HOW GAINS AT THE TOP INJURE THE MIDDLE CLASS
The modern effects of Adam Smith’s words on “necessaries” are examined by a Cornell University economist renowned for explaining how income inequality distorts and damages the social fabric and individual lives.
Suppose you had to choose between two worlds: World A, where you earn $110,000 a year and everyone else earns $200,000, and World B, where you earn $100,000 and everyone else earns $85,000.
Most neoclassical economists would have an easy time deciding. Neoclassical economics, long the dominant wing of the profession, tends to equate personal well-being with absolute income, or purchasing power. By that standard, World A wins hands down: even as the low earner on the totem pole, you would be doing 10 percent better there than in World B. In other words, you could have 10 percent more food, clothes, housing, airplane travel, or whatever else you wanted.
And yet, when the choice is put to American survey respondents, many seem torn, and most actually end up opting for World B. Is this just an amusing example of human irrationality? Are people so preoccupied with status and rank that they lose sight of objective reality? Or could it be the neoclassical economists who have missed something?
For a glimpse of the possible downside of World A, it may help to consider Wendy Williams, a lanky, soft-spoken adolescent living in a trailer park in an upscale Illinois community during the boom years of the late 1990s. Every morning, according to reporter Dirk Johnson’s account in the New York Times, Wendy shares a school bus ride with a group of more affluent classmates, who “strut past in designer clothes,” while she sits silently, “wearing a cheap belt and rummage-sale slacks.” She is known as Rabbit because of a slight overbite—“a humiliation she once begged her mother and father to avoid by sending her to an orthodontist.”
Most children have been counseled not to measure their financial circumstances against the circumstances of others. That advice can sometimes be easier to dispense than to follow, however. Wendy Williams makes a game effort to bridge the socioeconomic gap. “That’s a really awesome shirt,” she tells one of the other girls on the bus. “Where did you get it?”
But teenagers can be cruel. “Why would you want to know?” the other girl replies with a laugh.
It is odd that economists who call themselves disciples of Adam Smith should be so reluctant to introduce the psychological costs of inequality into their discussions. Smith himself recognized such concerns as a basic component of human nature. Writing more than two centuries ago, he introduced the important idea that local consumption standards influence the goods and services that people consider essential—the “necessaries,” as Smith called them.
The absolute standard of living in the United States today is of course vastly higher than it was in Adam Smith’s eighteenth- century Scotland. And higher living standards create a whole new set of necessaries. For a teenager in an affluent suburb, it is no stretch to imagine that these might include straight teeth. Looking good is an irreducibly relative concept; but it is one, we all know, that sometimes has objective consequences. No one would accuse you of foolish vanity if you went to a job interview with IBM wearing your best suit and tie rather than a tank top and jeans. Impressions count.
And impressions are not the only reason to be conscious of other people’s choices. Think about buying a car. Thirty years ago, a middle-class family with kids might have been content with a fourdoor sedan of modest size. Imagine the grown-up child of that family, with children of her own, facing the same decision. She might be tempted to say, “A 2,500-pound sedan was good enough for my mom, so it’s good enough for me.”
But on today’s roads, surrounded by 6,000-pound Lincoln Navigators and 7,500-pound Ford Excursions, a 2,500-pound Honda Civic doesn’t simply look a lot smaller and frailer than it did in 1975. It’s objectively more dangerous. The odds of being killed in a collision rise roughly fivefold if you’re driving such a vehicle and the other party sits at the helm of a Ford Excursion. In sheer self-defense, you might want a bulkier—and costlier—car than Mom’s.
In the housing market, as in the automobile market, you don’t have to be a spendthrift to feel pressured into overspending. Imagine a young couple who buy a house in a prosperous suburb, taking on mortgage payments that commit them to working nights and weekends and leave them with no margin of safety in the event of a health or professional setback. We might consider them reckless if they assumed these burdens just to get a few hundred extra square feet of floor space, a Jacuzzi, and the bragging rights that go with an address in Pinnacle Heights. But if, in addition to spacious houses, Pinnacle Heights offered an outstanding school system for their children, we would probably judge them less harshly.
The housing and car markets present two possible instances of what I have termed a “spending cascade,” in which top earners—the people who have fared the best in the current economy—initiate a process that leads to increased expenditures on down the line, even among those whose incomes have not risen. Logic suggests that growing inequality of income and wealth might encourage additional spending in this way. Empirical evidence suggests it, too.
Two small midwestern cities, Danville, Indiana, and Mount Vernon, Illinois, make the case pretty clearly. The median income in Mount Vernon was more than $10,000 higher than it was in Danville in the year 2000, but Danville’s incomes were much more unequally distributed. In Danville, a family at the ninety-fifth percentile mark earned more than $141,000, while the equivalent family in Mount Vernon earned just over $83,000. Despite its much smaller median income, Danville’s median house price was almost $131,000—more than double the Mount Vernon median. It turns out that Danville and Mount Vernon follow the pattern of other American communities: median house prices depend not only on median incomes, but also on income inequality.
The Danville–Mount Vernon story illustrates how the huge income gains accruing to top earners in the United States in recent decades have imposed costs on those in the middle. Of course, nobody is forced to buy an expensive house or car. But inequality may be creating an increasing number of situations in which we are forced to choose between unpleasant alternatives. And through a series of decisions that make good sense for us individually, we appear to be moving in a direction that makes little sense for us as a society.
The family that overspends on housing at the cost of heavy debt, long working hours, financial anxiety, and a scarcity of family time is not just a familiar anecdote, but also a fair description of where middle-class America as a whole has been going. The median size of a newly constructed house in the United States was 1,600 square feet in 1980. By 2001, it was more than 2,100 square feet. Meanwhile, commutes were getting longer and roads more congested, savings rates were plummeting, personal bankruptcy filings were climbing to an all-time high, and there was at least a widespread perception of a sharp decline in employment security and autonomy.
Happiness is not as easy to measure as house size. Nevertheless, there is evidence that house size doesn’t do much for it. If you move from a two-thousand- to a three-thousand-square-foot house, you may be pleased, even excited, at first. In time, however, you are likely to adapt and simply consider the larger house the norm—especially if other houses have been growing, too. Yet the sacrifices we make in order to pay for bigger houses often take a lasting toll.
One strategy of cash-strapped families is to limit their mortgage payments by commuting from longer distances. Your adaptation to a long trip from home to work through heavy traffic will probably not be as complete as your adaptation to a bigger house. Even after a long period, most people experience long commutes as stressful. In this respect, the effect is similar to that of exposure to noise and other irritants. A large increase in background noise at a constant, steady level seems less intrusive as time passes; nonetheless, prolonged exposure produces lasting elevations in blood pressure. If the noise is not only loud but intermittent, people remain conscious of their heightened irritability even after extended periods, and their symptoms of central nervous system distress become more pronounced. This pattern has been seen, for example, in a study of people living next to a newly opened highway. Interviewed four months after the highway opened, 21 percent of the residents said they were not annoyed by the noise; that figure dropped to 16 percent when the same residents were interviewed a year later.
The prolonged experience of commuting stress is also known to suppress immune function and shorten longevity. Even daily spells in traffic as brief as fifteen minutes have been linked to significant elevations of blood glucose and cholesterol, and to declines in blood coagulation time—factors that are positively associated with cardiovascular disease.
Commuting by automobile is also linked with the incidence of various cancers, especially cancer of the lung (possibly because of heavier exposure to exhaust fumes). The incidence of these and other illnesses rises with the length of commute, and is significantly lower among those who commute by bus or rail, and lower still among noncommuters.
Finally, the risk of death and injury from accidents varies positively with the length of commute and is higher for those who commute by car than for those who use public transport.
Among rush-hour travelers, the amount of time wasted in stalled traffic increased from 16 hours to 62 hours per year between 1982 and 2000; the daily window of time during which travelers might experience congestion increased from 4.5 hours to 7 hours; and the volume of roadways where travel is congested grew from 34 percent to 58 percent.
If long commutes are so hazardous, why do people put up with them? It may be because they have unconsciously allowed their spending decisions to lean toward conspicuous consumption (in the form of larger houses) and away from what, for want of a better term, I call “inconspicuous consumption”—freedom from traffic congestion, time with family and friends, vacation time, and a variety of favorable job characteristics.
Can we attribute this to rising inequality? Although there is no simple way to prove or disprove the hypothesis, it is consistent with a substantial body of research. In a 2005 study, for example, Bjornulf Ostvik-White, Adam Levine, and I found that areas with higher inequality—specifically, with higher ratios between the income of households in the ninety-fifth and fiftieth percentiles—had significantly higher personal bankruptcy rates, divorce rates, and average commute times. Analyzing international data over time, Samuel Bowles and Yongjin Park found that total hours worked were positively associated with higher inequality.
The wealthy are spending more now simply because they have more money. But their spending has led others to spend more as well, including middle-income families. If the real incomes of middle-class families have grown only slightly, how have they financed this additional consumption? In part by working longer hours, but mainly by saving less and borrowing more. American families carry an average of more than $9,000 in credit card debt, and personal bankruptcy filings are occurring at seven times the 1980 rate. Medical expenses account for a significant share of that debt. Some forty-five million Americans have no health insurance—five million more than when Bill Clinton took office. The national personal savings rate was negative in several recent years, including a few of the peak years of the 1990s economic boom. Millions of Americans now face the prospect of retirement at sharply reduced living standards. Increased spending by top earners may not be the sole cause of financial distress among middle-income families. But it has clearly been an important contributor.
Spending cascades are also an indirect cause of the median voter’s growing reluctance to support expenditures for what were once considered essential public goods and services. Nationwide, more than 50 percent of our major roads and highways are in “backlog,” which means they will cost from two to five times as much to repair as those that are maintained on time. We face an $84 billion backlog in the repair and replacement of the nation’s bridges. Between blown tires, damaged wheels and axles, bent frames, misaligned front ends, destroyed mufflers, twisted suspension systems, and other problems, potholes on American roads cause an average of $120 worth of damage per vehicle each year, and untold numbers of deaths and injuries.
Americans spend less than we once did to ensure the safety of the food we eat. Despite growing instances of contamination from E. coli 0157, listeria, and other highly toxic bacteria, the Food and Drug Administration had resources sufficient to conduct only five thousand inspections of meat-processing plants in 1997, down from twenty-one thousand in 1981. And although food imports have doubled since the 1980s, FDA inspections of imports have fallen by half. Exposure to E. coli alone causes an estimated twenty thousand infections a year, and between two hundred and five hundred deaths.
We have been woefully slow to upgrade our municipal watersupply systems. The century-old pipes in many systems are typically cast-iron fittings joined by lead solder. As these conduits age and rust, lead, manganese, and other toxic metals leach into our drinking water. According to one estimate, some forty-five million of us are currently served by water systems that deliver potentially dangerous levels of toxic metals, pesticides, and parasites.
We have grown reluctant to invest in cleaner air. The Environmental Protection Agency proposed a tightening of standards for concentrations of ozone and particulate matter that would prevent more than 140,000 cases of acute respiratory distress each year and save more than fifteen thousand lives. The EPA proposal drew intense and immediate political fire, and bills were introduced in both houses of Congress to repeal the new standards, which have yet to be implemented.
Although spending on public education has not declined relative to historical norms, here, too, important inputs have not kept pace. For example, the national average starting salary for primary- and secondary-school teachers fell from 118 percent of the average salary of college graduates in 1963 to only 97 percent in 1994, a period that saw a significant decline in the average SAT scores of people who chose public-school teaching as a profession. And although we know that children learn more effectively in small classes than in large ones, we have offered fiscal distress as the reason for allowing class sizes to grow steadily larger during that same period.
We have slashed funding not only for services that benefit middle- and upper-income families, but also for the Head Start program, the school lunch program, homeless shelters, inner-city hospitals, and a host of other low-overhead programs that make life more bearable for the poor. We cut these programs not because they did not work, not because they destroyed incentives, but because the median voter decided that he couldn’t afford them. That perception was, in large part, a consequence of the growing income gap.
When we choose between conspicuous and inconspicuous consumption, we confront a conflict between individual and social welfare that is structurally identical to that of a military arms race. We become like the superpowers during the heyday of the Cold War, robotically obedient to the doctrine of mutually assured destruction (with its memorable acronym MAD). The person who stays at the office two hours longer each day to afford a house in a better school district has no conscious intention of making it more difficult for others to achieve the same goal. But that is an inescapable consequence of her action. The best response available to others may be to work longer hours as well, thereby preserving their current positions. Yet the ineluctable mathematical logic of musical chairs ensures that only 10 percent of all children can occupy top-decile school seats, no matter how many hours their parents work.
A family can choose how much of its own money to spend, but it cannot choose how much others spend. Buying a smaller-than-average vehicle means a greater risk of dying in an accident. Spending less on an interview suit means a greater risk of not landing the best job. Spending less than others on a house means a greater risk of sending your children to inferior schools. Yet when all spend more on heavier cars, more finely tailored suits, and larger houses, the results tend to be mutually offsetting, just as when all nations spend more on missiles and bombs. Spending less frees up money for other pressing uses, but only if everyone does it.
If it is hard for nations to unwind from such a spiral, it is surely no easier for individuals. But the first steps are probably the same: We need to look at ourselves. We need to think about our actions in relation to their consequences. We need to talk.
Adapted from Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences, ed. James Lardner and David A. Smith.