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Middle class is in the middle

Using consumption (Veblen goods, Giffen goods) to distinguish ones class leaves middle class citizens in the middle.

Individual demands are heavily shaped by the social environment. As the economist Richard Layard has written, for example, "In a poor society a man proves to his wife that he loves her by giving her a rose, but in a rich society he must give a dozen roses." For the last three decades, virtually all income gains in the United States have gone to top earners. Recipients have spent most of their extra income on positional goods, things whose value depends heavily on how they compare with similar things bought by others. Like mutually offsetting weapons in a military arms race, consumption of this sort is largely wasteful. Many of the most spectacular increases in high-end consumption in recent years appear to have been driven almost entirely by positional forces. If people acted in tandem, resources could be diverted from positional consumption at little sacrifice.

Although there is scant evidence that middle-income families in America resent the spending of top earners, they are nonetheless affected by it in tangible ways. Additional spending by the rich shifts the frame of reference that defines what the near rich consider necessary or desirable, so they too spend more. In turn, this shifts the frame of reference for those just below the near rich, and so on, all the way down the income ladder. Such expenditure cascades help explain why the median new house built in the U.S. is now about 50 percent larger than its counterpart from 30 years ago, even though the median real wage has risen little since then.

Higher spending by middle-income families is driven less by a desire to keep up with the Joneses than by the simple fact that the ability to achieve important goals often depends on relative spending. Because of the link between housing prices and neighborhood school quality, for example, the median family would have to send its children to below-average schools if it failed to match the spending of its peers on housing. Instead, middle-income families have opted to save less, borrow more, work longer hours, and commute longer distances than ever before, all in an effort to keep pace with escalating consumption standards.

Robert H. Frank


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