Americans generally have more spending power now than 50 years ago, across almost all income levels. But the perception is that lower income families are losing ground. Of course, some are, but generally, pretty much all of us can buy more and better stuff than we ever could in the past. In 1909, many things we consider absolute necessities didn’t even exist. So why the perception of slipping back? The answer is that income distribution is indeed diverging. The extremely rich are getting much more of the expanding pie than anybody else, and those at the bottom get the least:
Chart from the Afferent Input blog.
A rich class of people are becoming much more wealthy, and most other people are becoming somewhat more wealthy. So what? The problem is that our happiness is based on how we perceive we’re doing compared to those around us, and not on any absolute measure of our well being. This leads to three observations:
- A shepherd living in a hut in one of the poorest countries in the world is generally just as happy as someone living in a house in America, one of the richest.
- Displays of wealth are much easier for us to see than a measure of actual happiness – it is hard to fake driving around in a Lexus, but easy to hide psychologist visits for our depression.
- As soon as a remote shepherd acquires a television, his happiness will likely decline since suddenly he isn’t comparing his success with his shepherd neighbors, but instead to the wealthiest people on the entire planet.
Recognizing this human frailty – that our built-in happiness meter is relative rather than absolute, and therefore set more by how much stuff we see our neighbors have rather than by how much we have, is the only way to counter its effect. Moving yourself to an absolute rather than a constantly receding relative goal allows you to be happy with what you have even if others accumulate more. This is the crux of keeping up with the Joneses; the only way to win is to not play the game.
This also explains the discomfort I feel about credit card debt in the US. If it really did add to happiness, then all for the better. And indeed, some people use credit card debt for absolutes – food, basic shelter, etc that increase their happiness since they don’t starve to death. But the majority use it to try and exceed those just ahead of them on the consumption curve. Credit card debt therefore creates a self-fulfilling prophesy – you see your (current) peers pulling away with fancier homes, cars, clothes and stainless steel appliances, and you feel worse about yourself. So you also whip out your credit card to catch up, and the cycle continues. But nobody actually gets any happier, since the top keeps pulling away.
Have doubts? Let’s look further afield than the United States, where I suppose it can seem like I’m splitting hairs. Below is an IMF figure for world income distribution, albeit from 1989, although I doubt it has changed dramatically in the meantime. The people at the top of this diagram (United States and friends) are basing their happiness against their neighbors rather than the vast majority of the world.