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Why You Don't Feel Rich

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CNBC.com

Sort of rich people feel bad about themselves because the truly rich are really richer.

That, in a nutshell, is the conclusion one economics blogger reached based on an analysis of income distribution data.

And the internets have been buzzing about it ever since.

The article that kicked off the debate was written by Catherine Rampell, the Economix blog editor at the New York Times.

Here is her basic Question: "Why don’t people at the 90th percentile of the income distribution feel particularly rich?"

And her conclusion: "The answer is simple: because any Americans who are richer than this cohort are so much richer."

The basic argument comprises two principal ideas: 1) that perceptions of happiness are based on a relative analysis of income; and 2) that the income curve is fairly flat until you reach the top 20 percent.

The second assumption is fairly straightforward: It's a verifiable by viewing her graph of income by tax units, a metric presumably selected because it filters out some of the noise in the data.

But the first assumption—that human beings evaluate their happiness in a particular, relative way—leaves greater room for interpretation.

Rampell's basic premise is this: What makes individuals happy is the ability to move upward, on a relative basis, on the income curve.

She writes: "Those in the middle earn a little less than people a few percentiles up from them, whereas those at the top earn a lot less than their counterparts in nearby, higher percentiles. For example, those who aspire to hop from the 30th percentile to the 35th percentile would need to increase their cash income by $4,000 annually (or by about 17 percent); those who aspire to hop from the 91st percentile to the 96th percentile would require an increase of $324,900 (or 171 percent)."

The flip side of that argument is not considered: Why wouldn't people at the upper end of the curve evaluate themselves relative to those who are a few percentage points poor – rather than those a few percent richer—and feel wealthier in the process?

Looking at the graph, the curve gets really steep really fast. Near the 100 percent mark, the curve appears only a few degrees shy of vertical.

While the graph clearly shows an increasing rate of slope, it seems reasonable to point out that most people above the 80 percent mark are considerably richer than those a few percentage points beneath them. This is true despite the fact that those a few percentage points above them are relatively more rich, on a percentage of income basis.

So, it would seem, the wealthiest 20 percent of the American population should have something to feel good about.

Perhaps the solution to the paradox—of why this would bring the wealthy so little solace—is more closely tied to human nature than to mathematical analysis.

Human beings are aspirational creatures: Particularly in capitalist societies.

And Americans tend to focus upward—on their dreams for the future, rather than on their achievements in the past.

So perhaps the biggest downside of all the economic opportunity we enjoy is this: if you don't succeed, who else can you blame but yourself?

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