With Democrats in control of both Houses of Congress for the first time in twelve years, economic inequality is back on the agenda.
In his response to the State of the Union address, new Virginia Senator James Webb began by contrasting how much those at the top of the average company earned with the amount earned by those at the bottom. Running for the Democratic Presidential nomination, John Edwards is returning to his 2004 theme of "two Americas." They are joined by liberal pundits such as Paul Krugman and Jonathan Chait, who between them accuse conservatives of "hatred" and of desperate efforts to confuse the issue.
But while liberals may appear united and ready on all fronts to fight a traditional class war, in the dozen years since they last controlled Congress much progress has been made in the study of what factors produce wealth in America. This progress is mostly thanks to the academic Dr. Thomas Stanley. In surveys of thousands of millionaires, aimed at identifying the choices and behavior that lead to prodigious wealth, Dr. Stanley identified again and again the same characteristics, catalogued in numerous books. Unfortunately for class warriors, they are poor fodder for an agenda based on envy.
The picture of an actual millionaire is dramatically less glamorous than commonly-held visions of exclusive neighborhoods, expensive clothes and colorful social lives. In his 1996 book The Millionaire Next Door, co-authored with Dr. William Danko, Dr. Stanley revealed that the typical millionaire spent less than $400 on their most expensive suit, and only about 1% spent more than $2,800. Only one in ten millionaires had ever spent more than $300 on a pair of shoes. Most millionaires pay a few hundred dollars or less for their watch, and $30,000 or less for their main motor vehicle. They have been married to the same person most of their adult lives.
The wealthy are conspicuous for their lack of consumption: "What are three words that profile the affluent? FRUGAL FRUGAL FRUGAL". The book is full of startling individual cases: the millionaire who refused the gift of a Rolls Royce because he couldn't imagine driving up in one to eat at the crummy restaurants he prefers, or throw caught fish in the back seat; the wife who, after her husband gave her $8 million in stocks, returned at once to clipping the 25 cent grocery coupons from her newspaper.
This is no coincidence. It is not that most millionaires are in the habit of being frugal despite their wealth: it is that they are so wealthy because they are in the habit of living so frugally. The plentiful residual income goes into savings and investments that are left to grow for decades.
It is not inheritance that explains American millionaires: most inherited nothing and fewer than one fifth inherited even 10% of their wealth.
Nor, crucially, does high income mean high net wealth, unless it is combined with a choice to live below one's means. Unfortunately, this is difficult in some high-income professions: "doctors, lawyers, accountants, and so on are expected to live in expensive homes ... wear expensive clothes, drive luxury automobiles." Many of them do - their high incomes can support this high level of consumption, and explains the market for watches and suits costing thousands of dollars. But these buyers become wealthy much less frequently than those who live below their means.
This surprising picture of America's wealthy presents class warriors with two problems. First, un-American as it might be to scapegoat and overtax the rich when they are perceived as Porsche-driving and Rolex-wearing, one can nonetheless imagine the envy that might inspire. But what is the future of class hatred in an America where, in fact, Porsche drivers and Rolex wearers have little net wealth, and the real rich are those who eat at the same restaurants and drive the same cars as most people, even when they can afford not to? It is difficult to imagine even the most skilled demagogue persuading Americans to resent the man who drives the same American-made car for years or the woman who faithfully cuts out every grocery coupon.
Second, devising economic policies that would target the wealthy would be still more difficult. Higher income taxes might reduce income inequality, but it would be a sideshow to the reality that inequalities of wealth are a result of some living below their means, not unequal incomes. Higher capital gains taxes, which can only be levied on realized gains, would have also have little effect on most millionaires, who are passive, buy-and-hold investors who see their stocks appreciate but rarely sell.
If liberals are determined to reduce economic inequality, they would have to take lessons from Dr. Stanley and encourage generally a culture of delayed gratification and a certain amount of self-denial - a self-reliant America of stockholders and coupon-clippers who marry and stay married. This is the profile of America's wealthy, and a serious effort to reduce inequality would mean getting more Americans to adopt this lifestyle. But of course, for many who see inequality as a curse, this cure would be worse than the disease.