Journalist Michael Kinsley recently wrote an article for Time magazine in which he criticizes the Social Security system for providing "entitlement" income for those who don't really need it. The starting point for his critique is a number he got from a Federal Reserve report that says the average net worth of American families whose head of household is between 65 and 74 years of age, is $690,900 (in 2004 dollars). Kinsley argues that with this kind of net worth, the typical American family is not in nearly the dire financial straits that are often depicted by the media.

On the face of it, this looks like a reasonable argument. The problem with it is that the number that he's using to describe the "average" net worth (the arithmetic mean) is a lousy measure to use when describing net worth. A much better measure, and the one used almost universally by those who want to describe things like the average income or net worth of a large group of people, is the median.

A typical way to explain the difference in these two measures is to think of five people in a bar. Let's say the net worth of each of the five people in the bar is $100K, $150K, $175K, $200K, and $225K. The mean net worth of the people in the bar is $170K (add the five numbers and divide by five), and the median is $175K (the "middle" number if we line the five numbers up from smallest to largest). Since the five values are relatively close together, the value of the mean and the value of the median are also relatively close.

If Bill Gates walks into the bar, however, with his net worth of roughly $58 billion, the mean net worth of the bar patrons suddenly becomes roughly $9.7 billion, while the median becomes $187.5K (the midpoint between the two middle values $175K and $200K). This is why the median is a much better way to describe the average net worth of a group of people: a single outlier can make it look like the people in the group are a lot wealthier than they really are.

In the case of the Time magazine article, Kinsley could have easily used the median net worth number, because it was in the same table where he found the mean value (page A8 in the Federal Reserve report, for those following along at home). The median value is $190,100 and maybe this explains why Kinsley didn't use this number, even though it's a more accurate way to describe the average net worth of a large group of people: it doesn't really support his argument that the "average" American family doesn't need the Social Security safety net.

(Thanks to Dean Baker for turning me on to the Kinsley article.)

But what did each of the people ORDER at the bar? Does the bar serve food? Were there any fights? A live band? DJ?

C'mon, what kind of blog post is this?