I’ve just finished reading two books about inequality. One is a beautifully written (and short) tome byÂ Robert Frank, entitledÂ Falling Behind: How Rising Inequality Harms the Middle Class.Â Over the years, many people have argued that one of the costs of inequality is envy (ie. your income enters negatively into my utility function). But Frank argues that there are other impacts as well. For example, heÂ contends that increased expenditures by top earners can affect the middle-class because it leads to an â€˜expenditure cascadeâ€™. Frank gives the example of housing, in which higher incomes cause those at the top of the distribution to build larger mansions, which in turn leads the next tier to build larger houses, which in turn means that the middle-class must spend more on housing or face the prospect of sending their children to below-average schools. He argues that the same cascade process operates in the cases of motor vehicles, professional wardrobes for job applicants, and gifts given to co-workers. In each instance, expenditures on positional goods by the most affluent individuals in society changes what is considered â€˜adequateâ€™ by those at the middle of the distribution. Â
I had only four minor quibbles about Frank’s conclusions. First,Â I think he overplays the negative impact of inequality on health. As Angus Deaton points out in a sweeping literature review, the theory in this area is stronger than the empirics (my own modest contribution to the debate – coauthored with Sandy Jencks – reaches the same conclusion). Second, he tends to repeat points for emphasis. Third, he makes the odd claim that US class sizes have become larger (they’ve become much smaller, as the statistics show). And fourth, he tends to make points he’s already made. But in the broad scheme of things, these aren’t terribly substantial.
The other inequality book I’ve been reading lately is Frank Stilwell and Kirrily Jordan’s Who Gets What: Analysing Economic Inequality in Australia. Unlike Robert Frank’s book, which is much more theoretical, Stilwell and Jordan’s tome has lots of useful facts and figures on inequality. A chapter titled “The Poor” draws mainly the standard ABS sources, while the chapter on “The Rich” has more diverse sources, drawing on Stilwell’s work analysing the BRW Rich List, CEO salary data, and my own work with Tony Atkinson using tax data. Neat discussions of regional differences and gender round out the “what’s going on” part of the book. I’m less enamoured by the chapter on happiness (I take the old-fashioned view that growth matters), and don’t agree with all the policy suggestions at the end, but you don’t have to concur with the prescription to find the diagnosis interesting.
I had been thinking that I might write a book on Australian inequality, but between Stilwell and Jordan, and recent data-driven books on inequality by Michael Schneider (La Trobe) and Peter Saunders (UNSW), the field seems to be becoming increasingly crowded.