fourfold increase. Thanks to this higher standard, only forty-five on the original list would have made its latest version. The late Daniel Ludwig, a shipping magnate, led in 1982 with $4 billion, again in today’s dollars. Last year, Bill Gates was first, with $51 billion. Following him, there are another forty-nine men and women who surpass the wealth once amassed by Mr. Ludwig. It is easier to become a billionaire in an era of hedge funds and leveraged buyouts, while the founders of electronics industries like Oracle, Google, and Dell have become as rich as a Carnegie or a Rockefeller in a fraction of the time.

More Millionaires. The Internal Revenue Service issues reports showing how much taxpayers declare as their annual income. These sums are undoubtedly on the modest side, since they show only what people choose to disclose, while much of high-bracket income may be sheltered. Even so, between 1981 and 2003, and adjusting for inflation, the annual returns exceeding $1 million rose more than sevenfold as a proportion of all 1040s. In 2003, the latest IRS figures, fully 181,282 households admitted to making more than $1 million a year, averaging $2,951,369. Their share of all taxpayers’ income has also increased seven times since 1981, which must mean the share going to the rest has declined. While most millionaires list some kind of business or professional income, these earnings amount to only a third of their total. Much of their money comes from inheritance and sales of property, including stocks and bonds. Almost all are safely rich, whether by their own efforts or inheritance, in that they have enough to continue to live well even without working.

Six-Figure Families. Each March, the Census releases a report on the distribution of personal income. In its 1982 survey, only 3 percent of all families had incomes over $150,000, computed in today’s dollars. By 2004, its latest report, 8 percent of households had reached that level, and most of those households have one earner making at least $100,000. This group now absorbs 27 percent of aggregate personal income, against 11 percent in 1982. So as matters stand, the other 92 percent of Americans receive 73 percent of the pie. This upward flow of money is only partly the result of tax cuts bestowed on the better-off. More important is the fact that executives and professionals are being given salaries, bonuses, and other forms of compensation that are much more lavish than in the past.

To return to the 400 richest Americans, perhaps the most salient feature of the Forbes list is its changing membership. At death, fortunes tend to be divided, and most descendants don’t inherit enough to stay on the list. While the current 400 includes members of the Pritzker, Hearst, and Walton families, they already have fifty-nine children, most of whom will end up rich but much less so than their parents. Back in 1982, the list had thirteen Rockefellers and no fewer than thirty-three du Ponts. By 2005, only two Rockefellers remained, and all the du Ponts were gone. Indeed, 1982 and 2005 come across as very different eras. The earlier year was strong on family scions; most of the places they once held are now occupied by self-made men and women, among them Oprah Winfrey, Margaret Whitman, and Martha Stewart.

To call the rich an “upper class” only tells us that they have the most money, not about the power they have, or their social influence. But when it comes to the particulars, there are not many signs that they share any traits other than their money. “Rich individuals have no feelings or purposes in common, no mutual traditions or hopes,” Alexis de Tocqueville observed of Jacksonian America. “Though there are rich men, the class of rich men does not exist.” At this point, we lack firm information on how much the very rich are giving back to society. In overall terms, the IRS reports that the 5,955 richest taxpayers, whose annual incomes average $26.2 million, gave away a deductible 6.7 percent of what they declared. Just how much more comes from the thousands of family foundations is hard to determine, since no one collates their annual reports. At the same time, such high-tech entrepreneurs as David Packard, William Hewlett, and Michael Dell have become important supporters of museums, orchestras, and a host of other causes. The fund created by Bill and Melinda Gates now gives away twice as much as Rockefeller, Carnegie, and Ford combined.

2.

Even as the relatively small group of rich people is getting richer, Class Matters asserts that social mobility in America has “flattened out,” “stagnated,” or even “declined” in recent years. A chapter called “Fifteen Years on the Bottom Rung,” describes an immigrant mired in a mundane job. Another, “No Degree, and No Way Back to the Middle,” tells of a laid-off manager whose résumés are returned because he doesn’t have a college degree. Reports like these are by no means rare. Still, we should ask if they reflect a growing trend.

How many people are moving upward, compared with some periods in the past? In the decades following World War II, millions of families bought suburban homes and embarked on new lives. Between 1953 and 1973, median income in constant dollars grew by a remarkable 75 percent. For most who gained, this was not the result of intense personal struggle. It was more as if the growing economy was a giant escalator lifting everyone upward. A parallel trend in higher education came with the GI Bill after World War II and continues apace as more Americans graduate from college each year. Among men and women in their early thirties, 32 percent now have a bachelor’s degree or better, compared with 25 percent in 1980 and 14 percent in 1970. These changes mean that millions of young people are moving past their parents, at least as measured by higher education.

But other indices suggest that the postwar escalator has not been moving for quite a while. Between 1982 and 2004, median earnings of fully employed men grew by only 2.7 percent, which is about as close to stagnation as one can get for a twenty-two-year period. At the same time, women’s earnings rose by 25 percent, from 63 percent to 77 percent of what men made. So if men as a group weren’t moving up, a lot of women were. This had an impact on family income. Between 1982 and 2004, family median incomes increased from $43,913 to $54,061, a 23 percent increase in real dollars, and at first glance a heartening sign. But this growth was almost entirely the result of the presence of additional earners, with more wives turning to full-time work and contributing more to the family total. In contrast, the median income in families with a single breadwinner rose only 6 percent in this period. So the rise in family income of 23 percent came mainly from more work by more members, the equivalent of running faster to keep in place.

True, median incomes only tell us about the persons or families who happen to fall in the exact middle. Even so, they remind us that when the median barely improves, it means that for most people who move ahead—and some plainly have—there will be someone else who is falling behind. As was noted earlier, from 1982 to 2004, the fraction of families that rose to the $150,000 tier grew almost threefold. Their progress had to be paid for. And it was, by households whose earnings declined. Among them are the growing number of single mothers, who tend to cluster at the bottom of the income pyramid (median income: $23,428), whereas earlier many of them would still be in two-spouse households (median: $50,867).

Mobility may also be analyzed by examining what happens to specific men and women in the course of their lives. One method draws on a sample of parents and then keeps in touch with them until their children have become adults. The best such study I have seen was published last year by Tom Hertz, an economist at American University, who draws on a database that has tracked 6,273 families over thirty-two years.2 As can be seen in Table B, he compares the parents’ economic standing when the children were growing up with how those offspring have fared on their own.

Hertz found, as might be expected, that many of the children raised in the top fifth—some 38 percent—are still up there as adults, and the same holds for many raised at the bottom. Yet of those who began at the bottom, 58 percent climbed up at least one tier and 34 percent moved up two or more tiers. Since we know that few from the bottom fifth get college degrees, it is striking that as many as 18 percent of them end up in the top two fifths. As for the children of the best-off households: fully 62 percent of them moved down, despite the advantages they had in their formative years.

A story in Class Matters hints at a downward future. In a socially mixed marriage, the mother has a sizable trust fund and her new husband was selling cars when they met. One of her own sons, who has dropped in and out of college, “fantasizes about opening a brewery-cum-performance-space, traveling through South America, or operating a sunset massage cruise.” However, he won’t have an independent income until his mother dies, and then there’s a brother to split the bequests in the will. Unless he has talents that aren’t now apparent, it seems likely he will have a lower living standard as an adult than he did as a child.

Using quintiles to track mobility also means, as we have seen, that if someone new moves into the top fifth, another person has to go down. Therefore, Hertz is not only telling us how many offspring have surpassed or fallen behind their parents. In his overall analysis, for every winner there is another loser. This also holds for the Forbes list, since no more than 400 can make the grade. Last year, there were forty-one newcomers, displacing thirty-three whose net worth didn’t keep up, plus another eight who died. By other measures, the increasing income of one family doesn’t mean the decline of another. Still, as was seen, the $1 million tier is getting rather crowded. In some circles now, you’re not really up there if you can’t declare $10 million a year (as 6,126 households did in 2003).

3.

In today’s United States,” Tamara Draut writes in Inequality Matters, “a four-year degree has become the all-but-official ticket to middle-class security.” As the four medians in Table C show, each academic rung brings higher pay. But medians (and averages) often mix together people with varied characteristics. For this reason, the table, by focusing on a more homogeneous group—in this case white men who are currently between the ages of forty-five and fifty-four—avoids disparities resulting from sex and race and age. This group was also chosen because most of them have been employed for twenty to thirty years, so that we can compare their current status with the educational level they attained a generation earlier.

If college graduates are more apt to get better first jobs, it is because established businesses and professions have grown accustomed to asking for degrees, which is also a convenient culling device. (The dot-com world has shown that such rules can profitably be broken, especially for first-rate programmers.) But a first job, while often important, is only a step in a career. According to all the evidence I have seen, promotions will soon be tied to performance, not on whether the candidate once took Anthropology 101. Still, the table confirms that many men who are only high school graduates end up in the bottom income third, which is probably where they started.

But I find it even more significant that more than half of them have moved into the top two thirds, with 17 percent now in the tier where college graduates are expected to end up. On the other hand, of these men in their forties and fifties, 46 percent with bachelors’ degrees and 31 percent with graduate degrees haven’t made it to the top third. Table B, which traced how children ended up, showed considerable downward mobility. Table C tells a similar story, since it says that while education generally correlates with earnings, these benefits accrue far less evenly than is generally believed.

One result is that many college graduates now hold jobs that once required only a high school diploma. The Bureau of Labor Statistics reports that 37 percent of flight attendants have completed college, as have 35 percent of tour escorts, 21 percent of embalmers, and 13 percent of both security guards and casino dealers.3 All signs suggest that the number of graduates will continue to grow, and many will end in well-paying professions. There still seems to be a strong demand for MBAs, of which 120,277 were awarded last year, as well as 105,668 degrees in engineering, and 151,690 in health-related fields. But we cannot expect the economy will automatically create better-paid positions to match the cohort acquiring higher education. And of course employers do not perceive all degrees as equal. When résumés are read, it’s thought important not just whether the candidate attended college, but which one.

4.

Jerome Karabel, a University of California sociologist, has written an intriguing study of how Harvard, Yale, and Princeton decided whom they would admit throughout the twentieth century. He describes the change from an emphasis on family background and “manly character” to academic excellence as shown by high grades and test scores. Undoubtedly the biggest break with the past is that The Three (as I will call them) now have fewer white and male students than they once did, as well as fewer Protestants and products of boarding schools. Of Groton’s seventy-six graduating seniors last year, only eleven made it to The Three. There was a time, Karabel notes, when almost all would walk in. The Three have also embraced affirmative action, and now reserve about 15 percent of their places for black and Hispanic undergraduates, even if their academic records are somewhat below the norm. Instead, credit is given for traits like perseverance and commitment. Karabel doesn’t say if he feels this is akin to the way “manly character” was used to favor earlier groups.

In recent years, The Three have admitted fewer than 12 percent of their applicants, odds below those at even honest casinos. This popularity is readily explained. As Karabel puts it, a degree from one of them is seen as a “ticket to success.” It’s certainly true, as he says, that their graduates “have always been heavily overrepresented in the American elite,” providing seven of the last century’s seventeen presidents.

Karabel’s use of the phrase “American elite” is telling, since he uses that term rather than, say, “ruling class.” Nor is this merely a semantic matter. One can sensibly say that America has rulers, whether political, economic, or cultural, with power concentrated in large organizations and institutions. But it need not follow that those who hold this power constitute a class. An important feature of an “elite” is that it consists of individuals who hold specified positions. The CEO of ExxonMobil belongs, as do the secretary of state and the president of Yale. How they perform may make a difference, but they still owe their power to the chairs they occupy.

It’s worth asking to what extent The Three are supplying candidates for the positions that count. A place where their degrees carry weight is the legal profession. Among last year’s entering class at Harvard Law School, 395 were from The Three, while their 1,267 classmates came from 235 other colleges. Moreover, their undergraduate degrees continue to make a difference. In powerful firms, like New York’s Cravath, Swaine & Moore and Washington’s Covington & Burling, more than a third of those picked as partners began at one of The Three.

But in other branches of work, The Three have less cachet. Their graduates account for only thirty-three CEOs of the top five hundred corporations on Standard & Poor’s list. So it may be that four sheltered years are not the best preparation for a corporate climb. Wall Street now also draws from a broader pool, as do leading medical and research centers. Most of The Three’s graduates on Forbes‘s richest list inherited their wealth. By way of contrast, many who amassed their own fortunes never attended or didn’t finish college, among them Steven Jobs, Michael Dell, and Lawrence Ellison.

The Chosen closes with a brief coda entitled “The Dark Side of Meritocracy.” Today, The Three admit students largely on their academic records, with their SAT scores among the highest in the nation. But Karabel cites the work of Michael Young, who a half-century ago in The Rise of the Meritocracy worried that a stratum based on merit was already “on the way to becoming hereditary.” Karabel has the same concern, adding that The Three and a few other colleges are creating “a ‘new class’ of privileged credential holders possessing the means to reproduce itself.” I’m not so sure this is happening. Harvard still admits about 40 percent of alumni offspring who apply, compared with 11 percent from the general applicant pool. Statistics like these have been used to argue that inherited privilege is still strong. However, even at Harvard, half of the applicants with legacies are turned down. The University of Pennsylvania rejects 59 percent, while Swarthmore rejects 64 percent, and Princeton 65 percent.4

We all know that the children of accomplished parents often don’t inherit their talents. They can be sent to expensive schools and receive extra tutoring, but these investments don’t always bring the wished-for results. Among students whose parents make over $100,000 a year, fully 59 percent scored less than 600 in the mathematics section of the SAT and 65 percent scored under that figure on the verbal part. Yet Yale admits fewer than 4 percent who have scores at this level. Since facts like these are widely known, many offspring of successful families don’t even bother to apply, and students with more modest social origins are admitted.

Would changed admissions policies alter the makeup of America’s elite? Karabel shows how The Three during much of the last century curtailed Jewish enrollment, and he explains why the policies had to be changed, as Jews became more established in American life, including the academic world, and their exclusion was damaging both to the quality of scholarship and to the universities’ economic future. Curiously, he says relatively little about the upsurge in Asian enrollments, which provide strong evidence that high school grades and test scores are more decisive than ever.

And the advent of coeducation at Yale and Princeton, as well as Harvard’s admission of more women, means that The Three admit 1,168 fewer men now than they did in 1970. Thus 1,168 men will go through life without a credential they might have had in an earlier generation.5 Indeed, The Three now enroll 1,581 more women than in 1970. If their degrees will also become Karabel’s “ticket to success,” as he calls them, then the topmost reaches of America’s elite should show more women and fewer men. (In fact, two leading American CEOs who went to Princeton are Margaret Whitman of eBay and Avon’s Andrea Jung.) Still, to reach the heights in practically any field today calls for a round-the-clock commitment. So we will have to see what women from The Three are doing when they reach, say, their late thirties. If more than a few decide to give up demanding careers, the men they once displaced as undergraduates, and who had to go to less celebrated colleges, may find they have a second chance to reach these top rungs.

Does it enhance our understanding to look for classes in America? As has been seen, any group we choose to call the “middle class” is so large as to be of little analytical help. Nor do the huge majority who are not rich qualify as a class. Moreover, there remains a very well-paid tier of corporate executives between them and the truly rich. Yet, along with the increased concentration of wealth, we are seeing millions of Americans being laid off, settling for lower paying jobs, losing health coverage, and watching pensions evaporate. Economic inequality is increasing, just as the millions who are born and stay poor are not getting anything like a fair chance to improve their situation. Victims of outsourcing don’t fit into a single class, nor do the people who suffer most from living in a society that is increasingly unequal and unjust. To see these trends as matters of class does not explain them. What is clear is that we have yet to see any convincing ways of reversing them.

  1. 1

    See www.factcheck.org/article249.html.

  2. 2

    Tom Hertz, “Rags, Riches, and Race: The Intergenerational Economic Mobility of Black and White Families in the United States,” in Unequal Chances: Family Background and Economic Success, edited by Samuel Bowles, Herbert Gintis, and Melissa Osborne Groves(Russell Sage Foundation/Princeton University Press, 2005).

  3. 3

    Bureau of Labor Statistics, Occupational Outlook Quarterly (Winter 2004–2005), p. 4.

  4. 4

    Entrenched Affirmative Action for Whites in College Admissions,” The Journal of Blacks in Higher Education,No. 40 (Summer 2003), p. 27.

  5. 5

    True, these men can go to Dartmouth or Williams. But taken together, the twelve most selective schools have approximately 7,500 fewer male students compared with 1970.

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