WHY MAKING THE RICH POORER CAN MAKE THE POOR (EFFECTIVELY) RICHER.

The New York Times article on how hard it will be for senior executives to live in New York on $500,000 is the sort of thing that makes me want to burn this rotted society to the ground and salt the earth atop which it once stood. Money quote:

Five hundred thousand dollars — the amount President Obama wants to set as the top pay for banking executives whose firms accept government bailout money — seems like a lot, and it is a lot. To many people in many places, it is a princely sum to live on. But in the neighborhoods of New York City and its suburban enclaves where successful bankers live, half a million a year can go very fast...Sure, the solution may seem simple: move to Brooklyn or Hoboken, put the children in public schools and buy a MetroCard. But more than a few of the New York-based financial executives who would have their pay limited are men (and they are almost invariably men) whose identities are entwined with living a certain way in a certain neighborhood west of Third Avenue: a life of private schools, summer houses and charity galas that only a seven-figure income can stretch to cover.

And these are, of course, people who should be unemployed. If you're taking the taxpayer's money, it's because your ban is insolvent. If your bank is insolvent, it would collapse without the federal support. And you'd be out of a job. In effect, the $500,000 in compensation is executive welfare. Can't have them running around the streets, after all. Never know the sort of mischief they might get into. Soon enough you'll see Dick Fuld tossing bags of mortgage-backed securities at cars and smoking cigarettes.That said, Megan McArdle makes the right policy point here. "This acts as if the price of all these goods is exogenous," she says. "Housing and schools cost so much in New York because all the people at the top make millions of dollars a year. If they made hundreds of thousands of dollars a year, the goods they consume would be priced accordingly. Given how badly the economy of New York is distorted by extreme wealth, inexorably forcing the middle class farther and farther towards the periphery, this might not be a bad thing." Robert Frank explains this well in his book Falling Behind: How Rising Inequality Harms the Middle Class, but a nice way to think about it is through housing: Would you rather live in a land where you had a 4,000-square-foot house and everyone else had a 6,000-square-foot house, or one in which you had a 3,000-square-foot house and everyone else had a 2,000-square-foot house? Given this choice, studies show that most respondents pick the latter. They'd rather have less home in absolute terms if it means more home in relative terms. That makes housing a positional good.Being concerned with one's relative position rather than one's absolute position is not irrational or merely motivated by envy. In order to retain your relative standard of living, you need to keep up with the purchases of others in your income bracket. Good schools, of course, are also a positional good – your education largely matters in terms of how much better it is than everyone else's. And because the rich in this country keep getting richer, we're caught in what Frank calls "expenditure cascades" in an effort to keep up with them. Their purchases raise the bar for the group right below them, which in turn increases the needs of the next income set, and so on. To retain our position, we're constantly needing to increase our incomes and affluence. But spending more to stay in the same place doesn't make us happier. And when the incomes of the rich are increasing much faster than the incomes of the middle class -- as has been happening -- it creates a sense of real imbalance in society.And so too with the rich. The problem for the bankers on $500,000 isn't that they can't feed their families but that they lose their positional status. And good. Screw 'em. Enjoy Hoboken. As for the rest of us, it's actually a good thing if the top falls a bit and the arms race eases. If a sizable chunk of the New York housing stock can no longer be aimed at a class of people who think $500,000 poverty wages, then housing stock will be cheaper. The more troubling question, though, is what happens to the new New York, which was largely built and sustained atop the tax revenues provided by Wall Street