Customer Reviews

Falling Behind: How Rising Inequality Harms the Middle Class (Aaron Wildavsky Forum for Public Policy)

5 star:		(2)
4 star:		(5)
3 star:		(2)
2 star:		(0)
1 star:		(0)

 

 

Frank is an economist who writes a column for the Wall Street Journal. He has written books that entertain and inform. This book clearly falls in the latter category. It contains a series of thought provoking observations about the present state of the American middle class. He finishes the book with some ideas about what can be done to continue to support it. Those that revolve around restructuring the country's tax system are sure to make some uncomfortable. The book is well worth a read.

The size and health of its middle class used to be a matter of pride for America. If you think the state of the middle class is not important, just compare America to countries that don't have a thriving middle class. There are a lot of them in Africa and Latin America.

The dictum "context is everything" is certainly true when it comes to assessing the value of material goods.

In Falling Behind, economist Robert H. Frank shows that what we consider "average" or "good enough" in a home or car is determined by context: what are others around us driving? where are they living? Is a `79 Chevy Nova is adequate (or even luxuriant)? The answer to this depends on the cars driven by others around us. This context varies between Cuba and the snazzier parts of L.A. Context matters in assessing the value of many things: cars, real estate, appliances, clothing. Not all goods are evaluated in this way: Frank categorizes those that are as positional goods.

Frank lays to rest the notion that wanting what others have is greed or envy, or that we are duped by snazzy advertising. Rather, it is natural to judge one's own assets in terms of local context. Having less than the "norm" has tangible consequences for professionals: Doctors or lawyers who fail to keep up appearances will be judged as incompetent. People who choose to buy smaller homes will end up in poorer neighborhoods, and suffer their attendant problems.

The inflation of positional goods is driven by income inequality. Since the 1970's, the incomes of those at the very top has risen dramatically, while those at the bottom are now earning about the same or less. (If you want clear graphics and elucidated statistics on rising income inequality, look no further than chapter 2.) However, changing standards for what constitutes a luxury home or car have "trickled down" so that middle-income Americans now need to spend more to achieve average.

Frank likens the arms-race style inflation of positional goods to the metaphor of the stadium. If one spectator stands up, he/she will get a better view. But if everyone stands, they will all have the same view as before, except they will have given up their comfy seats. The author calls this behavior "smart for one, dumb for all."

Frank outlines what working and middle class families have had to sacrifice to achieve the new average: time, equity, and investment in public works. Workers must live farther from work to afford average, and have longer commutes. They work longer hours, and sleep less. Families don't save as much, and they go into debt. People who feel strapped for cash are less willing to pay the taxes necessary to maintain roads and schools, so these services get cut.

For all that I enjoyed this book, I cannot rate it a 5. While the tone through most of the book was jargon-free and accessible to the non-economist, Frank lapses into dense econo-speak in places (notably chapters 6 and 7). Frank also delves into "Darwinian" hypotheses in chapter 6, which only detracted from his larger point. After all, he had already made the case for the positional judgement of goods. The evo-psych explanation lacks any evidential support, and merely stating that it is the "biological," or, worse yet, "Darwinian" point of view is not sufficient for it to be taken seriously.

The final chapters redeemed this book for me, as the author proposes a novel, progressive tax solution: taxing consumption while exempting savings. A progressive marginal tax rate on consumption would reward those who save rather than spend, limiting the inflation of positional goods as people opt for smaller mansions and more utilitarian vehicles. The tax is not regressive: People earning modest salaries can apply their deduction to their taxable consumption, so that they are not penalized for being unable to save.

If you want to know why the rich get richer, the poor and middle class can't get ahead, and houses and cars seem to have doped up on steroids since 1970, give this book a read.

The first college I went to was a small community college out in the middle of nowhere. Most of its residents were extremely poor people fresh from the factory. In such an environment, I felt very wealthy and did not see the need to buy better clothes. I soon transferred to Michigan State University. Talk about a sea-change. Suddenly, I was the odd man out. My clothes were otiose, my habits slovenly and my look unkempt. It was extremely stressful (I am sure my HPA was going nuts pumping cortisol like crazy). I needed a new wardrobe. Not only that, but I need a conspicuously expensive and ridiculous one.

If you take this experience and apply it across the middle class board, you have Mr. Frank's book. You see, all of the middle class is in a positional arms race over goods like cars, houses, clothes, watches, and other oddities, while skimping over public goods, insurance, and saftey.

Frank compares this arms race to animals who constantly get bigger antlers to compete and get females. Soon the antlers are so big and cumbersome that they are a handicap in many ways. Yet, if a mutation 'attempts' to take over the population and make smaller antlers, the bigger antlers will win because animals that possess them can fight better and monopolize the females. Frank calls this the "smart for one, dumb for all" principle. I think the reasons are fairly obvious. Similarly, if we would all agree to limit the size of our house and cars and pay more for roads and parks, we would all benefit. However, there is always going to be that one idiot who gets the bigger house and the SUV. Now he is rolling in attention, going to the best school, and safer than ever in his huge SUV. All it takes is this small spark to ignite an all out war for position. But, remember, since position is relative, we end up in the same spot anyway! Except, we are now skimming on the important, non-positional public goods.

Frank's book is a short, lucid, and compelling account of what is going on with the middle class. I think he gives short shrift to role of the media and corporations, but his theories and ideas do have the benefit of being parsimonious and logical.
Great book.

Before the advent of neoconservative economic policies beginning with Ronald Reagan, the American middle class arising out of various New Deal reforms enjoyed the longest period of rising prosperity in U.S. history. The laws insuring social security, the right to form unions, the GI bill, certain banking reforms are among several of those adjustments that allowed the middle class of that 40 year span to flourish. Then Reagan ascended to power and immediately began to dismantle the underpinning of the middle class beginning with his union busting in firing the PATCO workers. (It certainly didn't stop there.) Before Reagan, during the 50's and 60's, and 70's, it was possible for a single middle class paycheck to buy a home and a car, food, put two kids through college, and buy a few toys besides, like a TV, a bike for the kids, and a trip to Disneyland. And this in turn gave rise to the economy that would produce those goods, which in turn provided jobs to the very people who were buying the goods. It was a good system, not perfect, but good. This 40 year era, coupled with our ultimate victory in WWII, gave rise to what is nostalgically remembered as the golden age of limitless optimism and rising expectation. We all thought of America as being #1 in everything. So did most of the rest of the world.

An era like this doesn't happen by accident, as I alluded to above. It took a Roosevelt, he didn't run on the New Deal in 1932, to come around and develop the vision necessary to enact specific laws, a change in the rules of the game as it were, so that a middle class could emerge. (FDR wasn't actually the first to envision such a state of affairs...his cousin Teddy thought of it first.) Unions, enabled by law in the 40's, were central to this middle class emergence.

Among the most important economic factors of the era was a marginal tax rate of 90% and the system of tariffs we imposed on imports to keep foreign goods competitive with American equivalents. Remember, these 2 factors were in effect during this period. True, JFK did lower the marginal tax rate to 70%, but it was not the equivalent of today's tax cuts. JFK realized that the wealthiest Americans were not in fact paying 90%, so he cut it to 70% ALONG WITH tax reform that eliminated a lot of rich people tax loopholes.

So along comes Reagan for reasons too numerous and complex to discuss here, and kicks the New Deal in the ass. Those 40 years of middle class emergence and ascendancy were real, and Reagan's embrace of the neocon philosophy of greed took over. Union busting, tariffs all but eliminated, the tax rate drops to 30%, outsourcing, the previously unseen flood of cheap exploitable labor by corporations beginning in the 80's. And on the other side, enabling all the rules necessary for wealth to accrue to the wealthy.

This book is an important exploration of the practical effects of the neocon destruction of the middle class. It should be noted that the author's remedy of reformed taxation, yes, increasing the taxes paid by the wealthy, is not a function of some middle class envy or resentment of the wealthy. It is a function of economic justice---the justice of those who created their wealth using the infrastructure of this country paying their fair share back into that commonwealth. It has nothing to do with "living beyond their means". It has to do with the cultural knowledge that their parents just one generation ago could attain that which the current generation has been cheated out of. A home, a car, one decent job--not 4.

The rules we live by are not ordained by god. They are created, sometimes by hook or crook, by men. The middle class is going to need to fight back.

I liked this book. I will recommend it to anyone who is interested in reviewing social aspects of economic development in the US.

book makes good points, especially in regard to avoiding the desire to keep up with the neighbors, which is keeping many of the middle in debt and without savings. i hadn't thought much about our view of 'what we need' based mostly on what others around us have... but it is certainly a valid point. also some comparisons about trading in an $80 grill, going to a store and looking at a $5000 grill and then seeing the ecocnomy luxury model for $1100 makes you think if you buy the $1100 you got a great deal... when you should be looking for an $100 grill...

i think i'm moving into a cabin in the wilderness now. :-P

Thorstein Veblen in his Theory of The Leisure Class coined the term conspicuous consumption. In many respects the last 10 year has been a veritable explosion in obnoxious displays of my car is bigger and better than your car, and house, etc...
The real threat to the middle class is in housing. Particularly in the Bay Area of California the cost of housing, both rental and purchased, has become prohibitive for all but a small percentage of the population. I include rental housing because the costs are exceedingly high, forcing most people to pay well over 50% of their salary in rent, leading to ruinous financial suicide when you are not able to save each month because the greed factor of housing has such a crushing effect on people's mental and emotional well-being. Housing has skyrocketed to present levels principally as a result of the mania of believing that everyone in the area makes $100,000 a year which is what any other community would require to sustain such high housing costs. The pay rates certainly are not commensurate with the increasing costs of renting and buying homes.

I have never read any of Frank's other books before reading this one. I have read over 200 books on investing, and this book piqued my interest because I have always been interested in income inequality.

Wilfred Pareto, the Italian economist, found interesting phenomena when he researched who had most of the income and wealth in Italy in the early 1900's. He was surprised to find that 20% of the population had 80% of the income or 80% of the wealth. He found the same phenomena when he researched England in the late 1800's. This phenomenon has come to be called the Pareto Rule...or the 80:20 Rule.

If you check the USA today, you will find Pareto's Rule is still alive and well. 20% of the population has about 80% of the income and about 90% of the financial wealth.

I have been interested in finding out why this phenomenon has held across 3 countries for over 100 years.

The author conveniently forgot to show the actual income distribution of the U.S. in his charts. He chose to only show the percentage change in income for each of the 5 deciles groups.

The whole premise of this book can be summed up as follows:

-Income inequality has increased in the US the last 40 years
-Rising income inequality is a bad thing
-One reason for the rising inequality is technological changes and the George Bush tax cuts for the wealthy
-The other reason for the rising inequality is that an "arms race" is created when the middle class sees the wealthy have more toys....and therefore the middle class must spend more on bigger houses and fancier cars
-The recommended fix is to switch from a progressive income based federal tax to a consumption based tax system (where savings are not taxed) and taxes would be increased for the wealthy
-The additional tax revenue would be used to provide more needed Federal Government services

One key assumption of this book is that US income inequality has increased the last 40 years. According to Wikipedia.....the Gini Coefficient for the US in 1967 was 39.7 and it increased to 46.3 in 2007. I'm not sure it is appropriate to ratio these two Gini numbers.........but if it is....this is a 17% increase in income inequality (the Gini Coefficient is supposed to be a metric for assessing income inequality).

A 17% increase over 40 years doesn't seem that dramatic to me. Given the large number of data sources required to calculate the Gini Coefficient......I doubt a 17% increase is even statistically significant at the 95% confidence level.

Another challenge to this key assumption is that Pareto's findings (20% of the population have 80% of the wealth) have held up over 100 years across three different countries and the 80:20 ratio has not changed significantly.

Based upon these 2 factors, I have my doubts that income inequality has really increased in the US the last 40 years.

Another premise of this book is that middle class citizens have no recourse except to go into debt and spend more to keep up with the Jones's.

Way back in 1849 when Charles Dickens wrote David Copperfield, Mr. Macawber says, with respect to money:

"Income 6 pence a week, expenditure 5 pence a week, result happiness: Income 6 pence a week, expenditure 7 pence a week, result misery."

In Stanley's Millionaire Next Door, he found that most millionaires chose to live below their means so they could save money....invest the savings......and eventually be millionaires. Many people intentionally stayed in homes in middle class neighborhoods with decent school systems.....versus neighborhoods with big houses and the expectation (and expense) of sending your kids to private school. These Millionaires were frugal on their expenses for clothes, watches, vehicles, and houses. In fact, many bought vehicles using the $ per pound ratio to get the best value (Ford F150's rank high on the $ per pound ratio). I would contend that many people are free to choose to their lifestyle.......so as Stanley says.........they can choose to own a lot of cattle......or be all hat and no cattle. The author seems to contend that 100% of the people have no choice but to participate in the arms race.

The author also suggests the current public school system is a well designed one because it caps educational costs versus the arms race which would result if vouchers could be used to attend any school. One wonders if vouchers could be used to attend any school...including the amount of property tax paid.....would this encourage some free market competition and possibly lower total educational costs?

I have often wondered why our current U.S. system penalizes savers. Taxes are delayed if you save in a defined contribution retirement plan.....savings beyond these plans is almost penalized. First, the money is taxed as federal, state, and social security taxes. Once you invest it, another government tax of inflation must be paid........ plus federal, state, and income taxes on any interest or capital gains. With inflation currently running higher than interest rates on savings accounts........there is not much incentive to save.

I might be in favor of switching our tax system to a consumption based system like the author advocates, but with some additional caveats. The caveats would be a 40-year transition of switching Social Security from pay-as-you-go to an individual account in low cost index funds like the current Thrift savings plan for government employees. I would also like to see total taxation capped at 15% of gross earnings (including local, state, and federal taxes)......unless during a Congressional declared state of war. I am also concerned about the "law of unintended consequences" if we change our tax system.

I do not agree with the author's plan to increase taxes on higher income earners.......giving the government more of our dollars to spend.......and waste.

I tend to side with Milton Friedman who believed that if government action is taken in pursuit of economic equality that our political freedom will suffer. In a famous quote, he said:

"A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."


Although you may not agree with the author's recommended fix, his book does cause one to think about how our US economic system is designed. At some point of high enough income inequality......the 80% of the population who does not have the income and wealth will vote themselves a share of the income from the 20% who take all the risk and generate all of the jobs (unless you believe the 20% with the money donate enough money to control our political system).

In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.

If you want to become one of the 20% who have all the income and wealth, you might want to read some of the books noted below. They may help you eventually enter the top 20% group.

The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

The topic of this book could have been very interesting to read about. However, I think it deserved more coverage than this tiny little "booklet" provides. While it is certainly true that the middle class in America today doesn't seem to have the quality of life that it used to have in the 1950's, the book focuses on only one or two reasons the middle class has lost ground when in fact there are MANY MORE reasons for the problem.

The book has the following chapters:

1. Introduction
2. Recent changes in income and wealth inequality
3. Inequality, happiness, and health
4. Envy or content?
5. The rising cost of adequate
6. Why do we care about rank?
7. What types of consumption are most sensitive to context?
8. How can middle-class families afford to keep up?
9. Smart for one,dumb for all
10. Looking ahead
11. Lessons for public policy
12. Reflections

Many of the middle class are having problems reaching an "adequate" standard of living. The book points this out. And I agree that the middle class seems to be working longer and harder hours per week to attain that standard of living. I also agree that the middle class as a whole is putting in those extra hours because they want to keep up with those who have more than they do. But there will always be someone who has more than they have.

I didn't enjoy reading that the have's need to be taxed so the middle class can stop striving to catch up to the have's. I would have liked the book a lot better if instead of suggesting that the well-to-do should be taxed that the middle class should take responsibility for their predicament and stop living above their means. If the middle class were to strive to live within their means and become a "have," then they would get their just due. But if they continue to spend everything they earn (and then some), then there is no hope for them to ever become a have. 3 stars!