$250,000 A Year In Fargo Doesn’t Buy You An Apartment In Manhattan

Allison Schrager offers what is I think my least-favorite economic argument, the regional variant of the old people who buy expensive houses aren’t rich because their houses cost so much switcheroo:

Perhaps fairness also requires that the tax code account for the higher cost of living in some areas. The income cut-off for tax increases floated by President Obama is $250,000. That sum buys you a lot more in Fargo than it does in Manhattan. Most high earners live in expensive areas. They command such high salaries, in part, to offset their high cost of living.

I think this is a big mistake. In the age of global production lines, internet shopping, and cheap shipping $250,000 buys you the exact same thing in Fargo and Manhattan in the vast majority of cases. Go online, find what you want, see the price, click, enter your credit card information, and it’s done.

Now of course it’s true that you can’t buy everything on the Internet. And these goods and services generally cost more in Manhattan than Fargo. But part of the essence of this non-shippable economy is that different stuff is for sale in Fargo and Manhattan. Most notably, a square foot of housing costs much more in Manhattan than it does in Fargo. But that’s not to say that $250,000 buys “more housing” in Fargo than it does in Manhattan, it’s to say that it buys worse housing. The people in those expensive Manhattan apartments are paying for the positive amenity value. They could move to the Bronx, but they don’t want to. Similarly, Manhattan is full of restaurants that don’t exist in Fargo. There are law firms in Manhattan and law firms in Fargo, but the Manhattan law firms are better. Service professionals move to New York to peddle their services because the city features a critical mass of well-heeled clients who can pay top dollar for the best hairstylists or dentists or architects in the world. Fargo’s not like that.

Obviously most people don’t live in Manhattan. Most people would prefer to spend their incomes on the cheaper goods and services available in lower-cost areas. And a minority of people insist on spending their incomes on the more expensive goods and services available exclusively in high-cost areas. And one of the great things about the USA being a large country is that we can all be accommodated. But we shouldn’t let rich people living in expensive cities get away with the claim that they’re somehow secretly not rich.