Did Income Inequality Force Poor People Into Debt?

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Wealth might not trickle down. But lifestyles do.

When rich people spend more money on certain things, middle-class people spend more money on those certain things, which encourages lower-income people to keep up. So while you're trying to keep up with the Joneses, the Joneses are trying to keep up with the Rockefellers.

In the 2000s, high spending trickled down, but rising incomes did not. Instead, they stagnated for the middle class. As a result: debt. Lots and lots of middle-class debt.

Economist Robert Frank explains the phenomenon, and why we should care:

People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of "expenditure cascades," whose first step is increased spending by top earners.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

The phenomenon was real. Savings rates in the late 00s plummeted for America's poorest 40 percent, and even turned negative. But did wealth gap force them to do this? Was it their old life that became unaffordable, or was it their new appetites?

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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