Making It

A spacious hive well stock’t with bees

That liv’d in luxury and ease

Millions endeavoring to supply

Each other’s lust and vanity. . . .

Every part was full of vice

Yet the whole mass a paradise

Envy itself and vanity,

Were ministers of industry

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John Mandeville’s wry poem “Fable of the Bees” illustrates the moral paradox of our consumer society: We depend on what is worst in human nature--envy, lust, greed and gluttony--to bring about the greatest good. Mandeville’s poem was considered so immoral in 1723 that the Grand Jury of Middlesex, England, declared it a “public nuisance.”

Two important new books by economists Juliet B. Schor and James K. Galbraith lock horns with Mandeville’s paradox. Schor argues that “vice-driven” spending isn’t good for us. Galbraith argues that without sound government policies, a “vice-driven” economy leads to wage inequality, which isn’t good for our society. Yet both authors realize that spending creates jobs.

In “The Overspent American,” Schor argues that the “bees” are in trouble because they spend more than they make. Back in the 1950s, Americans tried to “keep up with the Joneses.” Neighbors set the standards for what we wanted, whether it was the Chevrolet in the driveway or the kid’s Hula-Hoop. Since next-door neighbors were likely to have an income similar to ours, keeping up with them was within our means.

Under what Schor calls “the new consumerism,” though, we don’t compare ourselves to our neighbors (some people don’t even know their neighbors) anymore, but to our co-worker in the corner office, celebrities and the “Friends” we see on television. In fact, Schor discovered a correlation between the time spent watching television and spending; she estimates that every extra hour per week spent watching television means a $208 increase in annual spending.

This new consumerism emerged in the 1970s, when marketing experts noticed that people no longer spent to belong to a particular group, but rather spent to express their individuality. As a result of this, marketers and consumers went upscale: The Pottery Barn started to look more like Williams-Sonoma, Pier 1 began to resemble Bloomingdale’s, and Kmart initiated its incongruous partnership with Martha Stewart.

Consumers not only went upscale, but they wanted more. The size of houses has doubled in the last 50 years, and expenditures on vacations and recreation have doubled since 1980. And the rich have grown richer. Between 1979 and 1989, the wealthiest 1% of households increased their income from an average of $280,000 a year to $525,000. In the 1980s, the “decade of greed,” the wealthy spent conspicuously on Mont Blanc pens, Rolexes and Lexuses, and the middle class mimicked them.

The odd part, says Schor, was that in the midst of all this spending, only one in four Americans believed their children would enjoy a higher standard of living than their own. Nonetheless, by the 1990s, households making $50,000 to $100,000 were taking on consumer credit debt at record levels. Sixty-three percent of this group owe something on their credit card. Meanwhile the savings rate has plummeted, and most households today operate with practically no financial cushion. Many are caught in a vicious work-and-spend cycle that Schor eloquently described in 1991 in “The Overworked American.” Work hours have increased by 10% over the past 25 years.

Schor says most Americans spend their money on “visibles” such as clothes, cars and home furnishings, while they scrimp on “invisibles,” such as insurance, retirement savings and college funds. Some of the reasons people spend money on visibles are silly. For example, in her study of buying habits in the cosmetics industry, Schor found that women are more likely to buy expensive lipsticks than expensive facial cleansers. This is not because the expensive lipsticks are better quality than cheaper ones, but because women often apply lipstick in public and don’t want to be seen using a cheap brand.

After reading this litany of consumer spending and debt, one can only wonder, “Have we all gone mad?” Schor clearly wants to make us think about how spending influences our lives and to consider her solution to overspending, “downshifting.” A Merck Family Fund poll found 85% of those who downshifted reported being happier spending less.

Schor profiles a variety of voluntary downshifters. Many of the people she describes do not sound like the 85% of those who report being happier. If anything, the examples are a little trite and depressing. Jennifer, a recovering “shopaholic,” stays away from stores, except to buy food. Ellen meets people over coffee or breakfast and sends postcards to save money on long-distance phone calls. Nancy concedes she now has a job that she likes and “spending less does not feel as punitive.” After making such a strong argument for why overspending is bad, one longs for an equally strong case for why cutting back is good. This we don’t get from Schor’s otherwise masterful take on the human folly of overspending.

By the end of the book, Schor is back to the central issue of Mandeville’s paradox. If everyone downshifted, there would be fewer jobs and less economic growth. This was one of the central concerns of the economist John Maynard Keynes. Keynes cited Mandeville’s poem when he argued that if the wealthy prefer the power of investing over the pleasure of consuming, their profits will grow while workers’ earnings shrink. After extensive analysis of Department of Commerce data on wages and income, James K. Galbraith concurs with Keynes. Today the top 1% of wealthy Americans earn half of their income from interest. As they get richer, the poor get poorer. In “Created Unequal,” Galbraith demonstrates how interest rates and other factors contribute to the growing wage inequality in America.

Inequality is bad for a democratic society, Galbraith tells us, because inequality is information. We know who the winners and losers are simply by driving around town and looking at where people live and how they dress. The rich feel more secure and the poor feel more hopeless. But most important, inequality weakens people’s willingness to share. The rich develop their own ethos, and exercise political clout to reduce their burden of payments to government, and shape economic policies in their favor. The middle class gets squeezed by their heavy tax burden and, as Schor has shown, they also spend more trying to keep up with the rich. This makes the middle class reluctant to have their tax dollars go to the poor.

Most economists agree that since the 1970s (also a time when consumer spending accelerated), the wages of the rich have gone up, middle-income wages have barely kept pace with inflation, and the real wages of low-income workers have fallen. In his book, Galbraith lines up all the usual suspects responsible for the growing wage gap--downsizing, deregulation, globalization and skill-based technological change--and meticulously shows why they do not explain it.

Take, for example, the case of skill-based technological change. The checkout clerk in a computerized retail store doesn’t necessarily make more money than the one in a store with an old cash register, and she certainly doesn’t make more than an economist who may or may not use a computer. Although computer technology enhances the productivity of the individual worker, it rarely requires a significant amount of education or skill on the part of the user. Becoming technically savvy is seen more as becoming a part of the new workplace than about becoming part of an elite work force. The real issue is not technology or skills per se, but the economic clout of the companies that can reap the financial benefits of this technological productivity.

Galbraith concludes that wage inequality is not the work of the all-powerful inscrutable hand of the market, but the result of deliberate actions by politicians and government administrators who are in turn influenced by the wealthy. For example, the government transfers money directly to the poor and the elderly through welfare payments, Social Security, etc. It also indirectly transfers money to the rich through the interest policies of the Federal Reserve Board, the Social Security earnings cap and low capital-gains taxes. Galbraith says the real villains behind wage inequities are government policies that concern unemployment, the exchange rate, inflation, interest rates and the minimum wage. All of these have an impact on wage rates. He believes that the only way to cure wage inequity is through an extended period of full employment.

One can almost see the politicians, economists and policy wonks shaking their heads at Galbraith’s Keynesian arguments. Their resistance would be testament to how economic dogma, which as Galbraith shows is sometimes unproven, calcifies our political system. Voters are only given a choice between two renditions of the same story. One story puts plastic slip covers on the economy and says wages will even out if you don’t touch them. The other says more education and technical training will equalize wages by making people more competitive in the job market. An extreme example of the latter view was House Speaker Newt Gingrich’s proposal to give laptop computers to welfare recipients. One can’t equate knowing how to use a computer with getting a job that pays a living wage.

“Created Unequal” is not light reading, but Galbraith’s elegant arguments, passionate exposition and profound conclusions make it worth the trouble. For economists like Galbraith and Schor, economics is not a “dismal science.” Their books remind us that the economy is and ought to be run by humans, not humans by the economy. Individuals should take responsibility for how they and the government make economic decisions. If it turns out that envy and vanity are indeed the “ministers of industry,” the public can and should throw them out of office.