Objective Harms from Inequality

stretchlimo.jpgMy last three posts (on doctor rankings, SUV’s, and family-obligation discrimination) all have a common thread. They involve what economist Robert Frank calls “positional arms races”–efforts to attain a ranking or relative position whose value depends on how well others are doing.

Driving around in a small car isn’t so scary if everyone else has a small car–but if you’re in litte sedan and you’re surrounded by Escalades, you’re in trouble if there’s a crash (to put it precisely, at least four times more likely to die than if hit by a small car). Similarly, the workplace can often be a rat race with success judged by hours worked–and not necessarily quality of work, a far more difficult thing to measure. Finally, the doctor rankings are a purely positional good: no matter how good the bottom half gets, as long as the top half is better, it will always be known as the bottom half. Similarly, there are only 20 “Top 20” law schools on any given ranking system; no matter how good the teaching & research gets among schools generally, there is an absolute limit on top spaces.

The mere fact of a positional arms race says nothing about the desirability of a given state of affairs. A well-designed doctor-ranking system might well lead to pay-for-performance rather than pay-for-procedure. Similarly, most law schools rely on a grading “curve” as a spur to excellence–even if it causes some anxiety.

But Robert Frank identifies a number of “arms races” that have hidden costs–both to those participating in them and those left behind.

His leading examples are the “expenditure cascades” caused by the increasingly rising costs of “adequate.” Even though the ultra-rich’s mansions may not excite envy in the middle class, they do provide a new frame of reference for the rich. . . who in turn provide a new frame of reference for the near-rich, and so on. That’s one reason the median size a newly constructed house in the US has gone from 1600 to 2100 square feet from 1980 to 2001–even though the median quintile’s after-tax income has only increased by 15% in about the same time period. (Frank, 44). As Frank explains,

A house of given size is more likely to be viewed as spacious the larger it is relative to other houses in the same local environment. And an effective interview suit is one that compares favorably with those worn by other applicants for the same job. In short, evaluation depends always and everywhere on context.

That analysis might seem close to the subjectivism I criticized in my last post on Frank. But the “bidding war” dynamics Frank describes more radically undermine neoclassical economic models than even he seems to realize.

Consider, for instance, what it means for a society when housing prices in general rise. Perhaps that demonstrates that the society is a great place to live–but what if housing prices are taking up an ever-higher share of middle-class incomes? The suspicion here is that there is a bidding war for desirable land and property–one that’s exacerbated when those at the top have the means to buy a much larger share than others.

Of course, there are ways around the bidding wars; as Frank acknowledges: “If you can’t afford to live in a good school district in a convenient location, then one solution is to move to a more distant one” (Frank, 80). Is it only coincidence that “traffc delays for rush-hour commuters in major U.S. cities roughly tripled between 1983 and 2003”? Such delays are not mere inconveniences–they cause a great deal of stress, ill-health, and heart disease. As Frank noted in an earlier article,

[H]igher levels of commuting distance, time, and speed are significantly positively correlated with increased systolic and diastolic blood pressure. The prolonged experience of commuting stress is also known to suppress immune function and shorten longevity. Even daily spells in traffic as brief as fifteen minutes have been linked to significant elevations of blood glucose and cholesterol, and to declines in blood coagulation time – all factors that are positively associated with cardiovascular disease.

So if you’re one of the people “bid out” of a neighborhood in close proximity to work, you’ve likely experienced what I’ve called a “buying power externality.” Just as a factory could reduce your quality of life by spewing smoke through your window, so has rising inequality reduced your quality of life by forcing you into a longer commute.

This “fractal inequality” happens at all levels of the income scale: even the very wealthy can get bumped by the superrich, and the middle class ends up “collateral damage” in their competition for space and prestige:

The single greatest change brought by the hyper-rich is in the cost of housing. The average Nantucket house price last year jumped 26 percent, to $1.67 million, said H. Flint Ranney, a veteran real estate broker. . . . [T]he high cost of housing is squeezing middle-class people off the island.

Many of those priced “off the island” may well have to engage in longer commutes–using gas-guzzling SUV’s that are raising food prices for much of the developing world. Robert Frank’s great contribution is to show how the competitive consumption at the very top, that often seems so harmless and titillating, sets off chains of events that lead to absolute deprivation at the very bottom. Frank eviscerates the old neoclassical insistence that only absolute deprivation matters, and not relative inequality, by showing the many ways the latter ineluctably leads to the former.

This is Part 3 of a series on Robert Frank, here is

Part 1.

Part 2.

Photo Credit: Flickr/BT.

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