Raghu Rajan points to an interesting study of the relationship between income inequality and the very low savings rate in the United States in the years before the Great Recession:
Bertrand and Morse find that in the years before the crisis, in areas (usually states) where consumption was high among households in the top fifth of the income distribution, household consumption was high at lower income levels as well. After ruling out a number of possible explanations, they concluded that poorer households imitated the consumption patterns of richer households in their area.
Consistent with the idea that households at lower income levels were “keeping up with the Vanderbilts,†the non-rich (but not the really poor) living near high-spending wealthy consumers tended to spend much more on items that richer households usually consumed, such as jewelry, beauty and fitness, and domestic services. Indeed, many borrowed to finance their spending, with the result that the proportion of poorer households in financial distress or filing for bankruptcy was significantly higher in areas where the rich earned (and spent) more. Were it not for such imitative consumption, non-rich households would have saved, on average, more than $800 annually in recent years.
This is one of the first detailed studies of the adverse effects of income inequality that I have seen. It goes beyond the headline-grabbing “1%†debate to show that even the everyday inequality that most Americans face – between the incomes of, say, typical readers of this commentary and the rest – has deep pernicious effects.
Although it’s an amusing characterization I don’t think that “keeping up with the Vanderbilts” is behaviorally accurate. Income earners in the lowest quintile of income earners aren’t trying to outbid those in the top .1% of income earners for multi-million dollar Long Island estates, Lamborghinis, vacation villas in St. Tropez, and ermine coats but they are in competition with those in the next income quintile up for housing, clothing, food—practically everything. While “the 1%” is a nifty slogan I also think it’s very revealing. In my view it reflects the jealousy of those in the top 10% of income earners for those in the niche just above them rather than the frustrations of the poor.
I don’t believe that most those in the “Occupy&148; movement aspire to the lifestyles of the ultra-rich. I think that far more of them are people who have worked hard and borrowed prodigiously to get college educations only to see an ordinary middle income lifestyle slipping beyond their grasp.
In my view the problem over the last decade or so hasn’t been that the top .1% of income earners have made too much money but that the top 10% of income earners have consumed far too much when they should have been saving a lot more. That includes many lawyers, most physicians, lots of mid-level managers of large companies, and lots of owners and top managers of smaller companies.
I guess that how you view the solution depends on what you think the problem is. If you think that the incomes of the rich are too high, taxing it away is an appealing but IMO superficial solution. Rather than reducing income inequality I think it is far more likely to result in greater and ultimately successful efforts to avoid taxation by hiring more and better lobbyists, lawyers, and accountants or shifting income around.
Rather than trying to engage in futile exercises in equalizing income it might be more prudent to address the problems caused by income inequality and, if this study is to be believed, inadequate saving is one of them. One prospective solution to that problem woud be rather than increasing the marginal tax rates on the highest income earners imposing a progressive consumption tax and reducing taxes on capital gains. Far fewer of those in the top 10% of income earners would be driving luxury cars and many more would have sizeable investment portfolios. And there wouldn’t be nearly as much pressure on those in the lower income quintiles to keep up with them.
Status via conspicuous consumption is not a universal value. Among the Japanese, for example, until relatively recently conspicuous consumption was seen as something rather shameful. That may be part of the reason their savings rate has been historically high.
