OWS and Inequality: How “Expenditure Cascades” are Squeezing the American Middle Class. 

Commentary about business and finance.
Dec. 5 2011 7:28 AM

Does Inequality Matter?

How “expenditure cascades” are squeezing the American middle class.

(Continued from Page 1)

Middle-income families have also been struggling to meet sharply higher tuition bills and health insurance premiums. To make ends meet, they’ve taken on substantial debt, worked longer hours, and endured longer commutes to work. In the parts of the country where inequality has grown most, we’ve seen the biggest increases in bankruptcy filings and the biggest increases in divorce rates.

Many have been harshly critical of families that borrowed more than they could reasonably hope to repay. If they couldn’t afford larger houses and more expensive weddings for their daughters, these critics say, they should have just scaled back. But that charge ignores the importance of context in meeting basic goals.

All parents, for example, want to send their children to the best possible schools. But a good school is a relative concept. It’s one that’s better than most other schools in your area. In every country, the better schools are those that serve students whose families live in more expensive neighborhoods. So if a family is to achieve its goal, it must outbid similar families for a house in a neighborhood served by such a school. Failure to do so often means having to send your kids to a school with metal detectors at the front entrance and students who score in the 20th percentile in reading and math. Most families will do everything possible to avoid having to send their children to a school like that.

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But because of the logic of musical chairs, many are inevitably frustrated. No matter how aggressively everyone bids for a house in a better school district, half of all students must attend schools in the bottom half of the school quality distribution. As in the familiar stadium metaphor, all stand, hoping for a better view, only to discover that no one sees any better than if all had remained comfortably seated.

Parents confront similar dilemmas when deciding how much to spend on a child’s coming-of-age party or wedding. The expenditure cascades spawned by higher spending at the top in those categories have raised expectations about how one should mark important social milestones. Of course, a family always has the option to spend considerably less on such events than most of its peers do. But it can do so only by disappointing loved ones, or by courting the impression that it failed to appreciate the importance of the occasion they were celebrating. By creating runaway demands for credit, growing income disparities also helped spawn the housing bubble that gave us the financial crisis of 2008, the lingering effects of which have forced many OWS protesters to try to launch their careers in by far the most inhospitable labor market we’ve seen since the Great Depression. Even those recent graduates who manage to find jobs will suffer a lifelong penalty in reduced wages.

In short, it is no exaggeration to say that rising inequality has driven many of the 99 percent into a financial ditch.

Adding insult to injury, it hasn’t really accomplished anything of value for its ostensible beneficiaries, the top 1 percent. They’ve all built bigger mansions and staged more lavish parties, yes, but in so doing, they’ve simply raised the bar that defines what’s considered adequate in these categories.

In short, the growing income inequality that OWS protesters are calling to our attention is not the nonissue that many of the movement’s critics say it is. Growing income disparities have imposed enormous costs on almost everyone. OWS protesters have performed an important public service by urging the government to take inequality more seriously.

Tomorrow: Why has inequality been growing?

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