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The Ladder

A Blog from New America's Asset Building Program

"Expenditure Cascades," Inequality and the Shrinking Middle Class

Published:  December 5, 2011

Yesterday Robert Frank published, on Slate, the first in a series of essays adapted from his new book, "The Darwin Economy."

The debut piece focuses on the impact of "expenditure cascades" in the US. The argument is, essentially, that as the wealthiest become wealthier they buy more expensive and "nicer" things. Those in the same social circles feel a need to "keep up with the Joneses" and so the less wealthy up the spending to keep pace, and this behavior echoes down the income ladder. Here's Professor Frank in his own words:

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. 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.

This is a core part of his argument, and one that I highlighted following Professor Frank's recent visit to new America. Here's a longer version of his argument, again from his visit to NAF:

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