Trickle-down consumption

By Chrystia Freeland
March 22, 2012

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, is a pioneering student of this behavior who has been writing about the subject for nearly two decades, long before it became fashionable. Frank, who is the co-author of two economics textbooks with the Federal Reserve chairman, Ben 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,’’ 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.’’

Instead, he argues, each of us imitates those near us – and the result is a cascade of unaffordable consumption.

‘‘There has been extraordinary growth in the 1 percent,’’ Frank said. ‘‘Ordinary people don’t want to emulate them, but what happens is that the people who are next to them want to emulate them, and so on. That social cascade ultimately explains why the middle-class home got 50 percent bigger in the past three decades.’’ (Frank says that the average U.S. house went from 1,570 square feet, or 146 square meters, in 1970 to 2,300 square feet in 2007.)

This cascading increase in consumption can have what some of us might consider to be benign effects – everyone working harder and more women entering the workforce. But it can also have malign ones. In ‘‘Expenditure Cascades,’’ a paper Frank wrote with Adam Seth Levine and Oege Dijk, the three show that more bankruptcies, a higher divorce rate and longer commutes all correlate with increased income inequality.

A draft study by two University of Chicago economists that is attracting a lot of attention in the academy supports this view. Marianne Bertrand and Adair Morse coined the term ‘‘trickle-down consumption,’’ and in their paper of the same name they find that higher spending, bankruptcy and self-reported financial distress all increase if you live in a community with higher income inequality, compared with one with lower income inequality.

The concepts of ‘‘trickle-down consumption’’ and ‘‘expenditure cascades’’ help to explain one of the great mysteries of the past decade in U.S. politics and society. Income inequality has been on the rise since the late 1970s, but it is only since the financial crisis that it has gained any real traction in public life. That may be because increased consumption masked growing inequality. Retail therapy meant the 99 percent didn’t notice that the 1 percent was pulling away.

Bertrand and Morse offer empirical evidence of an important explanation for why that was possible. In areas with higher income inequality, politicians were more likely to support measures to make consumer credit cheaper and more available. People weren’t talking about inequality much before 2009, but they felt it. And, America being a democracy, the political system worked to soften it. Interestingly, because inequality grew at a time when overt redistribution was falling out of favor, politicians made it easier to borrow.

If you think the American middle class had too much debt before the crisis, and if you buy the notions of expenditure cascades and trickle-down consumption, the bad news is that the cycle may be about to start all over again. Ipsos MediaCT, a research firm, does a monthly poll of a group it describes as ‘‘the affluents,’’ people with a household income of more than $100,000. Their February survey, released this week, showed this group is poised to hit the malls.

‘‘We have seen for some time what people call frugal fatigue,’’ said Steve Kraus, chief research and insights officer for Ipsos MediaCT. ‘‘Last month it jumped up from about a quarter to a third. They want to revisit the glory days of 2005 or 2006, when they could just buy something nice and treat themselves and not worry about it.’’

But credit is a lot tighter today than it was before 2008, so how will those who aren’t affluent cope when consumption at the top again becomes conspicuous? The alternative to easy credit for the poor is higher taxes for the rich. Surprisingly, Kraus found that his affluent respondents were willing to pay up. Nearly 60 percent were in favor of higher taxes for the rich and nearly 40 percent sympathized with Occupy Wall Street.

“The past 40 years have been the best 40 years for rich people in the history of rich people,’’ Kraus said. ‘‘There is a recognition that we’ve had a pretty good run and now something has got to be done.’’

Even at the very top, though, there turns out to be a class divide. Households with an income of more than $250,000 are far less supportive of higher taxes and more hostile to Occupy Wall Street.

‘‘When you get to the really high-end folks, you get more of a strident conservative,’’ Kraus said. ‘‘More of a crowd that says: ‘Cut spending rather than raising taxes.’’’ Consumption may trickle down, but when it comes to the very top, ideas don’t climb up.

32 comments

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“The past 40 years have been the best 40 years for rich people in the history of rich people,’’…in the history of rich people…really?

There has been an elite ruling class in every country and in every era of history. Even in communist countries there is always a ruling “1%” who operates largely above the law.

If trickle down economics officially doesn’t work, please enlighten me as to what does. Entitlement handouts and a perpetual stimulus initiative?

Posted by jaham | Report as abusive

Much of what goes on with the 1 percent is invisible to the rest of us. The truly rich are often not conspicuous consumers. The trend that is alarming is what is being called the “hollowing out” of the middle class. Many millions of good blue collar jobs have been lost to oversees competition. Technology continues to make it possible to do more with fewer people. Brick and mortar retailing is shrinking in favor of electronic (the web) shopping. Another example is the precipitous decline in print journalism. Big challenges lie ahead. Whether we like it or not, markets will determine our direction and our fate, not politics.

Posted by gordo53 | Report as abusive

Seems right to me. Apes will be apes, and for those who have functional mirror neurons, the urge to keep up with the hypothetical Joneses is just as powerful as the urge to eat or reproduce.

There’s a great book called “Demonic Males” (Wrangham/Peterson) that explores the groupthink psychology of primates and makes convincing generalizations to the human population. Social hierarchy and status is an extremely powerful motivator of behavior in the primate world. The book does have a focus on why most primates are violent (and why a few select primate populations are not), but it also has a deep exploration of social hierarchy and status displays.

Alain de Botton’s “Status Anxiety” provides a less scientific but no less fascinating insight into the phenomenon as well.

Posted by Nullcorp | Report as abusive

This piece again demonstrates how the U.S. society has lost discipline in what it does and obviously how it spends. No different than the U.S. governement which has taken on the attitude of J. Wellington Wimpy who said: “I’ll gladly pay you Tuesday for a hamburger today.”

Posted by WhatIsNexttt | Report as abusive

So households that make 100k a year (how that is ‘affluent’ is anyone’s guess) support taxing the wealthy, while households that make 250k (the ones who actually would eat the higher tax) are against it… what a shock. Then the wealthy households would rather the government cut spending (ie take money away from programs only poor people use), effectively putting the burden on those below their economic status. Another shocker!

The concept of trickle down consumption is an interesting way to look at overspending. Don’t bog it down with obvious tautologies like “People want lower taxes/higher benefits, at the cost of higher taxes/lower benefits for others”.

A much more interesting and relevant study might have explored the very large population who is willing to vote against their own self interest; poor/middle class voters who push for republican fiscal dogma, even though it means tax cuts for the wealthy and cuts to spending on social programs that benefit people in their own income brackets.

Posted by spall78 | Report as abusive

Please, don’t call them “glory days of 2005 or 2006″.

Posted by zebra69 | Report as abusive

Sounds like a new take on the “keeping up with the Joneses” adage.

Posted by AltonDrew | Report as abusive

guapa!!!

Posted by rbsp | Report as abusive

What a great read! Makes good sense. Haven’t thought about this aspect of the economic divide before.

Posted by GlobalJackie | Report as abusive

Grate article
Veblen’s idea of conspicuos consumption (for signaling pourposes) actually leads to the same conclutions regardin the effect of income inequality

Posted by martintetaz | Report as abusive

The sad part is the fact that the information in this article isn’t already common knowledge.

Posted by ProfMagyar | Report as abusive

I think she missed the point about the survey of “affluents”. They were probably asked if the rich should be taxed more, but they don’t consider themselves rich. The question should have been: “Should you pay higher taxes?”. I wonder what the answer would have been to this question. The author is writing under the assumption that the latter question was asked, but I suspect it was the former question that was in the survey.

Posted by stevedebi | Report as abusive

Excellent article, and agree 100% The only thing I question is why it took a University study to figure out the obvious? And the average beggar still won’t figure it out even after reading this article. They definitely will be in denial – hence nothing will change until leaders take action.
My only disagreement is: The cycle will not start all over again, but continue as has been. But, People are beginning to realize the inequality, yet they don’t know what to do about it, so they live in denial and hope all will all go away by itself.
We don’t envy the rich, we envy people on subsidies (like you said: “beggars envy beggars”), which will lead to an increase in the beggar population. And higher taxes on the rich won’t solve the problem (as they think) taxes used to be much higher yet I’ve seen the income divide at work even then during the highest taxing period. Interestingly enough the higher taxes which are suggested will be just enough to run government an extra 2 hours. So that is supposed to solve the divide ? They have to do better.

Posted by DDavid | Report as abusive

While it may be true incomes of top earners have gone up more than the rest of us, I feel that the writer should consider how the availability of easy credit has helped those with modest incomes.

If a person accumulates excessive debt, there are some situations where they can end up getting the debt paid for nothing. For example, here in California at least, if you buy a house beyond your means or if the value drops and you are “underwater”, if you allow the home to foreclose, the lender usually won’t come after you for the unpaid debt (someone else might want to clarify about the details, but from what I understand, there is no deficiency judgement for purchase money loans).

Another example is how homeowners who stopped making payments for whatever reason recently have been allowed to stay in their homes for months without paying and without the lender starting foreclosure. There has been some moratorium on foreclosures in place for a while.

Another example is that a person might accumulate excessive debt, then declare bankruptcy. A person with modest income can live beyond their means for while while running up debt, then go bankrupt. This can be a way to get something for nothing, while the person who lives within their modest means loses out.

Posted by bsnider | Report as abusive

I live in Loudoun County VA with a 2010 median household income of $109,000. I lost my job in 2011. Trickle down certainly plays a part especially here. However, there comes a point when the lower incomes simply have NO FUNDS for any sort of enrichment activities for family and consumer goods. In fact, basic necessities here have become overwhelmingly expensive. I just don’t understand how there is this expectation the 99% will buy much of anything. Credit sources are tapped out; many people work more than 1 job. People are stuck in their houses because they can’t sell for a profit and therefore can’t move up or down or out of the county.

So how can prices for everything keep rising (not especially in Loudoun due to many rich but in “normal” income places)? Also, the US went to a quantity profit model rather than a quality profit model. Where are the quantity sales going to come from? There has been some “rollback” in pricing here which would still be too expensive in a regular local economy; even our “thrift” stores are expensive.

Posted by Esmerelda5 | Report as abusive

I believe that Roubini et. al nailed it … supply-side is imbalanced.

Consider jobs creation: in 2010, the US imported 57K educated workers for itinerant work. Today, the approved number is 65+20, or 85K workers … at a time when college grads are struggling to find jobs! So why, pray tell, did congress boost the supply of tech workers with foreign imports? Does congress object to Americans working?

Posted by SanPa | Report as abusive

Excellent! This is an article rich with knowledge nuggets that can help us to understand how we got into this depression. (The technical definition of a depression is two years or more of less than breakeven growth. It’s almost five years now.)

Class Warfare is not a fantasy.

Posted by ptiffany | Report as abusive

Where are the comments? The comments tab or list have been missing from Freeland’s articles recently.

Posted by ptiffany | Report as abusive

Seems right to me. Apes will be apes, and for those who have functional mirror neurons, the urge to keep up with the hypothetical Joneses is just as powerful as the urge to eat or reproduce.

There’s a great book called “Demonic Males” (Wrangham/Peterson) that explores the groupthink psychology of primates and makes convincing generalizations to the human population. Social hierarchy and status is an extremely powerful motivator of behavior in the primate world. The book does have a focus on why most primates are violent (and why a few select primate populations are not), but it also has a deep exploration of social hierarchy and status displays.

Alain de Botton’s “Status Anxiety” provides a less scientific but no less fascinating insight into the phenomenon as well.

Posted by Nullcorp | Report as abusive

Another false docrine – expenditure cascade.

In plain terms, the nation is economically polarized – the hallmark of a developing nation.

Mature practices of developing nation will kick-in such as – nationalizing banks, food and energy subsidies, luxury taxes, import-duties and the like. This however, will take some time.

Posted by Mott | Report as abusive

isn’t this notion a simple recyclingof Schelling`s tipping model (Micromotives and Macrobehavior)?

Posted by scythe | Report as abusive

Thank you Chrystia.

One thought on the >$250K/yr demographic. If there were some breakdown of that demographic, I would wonder how many of this class make some or the majority of their earnings/compensation from financial products?

Posted by Laster | Report as abusive

I used to pat myself on the back for not envying the rich. After reading this article, I’ve realized that my envy problem is a lot closer to home than I was previously willing to admit.

Posted by ewilc773 | Report as abusive

Home square footage also increased in periods of oversupply. It was the builders’ strategy to avoid lower selling prices in those periods, since it was cheaper for them to offer a bigger house than to scale back their operations.

Posted by PapaDisco | Report as abusive

Oh! You really need to have a Ph.D. for this? Hasn’t this been called “Keeping up with the Jones’s since the Ozzie and Harriet days?

Posted by Aractines | Report as abusive

Otherwise known as “Keeping up with the Joneses ” which in most cases forces people into spending money that they don’t have. A true, but trivial contribution in helping with today’s economic disaster.

Posted by GMavros | Report as abusive

Yet more flowering rhetoric to disguise the fact
that people were irresponsibly spending twice
what they earned. Free flowing credit and
misguided government policies enabled the orgy.
It could NOT have happened without both regardless
of what the 99% might have wanted to consume.
Sadly, the government is now promoting the premise
that everyone is “entitled” to have equal results.
To see how government dependence works when it
controls cradle to grave support, just study how
well it has worked out for the Indians. Motivation, personal responsibility and risk related to rewards are necessary for prosperity. It’s past time for the
whining and blaming others to stop.

Posted by giatny | Report as abusive

The government is taxing and spending a much greater portion of the GDP than is historically done. It is running up debt almost faster than you can count it. They already spent all the money in the SS trust(?)fund. They moved all the taxation on gas to the general fund instead of taking care of the roads and bridges and now they want money for that. They made so many promises to so many people that they will never be able to keep. So now they need scapegoats and you are helping them.

If you took every asset from everyone who is making 250k it will not even come close to covering all their promises. In a year it would all be gone and then what?

They need to get rid of all government unions and just like private industry cut the Fed workforce by 20%. Stop giving people these unbelievable retirements with our money. Those that are left need to learn how to work like anyone who works for private industry or be let go. Something like 1 in 3000 government workers is ever fired. I just don’t believe they are all so good as my experience with them says “NOT”.

They also need to get out of our everyday lives. I can think for myself thank you. We don’t need thousands of new laws every year. So many that no one could ever comply with them all.

We need congress to start overseeing unaccountable bureaucrats and approving all their edicts or not. They were not elected and should not be making laws. If there are so many of them that this is not possible then start eliminating them till they can. I want someone that we can all hold accountable.

Congress needs to stop trying to make everything (in their opinion) fair. It always has the opposite effect with it’s unintended consequences. The Housing Bubble is their fault. The current fiscal crisis is their fault and so on and so on. Anyone who pays attention can’t help but come to this conclusion. You need only go back to Barney Frank and Christopher Dodd to see what they said and did. They were warned over and over about what would happen and they ignored it. Now see what we got.

Your article only says that people are sheep and they have no self control so you want to fix it for them. It was others who tried to fix it that taught them the behavior they now exhibit. They need to stop looking for the government to save them and fix it themselves. It won’t be easy but they can do it and we will all be better off in the long run. If you have your way we will all suffer the consequences and then they will have to do it anyway as there will no one left to help.

And no I am not rich. I live on a fixed income that isn’t much but if I so decide I could still make myself rich with hard work if the government will just stay out of my way. Never was rich but I have enjoyed the freedom that my country has provided me for the last 64 years and want that for my children as well. Now you want to take that away too. GTH

Posted by crlos3 | Report as abusive

Many people are in debt because they’ve simply discarded the notion that saving equals financial security. They’ve accepted that they’ll never get ahead because the game is rigged. Therefore, the rationale ‘life is short so enjoy it while you can’ pervades. This systemic economic pessimism is exacerbated by high unemployment, plummeting wages, high fuel costs and dismal property values. There simply is no positive incentive for the average citizen to make sacrifices for such a hopeless economic future.

Posted by GLK | Report as abusive

Soon, we won’t be able to afford heath insurance. Then why save if the first illness wipes you out? The country is going down.

Posted by urownexperience | Report as abusive

Commenting on an article expressing the findings of a study of human nature and the economic implications of the studied behavior with ‘no duh’ or ‘we’ve always known this is keeping up with the Jones’s’ is idiotic.

Folks like these are similar to those who know the sun rises in the morning and sets in the evening, but care little about how and why…and who are Capernicus, Newton and Einstein anyway?

These same folks care little about Keynsian theory or why ‘Trickle Down Economics’ is such a bitter failure…so long as their political party throws enough red meat to keep them angry or fearful, why would facts and logic be necessary?

Thanks for bringing attention to this study. Food for thought.

Posted by NobleKin | Report as abusive

This resonates. It feels right to me. One danger however, is to rely on a head count assuming the heads belong to the same people year to year. I’ve seen a lot of economic movement between acquaintances in my life, some way up, a lot a little up, and some down. So I would surmise that the churning within a class has to be an attribute included in an assessment the psychological drivers to consumption.

Posted by SeaWa | Report as abusive