Inequality.org

A project of the
Institute for Policy Studies

Blogging Our Grand Divide

Inequality and the Cash Register

Flacks for grand fortune would like us to believe the rich are performing a public service every time they go shopping. Our wallets tell a different story.

The world’s most inventive people may well be the apologists for our staggeringly unequal economic order. These clever folks have to be inventive. How else could they convince us to welcome, not fear, the concentration of our world’s income and wealth?

The rationalizations these creative apologists manufacture can even appear, at least at first glance, to make a lot of sense. Take the case that rich people-friendly flacks make for the “benefits” that come our way, as average people, when the wealthy go shopping.

Everyday prices are rising significantly faster for America’s poor, a new study documents, than for America’s affluent.

Everyday prices are rising significantly faster for America’s poor, a new Harvard study documents, than for America’s affluent.

Bold new products, the argument goes, typically cost a sweet penny. Only wealthy consumers can afford these expensive new products. By stepping up and paying that high price, the wealthy give fresh and exciting products a foothold in the marketplace. Eventually, this “product cycle” theory holds, the prices of these wonderful new products will start falling, and everybody gets to enjoy them.

Economists who examine actual consumption patterns — like Cornell’s Robert Frank — have a different story to tell.

The more wealth concentrates, Frank notes in his 1999 classic Luxury Fever, the more retailers tend to lavish their attention — and their innovating — on the luxury market. Year by year, products come to embody ever “more and more costly new features.”

Over time, one year’s high-end models become the next year’s base models, as “simpler versions of products that once served perfectly well often fall by the wayside.”

Frank uses barbecue grills as his classic example. We set out to buy a simple, sturdy grill to replace a now rusted grill we bought a dozen years ago. That simple, sturdy model no longer exists. We find ourselves paying for racks and ash collectors we don’t want and probably will never use.

We grumble, but we buy that feature-laden grill anyway. But the extra features, the extra costs, eventually add up. At some point, hard-pressed average households find themselves having to start cutting back on the basics that used to define America’s middle class good life.

The more wealth concentrates, the more retailers lavish their attention on the luxury market.

Columbia University economist Moshe Adler takes us still deeper into how inequality distorts the marketplace in his insightful 2010 book, Economics for the Rest of Us. Growing concentrations of income and wealth, Adler explains with a variety of entertaining examples, make our lives far more “dismal” than they would be if we distributed resources and power more equitably.

Consider rock concerts, for instance. Back in 1980, in a considerably more equal United States than we have now, 73 percent of rock concerts in large venues charged the same ticket price for all seats. To get a good seat, a dedicated fan only needed to show up early.

Fast forward a generation. By 2003, only 26 percent of concerts charged the same price for all seats. And the best seats had increased the most in price.

Nothing strange, notes Adler, in any of this. In a relatively equal society, with little difference in income between the rich and everyone else, monopolistic vendors have “little to gain from selling only to the rich.” But that all changes when the rich go mega. Vendors can charge more for their wares — and not worry if their less affluent customers can’t afford the freight.

The end result of this rising inequality: Average-income rock fans, observes Adler, “must now content themselves with fewer live concerts because rock stars can now make more money charging higher prices and performing less.”

In the grand scheme of things, of course, average-income rock fans can survive having to attend fewer rock concerts. But what about people whose incomes don’t run high enough to even dream about attending a big-time rock concert? How does inequality affect their everyday consumption?

Inequality raises the cost of our everyday consumption.

Harvard researcher Xavier Jaravel can tell us. His newly published and painstakingly detailed analysis of prices for everyday retail purchases — between 2004 and 2013 — has just revealed that prices are rising significantly faster for America’s poor than for America’s affluent.

Why? Jaravel points to inequality. Rich households have more money to spend, and firms have “strategically introduced more new products catering to these consumers.” The resulting competition between firms — for the affluent consumer dollar — drives down the everyday retail prices richer consumers face.

No such luck for poorer consumers, those Americans in households making under $30,000 a year. Few manufacturers are coming up with new products to grab their attention. In the grocery and drug stores the poor frequent, they find the same old same old year after year.

This absence of new-product competition, as one commentator on Jaravel’s research observes, allows “grocers to increase the prices on the old products more from year to year.”

Jaravel’s new research has huge implications. Inflation, his work shows, appears to be a much greater problem for low-income households than high. Yet federal stats still treat cost-of-living data as one big blob, with no attempt to differentiate actual price movements in increasingly unequal poor and rich communities.

We need to start, Washington Post analyst Max Ehrenfreund notes, accounting for this inequality.

Better yet, let’s make our nation more equal.

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