Greenhouse gas emissions also dropped in 2009. That wasn’t because environmental regulations mandated it. Nor was it because people suddenly became more environmentally conscious. Emissions dropped because consumption declined in the United States and in many other places around the world, thereby reducing production and usage of everything that emitted carbon dioxide. In all likelihood, this improved the health of Americans, as well as that of others around the planet.
Given all these palpable benefits, it is not implausible that Americans will find more contentment as we consume less. But this sanguine prognosis ignores several painful adjustments we will have to make.
4
The Pain of Economic Loss
The first painful adjustment will be to a lower standard of living—or at least far lower than we anticipated. Behavioral research shows that losses are more painful than gains are pleasurable. Most people won’t take a bet that gives them an 85 percent chance of doubling their life savings and a 15 percent chance of losing them. In a similar vein, most of us put a higher premium on the cost of giving up something than we do on receiving an item in the first place. Princeton psychologist Daniel Kahneman demonstrated this by placing people into two randomly selected groups. Those in the first group were shown a particular type of mug and asked how much they’d be willing to pay for it. Those in the second were given the mug and then asked how much money they’d want in order to give it back. It turned out that people in the second group demanded twice as much to part with the mug as those in the first group were willing to pay for it.
Gains and losses aren’t symmetrical, because whatever we possess sets a minimum standard for how we judge our material well-being thereafter. When we lose something of value, we retain the memory of having once had it, and regret the loss. If we lose a convenience or a benefit that we relied on, even worse: We must also forego our dependence on it. Someone who’s enjoyed the benefit of an air conditioner and then has to do without because he can’t afford to fix it after it breaks, for example, is likely to feel much worse off than someone who could never afford air-conditioning in the first place.
Societies whose living standards drop experience higher levels of stress than do societies that never had as much to begin with—and the deeper the drop, the higher the stress. Suicide rates offer some evidence. When even a wealthy economy like the United States dips, the rate of suicides rises; the longer the downturn lasts, the higher the rate becomes. Behavioral economist Christopher Ruhm found that for every 1 percent rise in a state’s unemployment rate, the number of suicides increases 1.3 percent. If people remain jobless for long, the suicide rate rises further. The stock market crash of 1929 caused an increase in suicides, and the suicide rate rose as the Great Depression wore on. In 1929, there were 15.3 suicides for every hundred thousand people; by 1930, 17 per hundred thousand; by 1932, 18.6.
An extreme example of the social and psychological stresses accompanying prolonged economic loss occurred in Germany after World War I, when most Germans became far poorer than they were before. The Treaty of Versailles required Germany to pay the Allies substantial sums in reparations for the cost of the war, making it difficult for Germany to rebuild and subjecting it to continued economic distress, including hyperinflation in the 1920s followed by widespread unemployment. By the time Adolf Hitler made his political debut, many Germans were eager to turn to anyone who seemed to offer a solution to the problems they had long endured, as well as an easy scapegoat.
Perhaps the hardest loss for middle-class Americans will be giving up the expectation that the future has to be materially better. We’re used to moving up in America, surpassing ourselves, trading up. Middle-class Americans have long assumed that hard work will ensure a better future for them and, especially, for their children.
The last time our hopes for a better life were dashed so profoundly was during the Great Depression. Robert and Helen Lynd, the sociologists I mentioned earlier who studied Muncie, Indiana, in 1924 and then wrote Middletown, returned in 1934 to see if anything had changed. Their report, published as Middletown in Transition, noted that the “staggering, traumatic effect” of “the great knife of the depression” was to end the hopes of Muncie’s citizens to own their own homes, send their kids to college, and do better than their parents did. The Depression also made them continuously fearful of sliding farther backward. The disappointment and anxiety resembled, in the Lynds’ words, “the crisis quality of a serious illness, when life’s customary busy immediacies drop away and one lies helplessly confronting oneself, reviewing the past, and asking abrupt questions of the future.” As one housewife remarked, “The march backwards entails many things that leave a bitter taste.”
My grandfather Alexander Reich was a wealthy man before the Great Depression but lost everything in the Crash of 1929. He moved his family out of a brownstone in New York City and into a small apartment. Although he initially believed he’d be able to regain lost ground, as the Depression wore on he gradually lost his faith. He tried other businesses but never succeeded. My memory of him from the 1950s is of a man filled with sadness and regret. For him, the American dream had been shattered.
Yet even so, my grandfather’s despair did not make him angry with the economic system or with the political or business leadership of the country. He was mostly angry with himself. So were countless others who had been caught in the sharp downdraft of the Great Depression. Will it be any different in the coming years? The economic conditions most Americans will experience may cause them disappointment and anxiety, to be sure, but will that turn them into angry reactionaries? That certainly doesn’t have to be the case.
5
Adding Insult to Injury
The second painful adjustment for most people will be to a standard of living that’s even more significantly lower than that attained by America’s rich. Social psychologists have long understood that people typically measure their own well-being by comparison to how others are doing. When the incomes of people at the top soar and they live better as a result, everyone else feels a bit poorer. This psychological truth is likely to become more important. While Americans have suffered economic reversals before, and the middle class has felt deprived relative to those at the top, the years ahead are likely to mark the first time Americans will experience both together.
America’s rich did take a hit in the Crash of 2008. According to Forbes magazine, the nation’s four hundred wealthiest people lost about $300 billion that year. That still left those four hundred enough to live on, though—a total of $1.27 trillion (more than the estimated cost of achieving universal health care for the entire nation for the next decade). The median pay of CEOs at America’s five hundred largest companies dropped 15 percent that year, to $7.3 million. Pay and benefits at Wall Street’s biggest banks dropped nearly 11 percent. It was not all bad news, however. New York’s attorney general found that nearly five thousand of Wall Street’s “top performers” still received multimillion-dollar bonuses that year. And a study by The Wall Street Journal found that the retirement plans of a quarter of the top executives at major companies actually increased in value, even as most of their employees’ 401(k)s declined precipitously. The executives’ employment contracts guaranteed them fixed returns.
Yet by the end of 2009, most of the rich had bounced back, and the gap between them and everyone else was widening again. One major reason: Most of the assets of rich Americans are held in stocks, bonds, and other financial instruments—whose values rose in the wake of the Great Recession as companies cut costs (especially their U.S. payrolls) and expanded their global operations. By contrast, as noted earlier, the major asset of middle-class Americans has been their homes, whose prices took a beating in the downturn and, in most parts of the country, won’t return to their 2007 levels for many years. Beyond this was the inexorable trend of corporations’ cutting the jobs and pay of anyone who could be replaced by foreign workers or by software and automated machinery, while competing for the
“talent” who pushed profits higher.
In early 2010, only a little more than a year after the crash, Wall Street awarded pay packages as if the crash had never occurred. JPMorgan Chase more than doubled its profits from 2008, generating record revenues and paying out $27 billion to its already well-heeled executives, traders, and other “vital” employees. Goldman Sachs posted its largest profit in history and distributed $16.2 billion in bonuses. (Goldman could have paid out bigger bonuses but, concerned about its tarnished public image, held back. According to The New York Times, Goldman’s employees accepted the less-than-anticipated payout but soon expected to be rewarded for going along with what one characterized as “a temporary public relations exercise.”) JPMorgan, Goldman, and the other big banks were so eager to lure and keep top deal makers and traders, they even revived the practice of offering multimillion-dollar guaranteed payments regardless of performance. Even though some of the worst abuses of the boom years had been contained, the Street effectively resisted congressional efforts to tie its collective hands. It was still making large global bets with other people’s money and taking in giant fees regardless of how those bets turned out. Few financial trends are as certain as the outsized rewards the denizens of Wall Street will continue to claim as their rightful winnings.
The compensation packages awarded to corporate CEOs and executives likewise continued to soar. Here again, top executive pay was on the same trajectory it had been on before the Great Recession, as if almost nothing had happened in the intervening time. Executive pay was linked to the profitability and stock market performance of their companies. Both were on the rise, reflecting the increasing ease with which payrolls could be cut and the work automated or parceled out overseas, and also the telling fact that many foreign markets were emerging from recession more rapidly than the United States. The race for executive “talent” had also become more global. Big companies continued to raise executive pay in order to attract the best from around the world, who in turn continued to scour the globe for great deals and new markets. This trend will surely endure. Astonishingly, the twenty-five leading hedge-fund managers did far better than even investment bankers and top corporate executives, raking in an average of $1 billion each, as I’ve noted.
Yet the majority of Americans will continue to battle obsolescence—competing ever more furiously with workers around the world as well as with new generations of software. Unless action is taken to reverse these trends, the share of national income going to the top will continue to grow and the share going to everyone else will continue to decline.
Many of the things people want are valuable in relation to what other people have. Indeed, much of the idea of “value” is related to the social role we’re playing. As economist Richard Layard has written, “In a poor society a man proves to his wife that he loves her by giving her a rose, but in a rich society he must give her a dozen roses.” You can see this most graphically in computer-based simulated worlds, where many people seem to get almost as much satisfaction from paying real money for “virtual” goods—tiny icons representing designer clothes or fancy cars—as they do from buying the genuine articles in the real world, at a much higher cost. In these simulated worlds, the virtual goods serve a similar social function as the real ones, establishing one’s relative wealth—and worth.
Relativity accounts for what’s seen as a “luxury” and what’s a “necessity.” As far back as the eighteenth century, Adam Smith defined necessities as “not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.” In most of eighteenth-century Europe, a linen shirt was not strictly speaking a necessity, but Smith noted that a common laborer would be ashamed to appear in public without one, “the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct.” Leather shoes were a “necessity” in England for both men and women, he wrote, but only for men in Scotland, and for neither in France.
In 1899, the economist-sociologist Thorstein Veblen noted that people take their cues from those above them and seek to match their living standards with the “conspicuous consumption” of the very rich. More than a half century later, economist James Duesenberry recognized that the demand for many products has more to do with the social standing they give their purchasers than with any intrinsic value. He called it the “demonstration effect,” which signals to others that the possessor of an item is wealthy enough to afford it, and thereby establishes his or her position in a social pecking order.
“Wealth,” said H. L. Mencken, the American satirist of the early twentieth century, “is any income at least $100 more a year than the income of one’s wife’s sister’s husband.” Times have changed and many women are now breadwinners, but a family’s relative position (and not just compared to one’s relatives) still matters. Yet the desire to do better when the incomes of people at the top are rising is not just due to envy or any other character flaw on most people’s parts. It’s connected to an implicit upward shift in the social norm of what constitutes a good life. Even people whose incomes haven’t actually dropped feel deprived relative to how those at the top now live; people whose incomes have dropped feel even poorer.
The evidence is all around us. People who live in states where incomes are more equal register higher levels of satisfaction than do people where the gap is wider. The same holds among nations. Scandinavians express more contentment with their lot in life than do inhabitants of southern Europe, where inequality is higher. Researchers have found that inequality correlates with health, for much the same reason. Richard Wilkinson of the University of Nottingham, in England, has discovered that once economic growth lifts a country out of extreme poverty, its citizens are likely to live longer and healthier lives—as long as there are not large differences in their incomes. The inhabitants of poorer countries with more equal incomes are sometimes healthier, on average, than are the citizens of richer countries whose incomes are more unequal.
Even people whose incomes rise feel less satisfied than beforehand when they are exposed to others whose incomes are much higher. After the Berlin Wall tumbled, living standards for the former inhabitants of East Germany soared, but their level of contentment declined. The reason: They began comparing themselves to West Germans rather than to others in the Soviet bloc.
Few middle-class people aspire to live in a forty-four-thousand-square-foot mansion like the one Bill Gates built for himself near Seattle. But by building that mansion, Gates set a new norm for other exceedingly wealthy people, some of whom subsequently built mansions just as big. These giant mansions also ratcheted up the aspirations of people below them, who were rich rather than exceedingly wealthy, and who began building larger homes than they had ever lived in before. And so on down the income ladder, until the new norm reached the middle class.
As economist Robert H. Frank has pointed out, something like this chain of comparisons helps explain why the typical new home built in the United States in 2007 (2,500 square feet) was about 50 percent bigger than its counterpart built in 1977 (1,780 square feet), even though median incomes barely rose. A similar comparative process operated on other purchases. As the exceedingly rich threw million-dollar birthday parties and even more extravagant weddings, a chain of comparison also pushed up the price of middle-class celebrations. The typical American wedding cost $11,213 in 1980; by 2007 it cost $28,082 (both figures adjusted for inflation).
Middle-class paychecks couldn’t keep up with the costs of these homes, weddings, and many other amenities, which is why so many people went so deeply into debt. But by 2008 that debt option disappeared—which may help explain why, for example, the typical new home in 2009 slipped back, to 2,392 square feet. Yet the chain of comparison has not disappeared. To the contrary, the middle class has become more acutely aware of how far it has fallen rela
tive to the top.
The very rich may have become somewhat more guarded about displaying their opulence. During the Great Recession, conspicuous consumption became unseemly. “Shopping is a little vulgar right now,” said an editor at Allure magazine. Yet in a world of instant and pervasive communication, the rich cannot easily hide their wealth. Shortly after Lehman Brothers went bust, The Daily Beast reported that Kathleen Fuld, wife of former Lehman Brothers CEO Richard Fuld, selected a plain white bag to conceal her purchase of three $2,225 cashmere scarves at an Hermès boutique in New York. One Web site, created in 2009, allows the curious to type in the name of any CEO or financial tycoon and zoom in on a bird’s-eye view of their personal estates.
As income and wealth have continued to accumulate at the top, the rich have been able to buy more highly desirable things whose supply is necessarily limited. Prestigious universities have only a limited number of places, which is one way they maintain their prestige. Because those schools are often gateways to the best jobs, competition for admission is intense. As the rich have grown richer while the middle class has lost ground, children from wealthy families have been at an increasing advantage in this race: They attend high-quality private high schools (or top-ranked public high schools accessible only to families wealthy enough to live in the area they serve, which amounts to the same thing), while the quality of public schools available to most families has declined. Children of the affluent have access to private tutors to help them with difficult subjects, to test preparation services that guide them through SATs and other entrance exams, and to coaches to help assemble their applications—incurring expenses that struggling middle-class families cannot afford. Some children of the wealthy also gain favorable treatment by admissions officials because their parents are major donors to the college (or likely to become so if their child is admitted).
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