Why Cost of Living Matters

20 Feb

The median income in the U.S. if $52,029. At first-glance, that doesn’t seem like alot, especially considering the insane amounts of money those at the very top make.  The administration (and many politicians) seem to consider a income about 4-5x the median to be rich.  Certainly, regardless of where one lives, making more money, ceteris paribus, results in a higher standard of living.  However, “rich” in one locale is absolutely not, no matter what anyone else may try to tell you, necessarily rich in another one.

In order for someone in Manhattan to have the same standard of living as someone making the national median income in St. Louis, they’d have to make over $125,000 a year!  The cost of housing is 486% higher in Manhattan than St. Louis, utilities 87% more, groceries 66% more.

Using relatively conservative assumptions for purchase costs, taxes, etc, let’s assume you can afford about $5,500/month or so on housing. $250,000 a year in St Louis gets you over 6,000 sqft, 5 bed, 5 bath mansion. $5,500 (or so) in Manhattan gets you a 3 bedroom, 2 bath,5th floor 1,200 sqft (probably less, in actuality) condo in a decent-to-good location (this particular one is on 28th & 6th).  The price/sqft is more than 5x higher for the NYC condo than the St. Louis mansion.

Certainly, there are more $250,000/year jobs in Manhattan than their are in St. Louis, but I think one would be hard pressed to consider raising a family in a 1,100 sqft NYC condo (even one with high-end finishes/appliances) versus raising one in a mansion in St. Louis, it’s hard to consider the former family rich, especially  versus the latter.  Sure, many people find the allure and cultural benefits of living in Manhattan worth the trade-off, but that’s another story for another time.  “Rich,” no matter how you choose to define it,  is a relative term when you account for cost of and quality of living.  Anyone who says otherwise is likely a pundit and/or politician pandering to “the poor.”

The house in St. Louis is the 10th most expensive home in St. Louis currently listed in the Missouri MLS.  The condo in Manhattan is roughly the 1,500th most expensive current listing there.  Hell, there’s about 500 current listings in Manhattan for over $5 million, and almost 200 over $10 million, topping out at a stratospheric $60 million!  $250,000 in St. Louis and you’re among the top 10 in town.  $250,000 in Manhattan and you’re just another middle/upper-middle class guy or gal trying to make it big in the Big City.

Personally – and this concept goes back to when I was but a wee lad – when I think of someone being rich, not just well-off, but RICH, I think of at least a new(ish) S-Class Mercedes and a Range Rover in the garage, if not a Porsche Turbo or Ferrari to drive on weekends up to the house in Westchester or South Hampton or wherever.  I don’t consider a family that can afford to live in a nice 1,100 sqft condo in an ok neighborhood in Manhattan to be RICH.

They’re certainly not poor by any stretch of the imagination – please, so saying would be patently ridiculous – but they’re not entertaining dozens of the City’s upper-crust guests for dinner parties (as one could do with the 6,000 sqft in the St. Louis mansion) let alone taking the non-existent Bentley out to the Country Club at which they can’t afford a membership.

Heck, depending on how many children they have and how much they spend on non-essentials, they’re still relegated to flying coach.  RICH people don’t fly coach – let alone commercial – unless its by their own volition.

No one should be even remotely considering playing a violin – no matter how tiny – for someone making $250,000 in Manhattan, but no one should think, not for a minute, they’re living the lifestyles of the Rich & Famous, either.

They’re living better than 99.99% of the rest of the World’s population for crying out loud, but a Nationally-uniform standard of “RICH” for tax and policy purposes that ignores cost of living unfairly punishes those who live in high-cost areas far more than it does those who live in lower-cost ones.

*Caveat: The information presented above on cost of living is from the link at the beginning of this article is from ReMax, the real estate brokerage.  The data is cited as being from a CNN Money article and the U.S. Census but I have not independently verified the accuracy of these numbers.

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11 Responses to “Why Cost of Living Matters”

  1. kduck February 20, 2011 at 11:00 pm #

    seems to me that people making over 250,000 know what they’re getting into when they choose to live in high-cost, luxury areas.

    anyways, so we know you think a national standard is unfair. what’s better?

    • The Analyst February 20, 2011 at 11:11 pm #

      Your first point is valid, although its human nature, for many, to underestimate costs and overestimate income (in current and future periods), so, while I’m no fan of naivete, I’ve made the mistake myself and understand why and how people do.

      That being said, if we know the different costs of living in different areas, how hard would it be to simply adjust for it?

      Is that silly, stupid, illogical? I don’t particularly think so (unless someone can make a reasonable argument to the contrary).

      • kduck February 20, 2011 at 11:18 pm #

        As a republican shouldn’t you oppose tax subsidies for special interest groups? Especially the naivete?

        • The Analyst February 20, 2011 at 11:26 pm #

          Where do you get this idea that I’m a Republican from? I despise bi-partisan politics, and have never, not even by accident, claimed to support either party (nor the politics thereof)! If you want to know, while I’m loathe to use bi-partisan political terminology, I’d describe myself (and this is grossly oversimplified), Fiscally conservative (as small a Government as possible without letting things go to hell) and socially liberal (I don’t really care what people do in their own homes as long as its consensual and doesn’t infringe on the rights of others).

          I’m not a fan of lobbyists/special interest groups/unions/subsidies/protectionism/government intervention in general (sans keeping things from devolving into chaos).

          • kduck February 20, 2011 at 11:48 pm #

            i haven’t seen any posts of yours indicating anything to the contrary. if you think you can avoid (even some degree of) criticism by avoiding the republican label, fine, but nevertheless a “fiscal conservative” should in theory oppose tax subsidies.

            anyway, just to be clear – you’re against special interest tax breaks, unless the interested choose to live in luxury areas?

        • The Analyst February 21, 2011 at 3:43 am #

          Seldom do I block comments from anyone, but you’re pushing your luck. If you continue to comment here without reading what I say you will be blocked.

          Learn how to read, because I addressed your question, quite directly. If you don’t comprehend that I’m wasting my time.

          • kduck February 21, 2011 at 2:26 pm #

            Just looking at what you’ve said,
            –The national-uniform standard of rich is unfair to those in luxury areas
            -Although you admit these people have knowledge of the high cost of living and thus willingly accept it, or otherwise suffer from naivete and therefore not worthy of sympathy

            –You are fiscally conservative and not a fan of special interest groups/subsidies
            -Although you’d like to give a special interest group, those living in luxury areas, a subsidy via a tax cut/adjustment (and in this case I doubt failure to give this subsidy would cause things to devolve into chaos)

            I just don’t see how you reconcile these.

            And I don’t think I’m being belligerent when I say the idea of a subsidy for a luxury area is not a libertarian-esque proposal – I can’t imagine Will Wilkinson, Bryan Caplan or Megan McArdle making a similar argument.

            It seems to me that a similar proposal would be: Ferrari/Lamborghini owners (who get very low miles per gallon) should have separate gas pumps where they pay less for gas than Prius owners because otherwise they’re unfairly inflicted with higher gas taxes.

  2. AndyWEllis February 22, 2011 at 12:12 am #

    If one wants to consider the spirit of taxing different brackets progressively, the whole point is to inflict a closer-to-equal amount of financial stress on any given citizen.

    Once you adopt the progressive system, it then becomes rather arbitrary as to where bracket lines are drawn. The poor, by default, are the special interest group. Richness/Poverty cannot be well measured numerically over the whole nation, it’s not homogenous. Whether you reference classics like Thorstein Veblen’s Theory of the Leisure Class or look at more contemporary papers researching income’s correlation with happiness; you’ll pretty quickly understand that standard of living can only be measured in relative terms.

    I don’t live in NYC or have any desire to, but I can certainly understand that a dollar there doesn’t go as far as it does in other parts of the country. If I’m making a quarter million dollars in Virginia, I’ll have a pretty nice horse farm; in Manhattan I’m not even sniffing a yard.

    The argument that income is adjusted for cost of living is rubbish, it’s not. A 100% cost-of-living increase is probably met with a 20% income hike ceteris paribus. An argument can easily be made that choosing a location with higher costs for reasons of opportunity/culture/convenience are all knowns that deserve no sympathy as people are often-rational creatures. That doesn’t mean, though, that the same argument can be applied to a situation where distinctions become subjective rather than absolute.

    Taxes aren’t designed to hit people in expensive areas harder, they are meant to shave off layers of discretionary income while trying to reduce disparities without eliminating incentive.

  3. AndyWEllis February 22, 2011 at 1:37 pm #

    Apparently WordPress ate my previous, long-winded comment.

    The gist was that from Classical (Thorstein Veblen) to contemporary economists, the consensus holds that wealth is relative. Progressive taxation is hypothetically aimed at reducing disparities in standard of living, not necessarily punishing extra earnings.

    For KDuck to imply that those living in urban areas having different tax structures to be a “special interest” group is nonsensical. The whole concept of progressive taxation is predicated on the low earners (the “poor”) being receiving special treatment. Otherwise we would have a flat tax and less headaches.

    The one chink in the Anaylst’s argument’s armor is that people do choose to live in cities, they aren’t being dispatched there by the military or some other central planning agency and therefore should be aware of the associated costs. The cost discrepancy being made up for in culture/convenience/higher income in urban environments works fine in a localized setting, but can’t be addressed by some blunt tipped national policy. The USA is not homogenous and ceteris paribus an increase in cost-of-living by 100% is often accompanied by an income increase of closer to 20% for moving markets.

    Designations of poverty and wealth are arbitrary in the most controlled of environments and practically meaningless when canvased over diverse regions such as those composing the United States.

    PS The luxury performance car/prius argument is inane. Gas taxes are based on consumption and associated with negative externalities (pollution). They are also tied in with commodity pricing and their revenue largely goes back into the roads being traveled.

    • kduck February 27, 2011 at 2:50 pm #

      Andy,

      Are you arguing that people with low income are the *only* special interest group under our tax code? What about the private equity guys who get carried interest treatment or commodities traders who get 60/40 treatment? Or homeowners, who get the mortgage interest deduction. I could literally do this all day. Besides, it’s a pretty ideological statement about what the “purpose” of progressive taxation is — perhaps progressive taxation is simply better at raising revenues.

      No one is arguing that income is adjusted for cost of living, although Analyst is arguing that income taxes should be adjusted for cost of living (thus making the dwellers of expensive urban areas into a special interest group receiving a tax break).

      My argument is that cost-of-living is reflective of the luxury nature of these areas (although people do not get the 100% increase in income, any such shortfall is remedied from the convenient/luxury nature of the area – otherwise they’d be idiots and markets wouldn’t be efficient). I think Mr. Ozimek sums it up quite nicely:
      http://modeledbehavior.com/2010/09/10/250k-isnt-a-lot-of-money-if-you-want-to-shit-gold-dust/

      PS – Federal (and I believe most state) gas taxes are not related to commodity pricing, they are a fixed amount per gallon, not a percent of price, and bringing up negative externalities is irrelevant because these taxes aren’t designed to combat these. Regardless, I think my example still works even though I acknowledge the difference between consumption and income taxes.

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