During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.
By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale.
Above is a graph of aggregate income of American households, broken into 5ths. Also included, in red, is the top 5%, which are also included in the top 5th. The poorest are yellow and the highest are brown. Notice the jump in the top 5% and how the lower incomes are stagnant or declining? Notice how much of the income pie the top 5th holds, especially the top 5%, and also how their percentages of the income pie have been increasing. In other words, income inequality in the United States has dramatically increased.
Onto the Robert H. Frank, Adam Seth Levine, and Oege Dijk paper. What exactly they discover about income inequality?
First, let's figure out what the paper title, Expenditure Cascades even means. From Wikipedia:
An expenditure cascade occurs when the swift income growth of top earners fuels additional spending by the lower earners. The cascade begins among top earners which encourages the middle class to spend more which, in turn, encourages the lower class to spend more. Ultimately, these expenditure cascades reduce the amount that each family saves, as there is less money available to save due to extra spending.
The super rich force an overall price increase, say home prices, because they can afford to pay absurd sums with their increased wealth. In other words, the uber-rich cause everything to increase in price, so the middle class and poor are forced to spend more, save less. Good examples of this are the California Bay Area and New York City. Then there is positional externality. To keep up with the Joneses, Billy Bob doesn't save, his usual amount, instead spends more money on a house payment, for a bigger house, thinking he must have a bigger house to keep up with his social class. He saves less, instead buying a McMansion, all to keep up the appearance of social status. The uber-rich increase the cost of maintaining that class status, cause they are going through the stratosphere, everything costs more.
What the authors found was the above explains the greater falling savings rate of Americans than traditional (read Milton Friedman) income and savings models predict.
Our expenditure cascade hypothesis is that a pervasive pattern of growing income inequality in the United States has led to the observed decline in savings rates.
Another startling statistic from the paper is 20% of Americans have zero or negative net worth. The paper also discovered, but with a lot of as well as piece of the pie, that income inequality increases anxiety, a lack of wellness in a society.
The GINI coefficient is a measure of income inequality and zero means everybody is identical and 100 means one dude has all of the money.
Did you know the United States has now slipped to 7th in wealth and ranks well below on the GINI coefficient scale to othe industrialized nations? Below is the GINI ratios for Households from 1999 to 2009.
What the authors found was a 1% increase in the GINI index was correlated with a 8.73% increase in personal bankruptcies.
For our sample of the 100 most populous counties, the Gini coefficients increased by an average of 4.41 percent between 1990 and 2000.
Our estimate thus implies that increased inequality in these counties was associated with an almost 40 percent increase in bankruptcy filings between 1990 and 2000. This estimate seems reasonable given that, on average, non-business bankruptcies increased 148 percent in our sample.
Gets better. A 1% increase in the GINI index correlates to a 1.21% increase in divorce.
Given that the average change in the Gini coefficient between 1990 and 2000 was 4.41 percent for counties in our sample, the estimate implies that increased inequality was associated with a 5.34 percent increase in the number of divorces during this period.
Gets even better. Remember all of those people buying houses 3 hours away because that's all they could afford in the early part of the decade. It appears income inequality also affects commute times.
Increased inequality is on average associated with an increase of 0.0073 in the proportion of adults with commutes longer than one hour.
Did you know an increase in total hours worked usually implies higher income inequality? Think workin' 3 jobs to make ends meet and you get the idea.
Also, the most expensive homes are also an indicator of nearby income inequality.
Yes, that's us, we're in a stratified society. Think Victorian Era and the Robber Barons. To make matters worse, there is a correlation between income inequality and increased spending among the lower classes.
From statistical analysis of U.S. Census data for the 50 states and 100 most populous counties, we find evidence that rapid income growth concentrated among top earners in recent decades has stimulated a cascade of additional expenditure by those with lower earnings.
I don't know about the validity of their mathematical models in terms of people's behavior, for one, I'm not sure if they normalized to interest rates for savings data.
Regardless, these results are not absolute, the results are showing just the ratios cause an increase in divorce, personal malaise, bankruptcies and living your life stuck in traffic on the highway.
Pretty damning if you ask me and of course, what bean counter puts sitting in traffic, bankruptcies or divorce on their macro economics GDP/GNP/productivity spreadsheet?
Interesting how the good ole days start with the FDR administration. Notice how the bad new days start with the Reagan administration. Just sayin'.