The Costs of Inequality: Pull from the Top or Push from the Bottom?

12/05/2011

Economist Robert H. Frank (as Half Sigma likes to point out, there are a whole bunch of commentators named Robert Frank, so it’s important to use the middle initial) writes in Slate:

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.

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.

… 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.

Yes, there actually is another way to explain it. Are people being pulled by the top or pushed by the bottom? Bigger houses, especially when mandated by developers and / or zoning, are not only an attempt to get closer to the top, they are very much an attempt to get farther away from the bottom, to physically escape to neighborhoods and school districts where the bottom can’t afford to live.

Neither the pull nor the push explanation is sufficient by itself, but it’s obtuse of Frank to ignore the obvious complementary explanation.

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.

Hint: what proportion of Americans are married in 2007 compared to 1980? Higher or lower?

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.

I see little evidence for that assertion. It would be much truer to say most parents don’t want to send their kids to the worst possible schools. Economists have long distinguished between maximizing and satisficing, and it would seem pretty clear that most parents do more of the latter when it comes to schools. For example, how many American parents apply their children to Eton or Harrow? Instead, Americans put huge efforts into getting their kids into good enough school districts, where the public schools are reasonably safe, where classes aren’t bogged down by the children of illegal immigrants who don’t speak English well, and so forth. Parents have criteria: e.g., If I send my daughter to this school, how likely is she to fall in love with a gangbanger?

But a good school is a relative concept. It’s one that’s better than most other schools in your area.

To some extent, true, but to a perhaps greater extent, parents try to get into a sufficiently good area and then are satisfied with sending their kids to an average or even below average school in that district. For example, I seriously considered buying the cheapest house in the cheapest neighborhood in Lake Forest and Wilmette, IL. I’m sure my kids would have been stuck in the worst neighborhood public school in Lake Forest or Wilmette, but that seemed like something we could live with. No doubt, if we had lived there, over time we would have noticed that our kids classmates weren’t the offspring of the town’s creme-de-la-creme, but the urge to go deeply into debt to move from the poorest neighborhood school to a better one in Lake Forest is a lot smaller than the urge to get your kids out of Chicago a public school and into a Lake Forest one. Economists have a concept called diminishing marginal returns. It applies here.

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.

Exactly. And the growth in the number of billionaires has only the most distant connections with the growth in the population of students who don’t read English well. Some billionaires agitate for more low wage immigrants, so they deserve some political blame, but it’s not their kids who are causing the need for metal detectors and dumbing down the public school curriculums.

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.

Sure, but how bad in an absolute sense is the bottom half of the distribution in quality of students? In Finland, not so bad. In Lake Wobegon, not so bad. In Lake Forest and Wilmette, not so bad.

In Chicago or Los Angeles, not so hot.

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.

Indeed.

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.

Coming of age parties? My impression is that spending by white Catholics and Protestants on coming of age parties is not enormous. For my son’s 18th birthday, we took him to dinner at The Cheesecake Factory and gave him a laptop computer to take off to college.

Further, my impression is that increases in bar/bat mitzvah spending are driven more by Jewish immigrant families from the Middle East or Russia. I can’t tell you about high end entertainment industry bar mitzvahs, but in my experience, the celebrations put on by typical American-born Ashkenazi families are not disproportionate to their substantial wealth.

The big money pit in Southern California is Quinceanara parties. My wife has pointed out the strip of shops in North Hollywood that cater to the Quinceanara business. Side by side there is a dress shop, a tuxedo shop, a limousine rental outlet, a beauty parlor, a nail salon, a florist, and a bail bondsman: everything for your Quinceanara needs, other than maybe a payday loan outlet and a gun shop for all your firing into the air Pancho Villa-style needs (fortunately, the LAPD has pretty successfully cracked down on that over the last decade by shooting a few celebratory shooters to discourage the others).

As for wedding costs, one of the mechanisms driving up the average cost of weddings is the decline in the number of first weddings. As marriage becomes more of an upper-middle class phenomenon, expenditures naturally go up. Moreover, weddings are becoming a class marker — people wish to disassociate themselves in clear terms from the non-marrying classes, and the most obvious way to publicly do that is by throwing a huge wedding. By no means is this the only explanation, but it’s one of the explanations.

In Los Angeles among gentile whites, coming-of-age parties are considered kind of de classe because they are associated with Quinceanaras, while weddings are considered classy.

By creating runaway demands for credit, growing income disparities also helped spawn the housing bubble that gave us the financial crisis of 2008 …

Indeed, but the the great bulk of foreclosures took place in neighborhoods, such as California’s Inland Empire, among people who don’t even know anybody who is super-rich. A classic driving force in the run-up of home prices was working class people using subprime and Alt-A mortgages to try to get their kids out of the 'hood.

The median home foreclosed in California was about 1500 square feet. Professors and journalists have a hard time grasping the scale of the various factors because they spend so much more of their time around the hugely rich than anybody else in their pay grade. They also try to avoid spending time with the 85-100 IQ working class, so they are pretty clueless.

None of this is to serve as an all-purpose defense of the billionaire class. But, for many social problems such as the poor quality of the student bodies in many public schools, you really can’t blame billionaire’s kids for being a big part of the problem.

The most general problem is the legitimacy granted to high-low coalitions: e.g., Angelo Mozilo announcing in 2005 that Countrywide is going to loan a trillion dollars to minorities and the poor to fight racial inequality. So, don’t get persnickety with questions about whether the borrowers can pay the mortgages back, you racist, you.

This concept of billionaire-NAM coalitions simply doesn’t register on the media radar yet.

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