A Prescription
for Middle Class Happiness

A Too Much review of
Falling Behind: How Rising Inequality Harms the Middle Class
By Robert H. Frank
University of California Press, 2007

By Sam Pizzigati

June 11, 2007

Should average Americans really worry about all those millions pouring into corporate executive pockets?

“D.” Taylor, the top official at Nevada’s biggest union, doesn’t particularly think so. He’s too busy bargaining middle class wages for 60,000 hotel workers to spend much time fretting about the massive sums now concentrating at the top of America’s economic ladder.

“We really don't care what the people in the executive branch make,” Taylor last month told a reporter asking about CEO pay, “just as long as our members and their families can share in the wealth and have decent pay and job security.”

Taylor won’t get any argument from the candidates running for the Democratic Presidential nomination. To fight inequality, they also maintain, you don’t need to obsess over what’s happening at the top. You concentrate instead on providing opportunity at the bottom.

The Democratic Presidential contenders, to be sure, do regularly assail the core unfairness of an economy that, as Senator Hillary Clinton noted late last month, “is working only for a few of us.” And all of them are also pledging to scale back the lavish tax cuts that George W. Bush has bestowed upon our nation’s wealthiest. They’re eager, as Clinton puts it, to “hit the restart button on the 21st century.”

But that’s it. None of the Democratic contenders are proposing anything that would reverse the incredibly grand redistribution of wealth and income — upwards — that took place in the two decades before George W. Bush became President, decades that saw the United States become the developed world’s most top-heavy nation.

Merely to “hit the restart button on the 21st century” would leave that inequality in place. A United States with the George W. Bush legacy erased would still be home to the world’s richest rich.

That prospect doesn’t seem to faze the current Democratic Presidential front-runners in the least. They all believe we can “rebuild the middle class” — and restore the American dream — without doing anything that leaves the wealthy significantly less wealthy.

If we concentrate instead on giving “all Americans the chance to compete and prosper in the global economy,” they’re convinced, we’ll be just fine.

Economist Robert H. Frank would beg to differ. To build a United States where average Americans can live truly secure, satisfying lives, Frank advises in his newly published 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 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 the New York Times. 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 other words, swims in the mainstream. But he’s splashing out a message — let’s worry, big-time, about the wealth of our wealthy — that America’s mainstream national leaders have been rejecting ever since the days of John F. Kennedy.

Kennedy’s New Frontier had no patience for aging New Dealers who worried about top-heavy distributions of income and wealth. For the Kennedy crew, only economic growth mattered. Grow the economic pie, and everyone will have a bigger piece, rich and poor alike. Or, as President Kennedy himself more memorably put it, a rising tide lifts all boats.

“Rising tidism” has dominated economic policy in the United States ever since. High taxes on high incomes have been regularly belittled — as an anti-growth brake on “private purchasing power, initiative, and incentive” — and steadily sliced.

In the 1950s, before the New Frontier, the ultra affluent faced a 91 percent top tax rate on annual regular income over $400,000. The New Frontier lowered that top rate to 70 percent. By century’s end, after Reagan Revolution and Clinton triangulation, that rate sat at 39.6 percent. The current top rate: 35 percent.

This huge sea-change in tax policy has helped break open the flood-gates that used to keep America’s economy in plutocrat-prevention mode. Over the last quarter of the 20th century, America’s richest 1 percent watched their incomes, after taxes and inflation, more than triple. In that same period, hourly worker wages actually shrank.

Robert Frank doesn’t delve into this history in Falling Behind. He has a different story to tell: how growing fortunes at the top of America’s economic ladder are significantly — and negatively — impacting the lives of everyone in the middle.

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 the 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 risen 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 live 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 other words, 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. “They can either send their children to a school of average quality by purchasing a house that is larger and more expensive than they can comfortably afford, or they can buy a smaller house that is within their budget and send their children to a below-average school.”

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 limiting 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.
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Sam Pizzigati edits Too Much, the weekly online newsletter on excess and inequality. For updates on inequality books — and everything else about inequality — check here for a free weekly subscription.