From the Washington Post:
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.
I'm all in favor of economists finally thinking about the cost side of inequality instead of just obsessing over the income side. Yet, this analysis seems largely backwards to me. No doubt it's true to some extent, but it seems to be missing the larger point of who is truly expensive for middle class people to share a metropolitan area with. Instead of Trickle Down consumption, what we see is more like Push Up consumption.
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 what you pay for, but when you have to pay more for the same thing.
Let's consider some major costs.
Do the 1% bid up medical care costs? Facelifts, certainly. They don't demand a lot of diabetes treatment, however.
Do the 1% bid up education costs? Manhattan kindergartens, no doubt. Private colleges to some extent. In the big picture, though, this doesn't seem all that significant.
Do the 1% increase transportation costs? The 0.05% get the 0.1% drooling over private jets that they can't afford. But as for cars, some, but really, it's hard to spend over $100,000 on a car. There are plenty of people who waste money buying or leasing more expensive cars than is prudent for them, but it's more like the 25th percentile aping the 5th percentile.
Let's think about the Big One, real estate costs. How much metropolitan land do the top 1% take up for their houses and yards? I was going to say 10%, but since many of the 1% live in a small number of urban areas with relatively small lot sizes (e.g., New York, San Francisco, Los Angeles), it may well be less on a national scale.
I've spent most of my life living in Los Angeles and Chicago between really rich people on one side and poor people on the other. One thing I've noticed is that the rich don't really take up all that much room.
When I go for a hike in the Hollywood Hills, for instance, I often walk by an imposing gated estate that other hikers assert is owned by some major movie star: Will Ferrell is the most popular claim. But it looks like about 4 to 8 acres, most of that steep hillside.
Last year I taking out the trash when I heard a whoop-whoop-whoop from overhead. I looked up and there was the Marine Corps One helicopter carrying the President to his fundraiser at George Clooney's house, around the corner from the supposed Will Ferrell manor. Clooney's house is 7,354 square feet and his estate is 3.16 acres.
I'm trying, but I'm having a hard time feeling really oppressed by the fact that George Clooney's house is about as big as my yard. That doesn't strike me as unreasonable. 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. But the fact that Clooney owns a bigger chunk of the San Fernando Valley than I do seems pretty ho-hum.
Granted, the environmentalism of the rich raises land prices by ruling out land for development, thus lowering the supply of housing and raising housing costs. But, I also like to go for hikes, so I understand the tradeoff.
I'm trying to think of how many personal golf courses there are in the Los Angeles area. Having a golf course in your yard is pretty extravagant, but then Los Angeles has always had a lot of extravagantly rich people, so this is an interesting measure of how much metropolitan land extremely rich people use up.
Offhand, I can think of four small backyard golf courses in the L.A. area. Bob Hope, who was a real estate tycoon in his spare time, had a one-hole golf course at his house in Toluca Lake. Jerry Perenchio, former owner of Univision, has a 10-acre golf course in Malibu. There's a small par 3 course in a coastal canyon farther out toward Zuma Beach. And I believe I've read that Will Smith has a one hole course on his property at Sherwood. No doubt there are some other miniature personal golf courses in the L.A. area that I'm not aware of (and there are several in Palm Springs, 125 miles away), but this isn't really Downton Abbey.
And, rich people's kids don't overwhelm your public schools.
What's really expensive for middle class families are poor people. Middle class people move to upscale school districts or send their kids to private school to get them away from poor people. New exurban developments have excessive house sizes to try to keep the public schools upscale.
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.