An Unlikely Class Warrior
June 14, 2007
Sam Pizzigati edits Too Much, an online weekly on excess and inequality.
Should average Americans really worry about the tens of millions pouring into CEO pockets? Or the hundreds of millions going annually to flippers and strippers inside the private equity industry? Or the $1.7 billion that last year went to America’s top hedge fund manager?
No angst necessary, says the lead article in this past Sunday’s New York Times Magazine special issue on inequality. “It’s not the rich people pulling away at the top who are the problem,” the Times intones, “it’s that so many have been stuck for so long at the bottom and in the middle.”
To fight inequality, in other words, let’s not obsess over what’s happening at the top. Let’s just concentrate on providing opportunity at the bottom.
Economist Robert H. Frank would beg to differ. To build a United States where average Americans can get truly unstuck, Frank advises in his important new book, Falling Behind: How Rising Inequality Harms the Middle Class, fewer dollars—far fewer dollars—need to be pouring into rich people’s pockets.
Frank’s perspective, in our contemporary political clime, smacks dangerously close to a declaration of “class war.” But Bob Frank makes for an unlikely class warrior. He teaches at Cornell University, in a top-notch Ivy League business school. He writes regularly for major media outlets. He does textbooks. His Principles of Economics may soon become an Econ 101 standard.
How eminently respectable is Bob Frank? His co-author on Principles of Economics just happens to be Ben Bernanke, the current chairman of the Federal Reserve Board.
Bob Frank, in short, swims in the mainstream. But he’s splashing out a message—we need to worry, big-time, about the wealth of our wealthy—that America’s mainstream national leaders have been rejecting ever since President John F. Kennedy started pushing for lower tax rates on America’s most fortunate.
Frank’s core point: Wealthy people spend more as they become wealthier. That increased spending, in a steeply unequal society, will eventually—and always—raise “the cost of achieving goals that most middle-class families regard as basic.”
So are we talking envy here? That’s not, Frank emphasizes, what’s driving our contemporary middle class squeeze.
“Middle-class families don't look to Donald Trump and worry about what he is spending his money on,” Frank notes. “Likewise, it's totally irrelevant to most in the middle class that Bill Gates has a 40,000-square-foor mansion on the shores of Lake Washington.”
But the existence of that mansion, the Cornell economist continues, does set off “a chain of local comparisons” that directly and appreciably “affects the spending behavior of people in the middle.” Those folks in the middle may not feel directly impacted by the Bill Gates mansion. Others, the near super-rich, will be.
For these near super-rich, the appearance of a huge new mansion will “alter the frame of reference that defines what kind of house is considered necessary or desirable.”
“And when the near rich, in turn, build larger houses,” Frank explains, “others just below them find their own 10,000-square-foot houses no longer adequate, and so on all the way down the income ladder.”
An interesting hypothesis—and easy to test. One example: If higher spending by wealthy people getting wealthier really does drive up home prices for average people, as Frank argues, then the prices of typical homes should be the highest in those metro areas where the incomes of rich people have been rising the fastest.
Lo and behold, that’s exactly what the data show.
The data show a great deal more as well. In deeply unequal metro areas, average people work more hours and get less sleep, commute longer distances and save less money, than average people living in areas where less wealth has concentrated at the top.
The same contrast surfaces with data on divorce and bankruptcy filings. The greater the level of inequality, the deeper the negative consequences on the daily lives middle class people live.
To understand why, Frank explains, we need to understand how we as individuals go about making our consumption choices.
Some things we spend time and money on, Frank notes, we value in a comparative context. Suppose, for instance, you could choose to live in one of two societies. If you chose the first, you would find yourself in a 4,000-square-foot house—and everybody else would have 6,000 square feet to call home. If you chose the second, your house would have 3,000 square feet, other houses just 2,000.
Which society would you choose? In experiments, Frank observes, most people choose the society that would have them living in the 3,000-square-foot house.
But if you ask the same question with vacation time, something where comparative context makes considerably less difference, most people answer the other way. Most people choose a society that would give them four weeks of annual vacation—and others six—over a society that would give them two weeks of vacation and others one.
In effect, as Frank puts it, we care about “relative consumption in some domains more than others.” We care so much more that we’ll spend our time and money on activities that enhance our comparative position at the expense of activities that don’t.
How does this play out in real life? Spending time with family and friends may bring us happiness, but, to afford a bigger, better home, we’ll short-change that time and devote more hours to working and commuting.
Apologists for inequality have little sympathy for middle-income people who feel trapped in this sort of situation. Just live within your means, they lecture, not beyond. Unfortunately, Frank counters, things -- in a deeply unequal society -- simply aren’t that easy.
In unequal societies, a middle-income family faces the same dilemma that confronts a nation caught in a military arms race. That family “can choose how much of its own money to spend, but it cannot choose how much others spend.” If others spend more, you have to spend more. You really have little choice.
Take, as an example, the most important purchase decision an average family ever gets to make: where to buy a home. In the United States, school quality almost always tracks home value. The higher local real estate prices, the better the local schools.
“Middle-income families thus confront a painful dilemma,” writes Frank.
By the same token, if job-seekers are wearing more expensive suits to job interviews, you either buy a more expensive suit or risk losing out.
'But if everybody buys a more expensive suit, of course, we’ve all wasted money to no real lasting benefit. ... To the extent that wearing the right suit, driving the right car, wearing the right watch, or living in the right neighborhood may help someone land the right job or a big contract,” as Frank observes, “these expenditures are more like investments than true consumption. But from a collective vantage point, they are extremely inefficient investments, for when all spend more, their return falls to zero.”
Meanwhile, the investments that do pay off in better lives—investments, for instance, in better public services—get short-shrift in a society where average people are straining to afford the middle class basics.
“If I am carrying $5,000 of credit-card debt and thinking about my needs for the next month, and then somebody proposes a tax increase,” notes Frank, “I am going to say I just can't afford it, even though I am fully cognizant that public services are underfunded.”
Politicos in the Ronald Reagan mold have exploited this dynamic relentlessly over the past quarter-century. It’s your money, their tax-cut campaigns thunder, you know how to spend it better than any politician.
“Such statements have obvious rhetorical force,” acknowledges Frank. “Yet the gains promised by tax cutters are completely illusory.”
Tax cuts, if they ladle more dollars on wealthy households, “worsen an already serious imbalance in the overall mix of the things we buy.”
“With more cash in their pockets, top earners will demand still bigger houses and cars,” Frank writes. “And increased spending at the top will spawn additional spending by others further down.”
The answer? In Falling Behind’s closing pages, Frank advocates a return to steeply graduated progressive tax rates, but with a new twist. He proposes hefty tax rates not on income, but on consumption, on how much income people spend rather than save.
A good idea? Maybe. In a better world, our Presidential candidates would surely be exploring ideas like Frank’s. They’d be debating which approach to curbing income at the top makes the most sense.
If you might like to see that better world, don’t send the candidate of your choice just another check. Send this book.