In a recent piece for Tax Analysts, tax writer David Cay Johnston revealed some depressing statistics about the income gap between the rich and the poor in the United States.
That the incomes for the bottom 90% have fallen is not a surprise, but according to Johnston, the adjusted gross income (AGI) for the poorest families rose just an average of $59 in four decades. Meanwhile, the AGI of the top earners in the country increased an average of $116,071.
The notion that the rich are getting wealthier while the poor stay poor is expected, but the statistics do give more depth to the sad reality of the wealth gap in America. In addition to income inequality impacting Americans economically, there’s also a sociological impact as well. Academics call it “trickle-down consumption.”
In a newly released paper, two economists from the University of Chicago argue that as the affluent class get richer, the middle class are struggling to live beyond their means in order to appear wealthy. Brad Plumer writes in the Washington Post,
Those at the top are spending more on fancy goods and bidding up the price of homes. In response, the slightly-less-rich have been spending more to keep pace. That pressure, in turn, eventually ripples down to the middle class — where incomes have stagnated of late — in what [Cornell economist Robert H. Frank] calls “expenditure cascades.”
What happens then, is that the middle class’ incomes are stabilizing, more people are facing bankruptcy, and fewer are retiring with an ample amount of savings and benefits.
But how does trickle-down consumption actually work? One way is through housing. In cities like New York, the wealthiest are competing for the most valuable apartments and bidding up prices — which has broader ripple effects. What’s more, as those at the top buy bigger and bigger houses, those below them have moved to buy up bigger houses too.
In areas where incomes of the top 10 percent are growing, [the economists] found, the supply of businesses and services that cater to the well-off also increase. Swankier bars replace cheaper bars. Expensive restaurants replace cheap restaurants. Whole Foods nudges out the local grocery store. And poorer residents end up spending more at these places.
Income inequality hurts the lower class and the middle class, even if in different ways. The poor can’t ascend to a higher status, and the middle class are spending more because they have to adapt to institutions and lifestyles that cater to the rich. The only winners are the top earners of the country who already control a vast majority of the nation’s wealth.