As income inequality in the United States has soared and median wages have flatlined since 1980, economists have spent a lot of time debating why the top 1 percent have done so much better than everyone else. Is policy to blame? The decline of labor? Technology?
An equally pressing question, though, is what those increasingly hefty incomes at the very top mean for the lives of everyone else. And a big, newly revised paper (pdf) by the University of Chicago’s Marianne Bertrand and Adair Morse finds that there is a connection, but not a happy one: The gains of the rich have come alongside losses for the middle class.
As the wealthy have gotten wealthier, the economists find, that’s created an economic arms race in which the middle class has been spending beyond their means in order to keep up. The authors call this “trickle-down consumption.”
The result? Americans are saving less, bankruptcies are becoming more common, and politicians are pushing for policies to make it easier to take on debt.
If that argument sounds familiar, it’s because Cornell economist Robert H. Frank has been making this case for years. Those at the top are spending more on fancy goods and bidding up the price of homes. In response, the slightly-less-rich have been spending more to keep pace. That pressure, in turn, eventually ripples down to the middle class — where incomes have stagnated of late — in what Frank calls “expenditure cascades.”
“What you think you need depends on the context you find yourself in,” Frank said in an interview. “And standards tend to be local. When most of the income gains are going to the very top, the people around them feel relatively poorer and spend more because of that.”
What Bertrand and Morse have done is put together a detailed empirical case that “trickle-down consumption” really is occurring in cities and counties around the United States — and that it’s responsible for roughly one-fourth of the decline in household savings rates since the early 1980s.
“Middle income households would have saved between 2.6 and 3.2 percent more by the mid-2000s had incomes at the top grown at the same rate as median income,” they conclude.
But how does trickle-down consumption actually work? One way is through housing. In cities like New York, the wealthiest are competing for the most valuable apartments and bidding up prices — which has broader ripple effects. What’s more, as those at the top buy bigger and bigger houses, those below them have moved to buy up bigger houses too. (Frank has noted that the median size of a new single-family house in 2007 was 2,300 square feet, or 50 percent bigger than in 1970.)
That’s just part of the story, though. In areas where incomes of the top 10 percent are growing, Bertrand and Morse found, the supply of businesses and services that cater to the well-off also increase. Swankier bars replace cheaper bars. Expensive restaurants replace cheap restaurants. Whole Foods nudges out the local grocery store. And less-well-off residents end up spending more at these places.
There also seems to be a “keeping up with the Joneses” effect. As wealthier Americans spend more on things like expensive preschools or fitness clubs or even fashion, their middle-income neighbors start spending more on these goods too — without cutting back elsewhere.
When a Whole Foods opens in your neighborhood, it doesn't actually nudge all the crummy grocery stores out of business. I drive past a Whole Foods all the time to get to the Jon's grocery store frequented by ominous flatheads from Omsk. Yet, Whole Foods is nicer than Jon's.
The real problem is not when you get more for what you pay more for (e.g., Whole Foods over Jon's), but when you have to pay more for the same old thing (e.g., a house with a yard in a safe neighborhood with a good public school).
Now, you could get me riled up over the unconscionable injustice of Clooney owning his Lake Como mansion in the Italian Alps instead of an average person, like, say, me. I could totally picture Comrade Sailer leading an enraged mob to evict Class Criminal Clooney from his Lake Como house and requisition it for the private use of The People, as personally embodied in Comrade Sailer.
But the fact that Clooney owns a bigger chunk of the San Fernando Valley than I do seems pretty ho-hum.
Now, the San Fernando Valley is 260 square miles. The rich take up the southernmost fringe, generally on mountain land that is expensive to build on and rather inconvenient to live on unless privacy is your foremost concern. The flat parts of the San Fernando Valley vary slightly in climate, but, really, it's all about who your neighbors are. And almost the entire Valley is in Los Angeles school district, so getting your kids in with good peers requires intricate feats of gamesmanship.
The real problem with the rich is that they dominate political thinking on questions like immigration. Keeping Up with the Bloombergs ideologically is politically disastrous for people in the middle.