Chrystia Freeland

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.

Watch as the billionaire investor tells Chrystia why the hedge fund community has abandoned President Obama and why there’s not a huge gap between the views of the president and Republican front-runner Mitt Romney.

Paul Martin and Ernesto Zedillo are members in good standing of the global elite. Martin is a former Canadian prime minister, finance minister, deficit hawk and, in his life before politics, multimillionaire businessman. Zedillo is a former president of Mexico, holds a doctorate in economics, directs Yale University’s Center for the Study of Globalization, and serves on the boards of the blue chips Procter & Gamble and Alcoa.

Yet when I interviewed the two of them in a wide-ranging public conversation last week, hosted by the Center for International Governance Innovation, an independent, nonpartisan Canadian research organization, they sounded an awful lot like the people camped out in Zuccotti Park in New York.

Neither Zedillo nor Martin had sympathy for the complaint that Occupy Wall Street lacked a clear agenda. As Zedillo put it: “These criticisms — ‘Oh, they don’t have an agenda, they only pose problems and provide no solutions’ — well, they are citizens and they have earned the right to express a very serious, real problem.”

The truth, the two statesmen agreed, was that the protesters were articulating a real, important and global concern.

“I have yet to talk to anyone who says they aren’t reflecting a disquiet that they themselves feel,” Martin said. “I think really the powerful thing is that Occupy Wall Street has hit a chord that really is touching the middle class — the middle class in Canada, the middle class in the United States, the middle class right around the world — and I think that makes it actually very, very powerful.”

In fact, Zedillo thought the Occupy group should widen its sights — “I could argue as an economist it’s not only about Wall Street. They should have an Occupy G-20” — a possibility his successors at the Group of 20 table are sufficiently worried about that protesters are being confined to Nice while the heads of state meet in Cannes this weekend.

Martin and Zedillo would be welcome at any corporate dining room on Wall Street or financiers’ dinner party, but it was striking how strongly their view of Occupy Wall Street differed from the conventional wisdom among American business elites.

That dissonance was not lost on Martin. He started out diplomatically — “I think that most people have basically given them a fair amount of credit” he said of the protesters — but then could not resist adding: “I don’t want to pick on U.S. bankers, but the reaction, the one that really got me was the banker who basically said, ‘You know, these are just a bunch of welfare bums. What we’ve got to do is cut welfare.’ A New York banker saying we’ve got to cut welfare is staggering to me. Why doesn’t he just look in the mirror? I think that actually what’s happened is that the inability of some people to defend their position has become so manifest that it’s actually added to the power of Occupy Wall Street.”

The welfare bums critique is a familiar elite response to populist rage, particularly from the left, and it is not confined to the United States. Some of the German reaction to protesting southern Europeans had a similar flavor, as did some of the British push-back against the riots there in the summer.

What is interesting about the United States is that the first burst of grass-roots anger came from the right. Although the policy prescriptions of the Tea Party could not differ more radically from those of Occupy Wall Street, the movements share an anti-elite sentiment. That may be why some agenda-setting thinkers on the right are putting forward an analysis of America’s ills that deftly combines the anti-welfare-bums riff of the country’s beleaguered upper crust with conservative grass-roots anger against many of those same elites.

This was the elegant pivot of Representative Paul D. Ryan, the Wisconsin Republican, speaking at the Heritage Foundation last week. The “true sources of inequity in our country,” Ryan argued, were “corporate welfare that enriches the powerful and empty promises that betray the powerless.” In Ryan’s analysis, the problem with America’s political economy is “a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules and preserve their place atop society.”

What is striking is how similar that dyspeptic vision is to the Occupy Wall Street consensus that the U.S. economy has been hijacked by bankers and the lobbyists and politicians they bankroll.

There is a reason “crony capitalism” is the common target of political movements that differ over nearly everything else. At a time when governments have spent billions bailing out banks even as they cut pensions and social services, and when income inequality is soaring worldwide, it is hard to deny that the 1 percent are getting a pretty terrific deal.

But taking the diagnosis of crony capitalism as the first step toward a cure for the Western world’s ills is a little more complicated.

Economic growth is the most pressing problem for everyone today, and no matter how fierce your animosity toward the 1 percent, it is hard to see how reining them in more effectively right now will goose the gross domestic product (indeed, in many countries the rise of the 1 percent has coincided with strong economic growth).

The second complication is that your crony capitalism may well be my meritocratic democracy. A general charge of crony capitalism is easy to make. But dividing the “bad” crony capitalists from the “good” innovative entrepreneurs is much harder to do. And sorting them out without creating a new group of crony capitalists may be the hardest thing of all.

Editor’s note: Due to a technical error crediting an earlier version of this article to the wrong author, it has been republished, without changes, to this URL.

On a drizzly evening in Zuccotti Park this week, where the Occupy Wall Street protesters are camped out with the modern revolutionary’s gear of iPhone, blue tarp and cappuccino, I spotted one young man wearing a T-shirt with an image of Ronald Reagan and the words “Bad Religion.”

It was the right outfit for the occasion. That’s because the greatest significance of the wave of leftist demonstrations that started in Lower Manhattan and rippled across the United States over the past few weeks is the potential challenge it poses to the Reagan Revolution.

During the 2008 campaign, Barack Obama drew shrieks from the Democratic base, particularly its Clinton wing, by naming Ron rather than Bill as a president who had “changed the trajectory of America.”

But Obama was right. We are all living in a world shaped by Reagan and his ideology of small “l” liberalism.

Three decades later, the triumph of Reaganism is remarkable. In the United States and Britain taxes shrank, regulation, especially of the financial sector, was pruned back, and state companies were sold off. Even Brussels was nudged toward liberalization.

The impact on the rest of the world was even more profound. Soviet Communism collapsed, China converted to capitalism and entered the world economy, India dismantled its protectionist License Raj, and many emerging market economies in Latin America and Africa embraced liberalization as the path to growth.

“Going back to the 1970s and 1980s is crucial,” said Branko Milanovic, a World Bank economist and author of The Haves and the Have-Nots, a 2010 book about income disparity around the world. “The ideology drove everything that happened in the next 30 years. Deng Xiaoping captured it best — ‘to get rich is glorious.”’

One result has been an unprecedented global economic boom. Its biggest beneficiaries have been some of the world’s poorest people, particularly in China and India: Shaohua Chen and Martin Ravallion of the World Bank have found that between 1981 and 2005, the number of people living in poverty in the developing world fell by 500 million. The West prospered as well, with relatively strong and consistent economic growth over the past three decades.

But something else has been happening, too. The triumph of economic liberalization has coincided with a sharp increase in income inequality. The growing gap is a worldwide phenomenon — it has been most striking in the United States and China, but income inequality has also grown, especially in the last past decade, in most developed countries, and in many emerging markets.

“What we now call the Reagan Revolution was a turning point in the American economy,” said Jacob S. Hacker, a political science professor at Yale University in Connecticut and author, with Paul Pierson, of Winner-Take-All Politics. “These patterns of rising inequality were established then.”

Economists, most notably Thomas Piketty and Emmanuel Saez, the data jocks who are the gurus of income inequality studies, have been pointing out the growing gap for a decade. But, particularly in the United States, which still determines the ideological weather for the rest of the world, that increasingly skewed distribution failed to catch fire as a political issue.

“Among elite opinion, this wasn’t talked about,” Jeffrey D. Sachs, director of the Earth Institute at Columbia University in New York and author of The Price of Civilization, published this month, told me. “It was viewed as impolite, it was viewed as class warfare.”

One reason the rest of society went along with that reticence is suggested by University of Chicago economist Raghuram Rajan, in his 2010 book Fault Lines — that the credit bubble of the 1990s and 2000s masked the stagnating wages of the U.S. middle class.

The financial crisis of 2008 brought that self-deception to an abrupt halt. And while the middle class is still in the doldrums, the top 1 percent has largely recovered, thanks in part to muscular intervention by the state. That one-two punch is why the old American taboo on talking about income distribution is lifting, particularly in Zuccotti Park.

“‘Class warfare’ has seldom had much traction in American politics because Americans tend to idealize the ‘free market’ as a separate sphere of life, with its own (rough) justice,” Larry M. Bartels, a political science professor at Vanderbilt University in Tennessee and author of “Unequal Democracy,” wrote in an e-mail reply to my questions.

“Escalating inequality and the wreckage of the Great Recession may now be focusing increasing anger on that top sliver — especially bankers, who are, conveniently, prominently implicated in the malfeasance that led to the financial meltdown of 2008 and (still) immensely rich.”

But the left shouldn’t declare victory quite yet. That’s because the anger of the United States’ squeezed middle class is also being harnessed by the right, and, at least so far, with greater and more focused political effect.

If you doubt that the winner-take-all U.S. economy is one of the Tea Party’s inspirations, consider the remarks this week by its heroine, Sarah Palin. In a speech in Seoul, she railed against “crony capitalism,” complaining that “well-connected banks get bailed out” and “certain companies get special deals through governments.”

Palin’s remedy to crony capitalism is to double down on the Reagan Revolution — lower taxes and shrink government further. Progressives have not yet come up with a solution of such seductive simplicity. Their standard prescription — higher taxes, more regulation, a stronger social welfare net, and more investment in education — may be sensible. But it lacks the rallying power of Palin’s call to smash crony capitalism by depriving the elites of their political tool — big government.

Even the energized protesters in Zuccotti Park know their left-leaning populist movement has found its complaint — “we are the 99 percent” — but not its remedy. They heard as much from Slavoj Zizek, the best-selling Slovenian philosopher, who was this week’s celebrity intellectual speaker: “We know what we do not want. But what do we want?”

After a lecture on income inequality and its pernicious consequences delivered on the square on Tuesday by Sara Burke, a policy analyst at a New York research organization, and illustrated with charts from I.M.F. economists, one listener said she was keen to “educate” people about the issue. But to do that, she wanted Burke to help her with something: “What’s my sound bite?”

The politician who answers that question will be the Reagan of the left.