Consumption and Spending

"Thirty years ago, a middle-class family with kids might have been content with a four-door sedan of modest size. Imagine the grown-up child of that family, with children of her own, facing the same decision. She might be tempted to say, "A 2,500 pund sedan was good enough for my mom, so it's good enough for me." But on today's roads, surrounded by 6,000 pound Lincoln Navigators and 7,500 pund Ford Excursions, a... Honda Civic doesn't simply look a lot smaller and frailer than it did in 1975. It's objectively more dangerous. The odds of being killed in a collision rise roughly fivefold if you're driving such a vehicle and the other party sits at the helm of a ford excusion. In sheer self-defense, you migh want a bulkier -and costlier-car than mom's." Robert H. Frank, "How the Middle Class Is Injured By Gains At The Top", in Inequality Matters edited by James Lardner and David A. Smith, pgs 138-149.

A second example is the housing market: median house prices depend not only on median incomes, but also income inequality in a neighborhood; that is, in more inegalitarian neighborhoods in America, the house values are far lower than in egalitarian neighborhoods, even when you adjust for median income. Worse still, better than average schooling means better than average education for one's children, and to get better than average schooling one has to pay higher than average property prices. The person who stays at the office for an extra 10 hours/week in order to buy a house in a better school distrit does not intentionally make it more difficult for others to achieve the same goal, but it is an inescapable consequence of her action.

According to Frank's work, inequality is creating an increasing number of situations in which people are forced to choose between unpleasant alternatives. Furthermore, he shows us that through a serious of decisions that make good sense for us individually, we are leading to a situation which makes little sense; another case of the paradox of rationality: individual actions that are rational in isolation leads to outcomes which are collectively irrational. In order to escape these problems, we must cooperate and work collectively.

As he puts it later on in the above quoted essay (pg. 148) "Buying a smaller than average vehicle means a greater risk of dying in an accident. Spending less on an interview suit means a greater risk of not landing the best job. Spending less than others on a house means a greater risk of sending your children to inferior schools. Yet when all spend more on heavier cars, more finely tailored suits, and larger houses, the results tend to be mutually offsetting, just as when all nations spend more on missles and bombs. Spending less frees up money for other pressing uses, but only if everyone does it."