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Lifestyles of the struggling middle class

Cover: Falling Behind: How Rising Inequality Harms the Middle Class

Falling Behind: How Rising Inequality Harms the Middle Class (The Aaron Wildavsky Forum for Public Policy)
by Robert H. Frank, Henrietta Johnson Louis Professor of Management and professor of economics
University of California Press (2007), 168 pages

Would you want to live in a bad neighborhood?

Probably not. Most people would rather live in a nicer neighborhood, even if it means taking on a hefty mortgage and bigger bills than they can afford.
Most Americans these days face this choice, as the rich get richer, the poor get poorer, and the middle classes get squeezed dry. That's one of the premises of Falling Behind, the newest book from Professor Robert Frank.

Frank's actual question is: Would you rather live in a 4,000-square-foot house while others live in a 6,000-square-foot house, or in a 3,000-square-foot house while others' are 2,000 square feet? Most people choose the second – not because they are shallow, materialistic people who want to rub their neighbors' noses in the dirt, but because having a smaller house than others would mean that they lived in a below-average neighborhood with substandard schools.

In matters like housing, consumers' choices are guided heavily by comparison with others', which Frank calls "context dependent." Historically, most economists have ignored context in explaining consumer behavior, says Frank. "But if you look at the evidence, you can't really question that context is an important factor in decisions."

Trickles and cascades
In the United States, growing inequality has separated the classes much more sharply since the 1980s, says Frank. Between 1979 and 2000, for instance, after-tax income for the middle quintile of Americans rose only 15 percent, while it shot up 201 percent for the top 1 percent of Americans. Assets are also concentrating at the apex: In 1983, the top 1 percent held 131 times as much wealth as the
Author, Professor Robert H. Frank
Author, Professor Robert H. Frank
middle 20 percent; by 2004, that figure had increased to 190 times as much – an average of $14.8 million compared with $81,900.

There's nothing wrong with people earning more, says Frank. The problem is that as the richest spend more, the next echelon notices the bigger houses, cars, and diamonds, and ratchets up its own spending. These "expenditure cascades" trickle down to the middle and lower classes. The result is consumption "arms races" in which most are spending more than they can afford just to keep up, and no one is better off than they were to begin with.

And, while the non-rich may be earning as much as or slightly more than in the past, their income doesn't cover the expenditures they have to make to keep their heads above water. To make up the shortfall, they are working longer hours, commuting farther (to the more-affordable suburbs), sleeping less, and racking up debt.

At the same time, tax cuts favoring the wealthy mean less funds in government coffers, deepening the national debt and necessitating cutbacks in public services, such as safeguarding nuclear materials stored in the former Soviet Union and providing nutritional assistance to poor mothers. So, Frank argues, spending beyond our means hurts everyone.

And greater inequality in a society leads to a raft of negative consequences, including worse health and higher homicide rates, says Frank. That's not too hard to imagine. Where the rich-poor gap is smaller, such as in Copenhagen or Tokyo, the "bad" side of town isn't so bad. But who wants to be in a bad neighborhood in Baltimore? In the greatest democracy in the world, some are just more equal than others.

Can we fix it?
"The good news is that since we spend so much on stuff that doesn't deliver much real impact for people, there's a huge amount of resources that can be freed up and spent on useful things without having to really give up anything of value," says Frank. "If everyone postpones the 10,000-square-foot addition on the mansion, nobody loses."

Towards that end, Frank suggests replacing the income tax with a progressive-consumption tax, whereby spending (calculated as income minus savings and taxes paid) would be taxed. Higher spending would be taxed at higher rates. In addition to encouraging citizens to save, the tax would bolster government funds. "We need to raise a lot of extra revenue if we're going to have universal healthcare and pay down our deficits," he adds.

Frank, who addressed the Democratic Senators' Issues Retreat and testified to the House Financial Services Committee about the tax this past spring, points out that a progressive-consumption tax is hardly a new idea. Similar proposals were made by conservative economist Milton Friedman in 1943, and by Senators Sam Nunn (D-Ga.) and Pete Domenici (R-N.M.) in 1995 as the Unlimited Savings Allowance Tax.

And, on NPR's "Diane Rehm Show" this past July, Frank was pleasantly surprised when fellow guest Alan Viard, resident scholar with conservative think tank American Enterprise Institute, beat Frank to the punch in proposing a progressive-consumption tax. "I figure, if the conservatives are willing to propose it, it's got a chance," he says.

Google and doppelgängers
Frank remains busy with media interviews and book tours for the two books he published this year: Falling Behind and The Economic Naturalist, now in its sixth printing. A lecture that Frank gave on The Economic Naturalist at Google headquarters was posted on YouTube. "In the few weeks it's been up, it's been watched by more than 4,000 people, and it shot right up to the top in ratings," he says. "It's nice that it's catching on, on its own, through these back channels."

Casual browsers of amazon.com might have thought that Frank published a third book in 2007: Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich. The Robert Frank who wrote that book is a Wall Street Journal reporter – and no relation.

Frank's Web site is at www.robert-h-frank.com/.

– Irene Kim

Cover: How to Do Systems Analysis

How to Do Systems Analysis
by William F. Gibson, MBA '75, John E. Gibson, and William T. Scherer
John Wiley & Sons, Inc. (2007)

This book is an unusual collaboration among a Johnson School alumnus, his father, and a colleague. During his university years, Will Gibson moonlighted as editor for his father, John Gibson, then dean of the University of Virginia's engineering school. John Gibson, who wrote about 25 textbooks over his career, was working on How to Do Systems Analysis when he passed away in 1991.

Over the subsequent 15 years, faculty at several prestigious universities used the manuscript, including the University of Virginia's Professor Bill Scherer, whom John Gibson had known for many years – first as a student, later as a fellow professor. In 2005, John Wiley & Sons asked Will Gibson and Bill Scherer to update the text with the aim of publishing it.

Ironically, most books on the subject do not teach the holistic, systemic thinking needed for successful systems analysis, according to Will Gibson, who is also founder and CEO of the consulting firm, IVY Creek Associates. He explains, "The analysis must progress through multiple phases whereby the narrowly defined problem articulated by the client is examined within a wider context, and the range of potential solutions is winnowed toward a narrower set of potential answers."

The book is designed to give recent business and engineering graduates a framework within which to perform analytical work, says Will Gibson: "We wanted to provide a useful, more practically oriented text, with examples drawn from our real-life experiences."

Cover: True Cost of Happiness: The Real Story Behind Managing Your Money

True Cost of Happiness: The Real Story Behind Managing Your Money
by Paula Boyer Kennedy '78, MBA '80, and Stacey Tisdale
John Wiley & Sons, Inc. (2007)

The provocative title of this book evokes philosophy, psychology, drama, individual well-being, and personal finance. While the book addresses each of these to some extent, you'll find it shelved under personal finance.

Successfully managing our finances, say the coauthors, requires aligning our financial behavior with our beliefs and ideals. Even as children, we learn lessons about money that carry over into adulthood. If our financial behavior is out of sync with these deep-rooted values, we suffer anxiety and discontent over money.

"The True Cost of Happiness is about self-examination," according to coauthor and financial planner Paula Kennedy, a vice president at Cammack LaRhette Consulting. "You need to figure out what's important to you, get rid of what's not, and make financial decisions accordingly."

Her collaboration with veteran business reporter Stacey Tisdale grew naturally out of a longtime business relationship. "Stacey interviewed me many times over the years, and we found that our views on financial planning were very similar," says Kennedy.

The book contains numerous case studies. "These come from situations that Stacey saw with her interviewees and I saw with my clients," says Kennedy. "If you've done enough financial journalism or financial planning, you see common themes emerge and repeat themselves over and over."

A percentage of the book's profits go to the Christopher and Dana Reeve Foundation. "Chris was a long-time friend of Stacey's and, of course, a Cornellian," notes Kennedy. Christopher Reeve '74 (1952-2004), widely known and loved for his role as Superman, was paralyzed following an accident in 1995 and subsequently became a tireless activist to increase funding and attention to spinal repair research.

Cover: The Evolutionary Bases of Consumption

The Evolutionary Bases of Consumption
(Lawrence Erlbaum: Marketing and Consumer Psychology Series, 2007)
by Gad Saad MS '93, PhD '94

Consumers' behaviors spring directly from our evolved preferences, says Gad Saad, an evolutionary behavioral scientist and associate professor of marketing at Concordia University's John Molson School of Business in Montreal. Thus, McDonald's global preeminence is due not only to its extensive advertising campaigns, but also to our evolved taste for sweet and fat-laden foods (high-caloric tastes that helped early humans survive when foraging in the wild).

The Evolutionary Bases of Consumption builds on such works as Richard Dawkins' The Selfish Gene, and is the first book to link consumer behavior directly to evolutionary psychology, says Saad, who defines "consumption" broadly, including the consumption of cultural products (songs, movies, and religious narratives), mates, and friendships. The book discusses several products and behaviors in terms of evolutionary theory: beautifying products and services, financial and physical risk taking, media content, and dark-side consumption (such as pathological gambling and compulsive buying).

Saad adds that his Darwinian approach can help clarify such marketing questions as whether to choose a local or global marketing strategy. "Evolutionary psychology is capable of identifying human universals rooted in a common biological heritage, cross-cultural differences that are adaptations to local niches, and idiosyncratic cultural phenomena that are outside the purview of evolutionary theory," says Saad. "Hence, international advertisers can utilize evolutionary psychology in navigating through the local-versus-global strategic decision."

– Irene Kim