Middle class feels squeeze as rich get richer

Falling Behind: How Rising Inequality Harms the Middle Class
by Robert H. Frank
University of California Press, $19.95

When the rich get richer, it isn't just the poor who get squeezed, according to a new book by income-inequality expert Robert H. Frank.

Skyrocketing pay for the top tier and increasingly conspicuous consumption in the United States have "raised the cost of achieving goals that most middle-class families regard as basic," Frank writes in "Falling Behind."

Frank, who teaches at Cornell University and has written several books on income inequality, points to the US housing market as one example of what he calls an "expenditure cascade."

It begins when the ultrawealthy build bigger homes, prompting the near-rich to upgrade, and so on down the income ladder. As a result, the median size of a house has increased to more than 2,010 square feet in 2001 from 1,600 in 1980 even though median income has barely changed.

That puts pressure on families with children, since school quality is often linked to property values.

"Middle-income families cannot send their children to schools of average quality now without spending significantly more, in real terms, than in 1980," Frank writes.

The expenditure cascade has also engulfed the auto business. Drivers who 20 years ago might have been content with a compact car now base their purchase on the fact they are sharing the road with huge SUVs.

For the nonwealthy, all this takes its toll in the form of longer working hours and commutes, reduced savings, and higher debt. But Frank says everyone suffers because of cutbacks in public services, with rich and poor alike inconvenienced by poorly maintained roads and endangered by inadequate port security.

Even the economy may be affected. Frank says research suggests that countries with high income inequality grow more slowly than those with narrower pay gaps.

Frank, who has authored an economic textbook with former Princeton University professor and current Federal Reserve chairman Ben Bernanke, considers himself a libertarian, advocating tax remedies rather than regulation to reduce the effects of income inequality.

In "Falling Behind," he calls for a progressive consumption tax that would encourage everyone to save. Tax would be paid on the difference between income generated and savings contributions .

While he says many people see such a tax as a political pipe dream, he noted that a 1995 bill that would have enacted it had bipartisan sponsorship. And conservative economist Milton Friedman endorsed the concept in 1943 to pay for the war effort .

Frank brought up many of the ideas in "Falling Behind" when he testified in May before the US House of Representatives' Financial Services Committee.

While he said there was nothing wrong with top performers getting paid the going rate, he criticized giving tax breaks to the wealthy while reducing benefits for the poor.

"There is . . . something morally questionable about a society that allows people's fate to hinge solely on market outcomes," he said. "That's never been the prescription for a sound society."