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.

Occupy Wall Street protesters.
Occupy Wall Street has made it necessary for politicians to discuss the growth of income inequality

Photograph by Spencer Platt/Getty Images.

This essay is adapted from Robert H. Frank’s recently published book, The Darwin Economy.

Robert H. Frank Robert H. Frank

Robert H. Frank is an economics professor at Cornell University’s Johnson School of Management, an economics columnist for the New York Times, and a distinguished senior fellow at Demos. He is the author, most recently, of The Darwin Economy.

Republicans have never wanted to talk about inequality, and many Democrats now seem afraid to. As a congressional Democratic adviser quoted by the New York Times reporter Jackie Calmes recently put it, the party is having difficulty articulating its position “in a way that doesn’t get us pegged as tax-and-spenders.”

The remarkable achievement of the Occupy Wall Street movement has been to make continuing silence about inequality politically unacceptable. Some have criticized the movement for not pressing specific demands. Yet most protesters wouldn’t pretend to have a sophisticated understanding of the forces that have been causing growing income disparities, or the policy experience to prescribe what might be done about them. But now that the movement has forced inequality onto the agenda, the time is ripe to focus on these issues.

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Because many continue to deny that income inequality has been growing, it’s useful to start with a brief review of how income growth patterns have changed since World War II. The three decades after the war saw incomes grow at an almost uniform 3 percent annual rate for families up and down the income ladder. Since the early 1970s, however, virtually all income gains have accrued to those whose incomes were highest to begin with.

It’s a striking fractal pattern. Most of the gains have gone to the top 20 percent of earners, but the lion’s share of the gains within that group have gone to the top 5 percent. And within the top 5 percent, most of the gains have gone to the top 1 percent, and so on. 

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Is this new pattern something to worry about? Many decry rising inequality because it makes those who’ve fallen behind feel impoverished. But it’s done much more than that. It has also raised the real cost to middle-income families of achieving many basic goals.

It’s done that through a process that I’ve elsewhere called “expenditure cascades.” The process begins with the completely unremarkable fact that top earners have been spending at a substantially higher rate than before. They’ve been building bigger mansions, staging more elaborate weddings and coming-of-age parties for their kids, buying more and better of everything.

Many social critics wag their fingers at what they perceive to be frivolous luxury spending. But that misses the point that all consumption norms are local. It’s not just the rich who spend more when they get more money. Everyone else does, too. The mansions of the rich may seem over the top to people in the middle, but the same could be said of American middle-class houses as seen by most of the planet’s 7 billion people.

The important practical point is that when the rich build bigger, they shift the frame of reference that shapes the demands of the near rich, who travel in the same social circles. Perhaps it’s now the custom in those circles to host your daughter’s wedding reception at home rather than in a hotel or country club. So the near rich feel they too need a house with a ballroom. And when they build bigger, they shift the frame of reference for the group just below them, and so on, all the way down. 

There’s no other way to explain why the median new house built in the United States in 2007 had more than 2,300 square feet, almost 50 percent more than its counterpart in 1980. Certainly, it’s not because the median earners are awash in cash. (The median real wage for American men was actually lower in 2007 than in 1980.) Nor is there any other way to explain why the inflation-adjusted average cost of an American wedding had grown almost threefold during the same period.

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.

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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