Keeping Up With the Slightly Richer Neighbors

March 22, 2012 | | The New York Times |

We know now that trickle-down economics doesn’t really work — the past decade in the United States has seen incomes at the very top soar, while the earnings of the middle class stagnated or declined. But a growing body of academic research is suggesting that this benign force’s wicked stepsister, a phenomenon two economists have dubbed “trickle-down consumption,” is having a powerful impact on the economy and politics of the United States.

The idea is that income inequality has a significant impact on the 99 percent: It drives the rest of us to consume more, whether we can afford to or not.

Robert H. Frank, an economist at Cornell University in New York State, is a pioneering student of this behavior who has been writing about the subject for nearly two decades, long before it became fashionable. Mr. Frank, who is the co-author of an economics textbook with the Federal Reserve chairman, Ben S. Bernanke, believes that rising income inequality affects the rest of us through what he calls “expenditure cascades.”
Rising income inequality, he notes, isn’t just about the gap between the 99 percent and the 1 percent; it is also about growing differences across the income distribution, including at the very top. The result is that all of us see people we think of as our peers earning — and spending — a lot more. As a consequence, we find ourselves spending more, too.
“The main idea is that frames of reference are very local,” Mr. Frank said. “Bertrand Russell said beggars don’t envy millionaires, they envy other beggars who have a few more coins than they do. Expenditure cascades aren’t because the poor want to emulate the rich.”