Sunday, October 17, 2010

Expenditure Cascades and Rising Inequality

No prevalent evidence suggests that rising inequality amongst world populace is bringing well-being of humanity. Still, lack of well thought out long term policy is exacerbating inequality that possibly has direct link to financial distress and meltdown. Cornell University professor Robert H. Frank's article in The New York Times points out a few facts that may need refresher from time to time:
"rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries"

"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 counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress."

"Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates."

"Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work."
Link to the full article: http://www.nytimes.com/2010/10/17/business/17view.html

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