November/December 2000 | Contents

YES, THE RICH GET RICHER, BUT THERE'S MORE TO THE STORY

BY ROBERT H. FRANK

At the turn of the twentieth century, when the state of Iowa alone had more than 1,200 opera houses, thousands of tenors earned adequate, if modest, livings performing before live audiences. Now that most music we listen to is pre-recorded, however, the world's best tenor can be everywhere at once. And since it costs no more to stamp out compact discs from Luciano Pavarotti's master recording than from a less renowned tenor's, most of us now listen to Pavarotti. Millions of us are each willing to pay a little extra to hear him rather than other singers who are only marginally less able or well known. And this helps explain why Pavarotti earns millions of dollars a year, even as other tenors nearly as talented struggle to get by.

Although the details differ case by case, the underlying story is much the same in many other industries. For example, the tax-advice industry, once the almost exclusive domain of the small-scale local practitioner, is increasingly served by the developers of TurboTax and a handful of other software packages. Once the market decides which package it likes best, the authors of that package can easily churn out as many copies as buyers want. Other packages become essentially redundant.

Similar technologies have transformed the economic structure of the media. For major world and national news stories, more and more people rely on a shrinking cadre of well-paid reporters from elite institutions. Networks and many dailies have cut back on foreign bureaus and Washington coverage, leaving such coverage to the top outlets. Papers like The New York Times and The Wall Street Journal can now be printed daily in every region of the country.

The same technologies that have allowed tenors, tax advisers, and news organizations to extend their reach have had important implications for the current boom. In purely economic terms the most salient feature of this boom is neither its magnitude nor its duration, although both are remarkable. Rather, it is the extent to which the resulting gains have accrued to families atop the economic pyramid. For example, families in the top 5 percent of the income distribution saw their earnings grow by 65 percent between 1973 and 1999, a period during which the incomes of families in the middle fifth grew by only 11 percent. Income gains at the very top have been even more pronounced. C.e.o.s of large American companies, for instance, now earn more than 450 times as much as the average worker, up from forty-two times as much in 1980. Recent changes in stock valuations, meanwhile, have produced a similar concentration of wealth at the top. Booms do not always have this effect. During the one that ran from 1945 until the early 1970s, incomes grew at almost 2.5 percent a year for high-, middle-, and low-income families alike.

The increased concentrations of income and wealth are the driving force behind the current luxury spending boom. The nation's wealthiest families have been doing what people up and down the income ladder have always done when their bank accounts swell. They've been spending more. And since they already owned the things most people think of as necessities, they've been buying luxuries. But whereas we saw little media coverage of luxury spending during the three decades from 1945 to 1975, stories like the ones Gary Poole, in his article, calls "wealth porn" are now pervasive. Why this change?

Part of the explanation is a simple contrast effect. People in the 99th percentile always used to have somewhat bigger houses and better cars than the rest of us. But that fact alone is not particularly interesting, and hence not a ripe topic for media commentary. Today, because the income and wealth gaps are so much larger than in the past, the wealthy are building 20,000 square foot houses with six-car garages, and filling them not with $50,000 BMWs but $200,000 Ferraris and Lambourghinis. These purchases are newsworthy for the same reason a group of eight-foot-tall fourth-graders would be newsworthy -- because they stand out so vividly in the frame of reference defined by everyday experience. Things that stand out in this way have always commanded attention.

Is it a problem that Time magazine tells us that a "massage now seems incomplete unless one is rubbed with freshly grated ginger or kneaded with heated stones (some of which are even placed between your toes) culled from Southwestern rivers?" Social critics worry that such stories foster the nation's preoccupation with "getting and spending." This may indeed be a problem, yet one can hardly expect to solve it by castigating the media. The phenomenon is striking, and people are naturally interested in it. Media that didn't cover it would soon lose their audiences to rivals that did.

(What is more, it is hardly clear that coverage of wealth porn is socially detrimental, even from the perspective of social critics who find it so distasteful. Most of these critics would prefer to see less spent on yachts and mansions and more spent on basic public services. Can they doubt that media coverage of over-the-top luxury spending has helped shape voter attitudes on tax cuts for wealthy families?)

Another salient aspect of the media's coverage of the current boom has been the extent to which even mainstream media have begun showering us with arcane financial data. A decade ago, reporters might have told us that interest rates had risen a quarter of a point, or that the unemployment rate had dropped a tenth of a point, or that the monthly trade deficit had fallen by $2 billion. But now, even on general news segments, we are bombarded with details once considered too technical even for seasoned financial industry professionals, from data on manufacturing inventories to capacity utilization to building permits and the like.

What's troubling is that all the churning required to produce these reports and all the millions of hours spent watching them are almost surely a waste of time and effort. Economists disagree about many things, but one belief we share is that investors can almost never make financial headway by trading on the basis of numbers they hear about through the media. By the time such news reaches us, others will have long since acted upon it.

But here, too, consider the potential cost to media outlets that failed to cover these numbers. Throughout much of the current boom, stock prices have risen more rapidly than during almost any other period in market history. Viewers were hungry for the latest numbers, and any outlet that failed to provide them would have been sure to lose market share. If there is a silver lining to the recent downturn in tech share prices, it is that this flood of information may finally recede. As long as the market was rising, people couldn't resist watching the stream of share prices scrolling beneath MSNBC's talking heads. But now that the news has become mostly unfavorable, many viewers are bound to find the same information far less appetizing.

One of the genuinely troubling aspects of the current luxury boom -- and one of its largely untold stories -- is that additional spending by the wealthy has led many middle- and low-income families to spend beyond their means. Although the incomes of these families have stagnated in real terms during recent decades, for example, the average new home built in the U.S. is now more than 50 percent larger than in 1970. To meet their larger mortgage payments, middle-income families have been saving less, borrowing more, working longer hours, commuting longer distances, going without health insurance, and filing for bankruptcy at record rates.

The media have almost totally ignored the causal connections between the wealth boom and rising distress among the middle class. (Some notable exceptions: Louis Uchitelle and Dirk Johnson of The New York Times have described this link in several well-crafted pieces; James Lardner wrote an incisive cover story about it for U.S. News & World Report; and the San Francisco Chronicle ran an excellent two-part series on this issue.) The pieces that do report on middle-class financial distress often quote spokesmen for the personal responsibility movement who condemn financially strapped middle-class families for their lack of discipline. These critics insist that if middle-income families can't afford to keep up with the consumption standard set by others, they should simply spend less and stop complaining.

But this criticism overlooks the fact that failure to spend on a par with others often entails costs that few families could comfortably tolerate. Living in a house priced well below average, for example, can mean living in a dangerous neighborhood, or having to send one's children to a substandard school. If the roads are filled with 6,000-pound sport utility vehicles, you may put your family at risk by buying a Honda Civic. And it may not be in your interest to show up for a job interview in a suit that costs half as much as the ones your rivals are wearing.

The technologies that have been steering the lion's share of income and wealth gains to those atop the economic pyramid are in their infancy. The gap between top earners and everyone else will continue to grow, as will the resulting pressures on middle-income families. This is not an inherently alluring story for journalists, but its importance will grow as the stakes in the battle for market share continue to mount. If it is not yet, as Merrill Goozner suggests in her article, the single most important economic issue confronting the nation, it soon will be.

Robert H. Frank (rhf3@cornell.edu) is the Goldwin Smith Professor of Economics at Cornell University and the author of Luxury Fever.