Beneath the prosperous veneer

While the stock market is busy making millionaires, millions of middle-class families are struggling to keep up.

That's the conclusion Robert Frank, an economist at Cornell University, draws when he sees the number of 3,000 square-foot homes and $35,000 sport-utility vehicles popping up everywhere.

"The cost of being a participant in society has gone up," says Dr. Frank in an interview.

For example, people need computers today much more than they did 10 years ago. Likewise, job seekers and independent contractors rely heavily e-mail, pagers, voice-mail, and cellular phones.

In his book "Luxury Fever: Why Money Fails to Satisfy in an Era of Excess," Frank claims that Americans are working longer and harder to pay for fancy goods that bring minimal benefit to society.

He cites statistics that show women now spend an 233 more hours on the job each year than in 1976, and men put in an extra 100 hours.

Keeping up with status

Frank makes three key points:

*Americans spend money that would benefit society more if it were saved.

*People at all income levels indulge in conspicuous consumption to keep up with their neighbors.

*Society makes "keeping up with the Joneses," a need, not a want.

So the conspicuous consumption of the rich puts spending pressure on the middle class and the poor who can't afford it. And everyone works longer hours to stay ahead.

The middle class finances this spending by saving less and charging more.

"People in the middle have no real savings," Frank says.

Indeed, the level of new savings for Americans is at historic lows. (See chart, above.) The first quarter of 1999 registered the first negative savings rate since the Great Depression, according to figures by the Bureau of Economic Analysis.

The poor, flooded with unsolicited credit-card offers, finance increased spending with plastic, leading to exploding bankruptcy rates.

Average household consumer debt topped $12,000 in 1997, and credit-card obligations soared to more than $4,000 per household, according to the National Foundation for Consumer Credit (NFCC).

At the same time, says the NFCC, personal bankruptcies in 1998 set another record at 1.4 million. That's 1 in 68 families, up from 1 in 200 in 1986. "It used to be high rollers who made bad bets who declared bankruptcy," Frank says. "Now it's people living on credit cards."

Meanwhile, huge salary increases at the top, among big-name athletes and actors, as well as corporate chiefs and their executives, have raised average incomes, while median incomes, the halfway point of the income range, are stagnant.

Median household income in 1998 reached $37,005. Between 1990 and 1995 it fell more than 2 percent and has been growing more slowly in the past 27 years than it did in the previous 23, Frank says. At the same time, average income rose to $49,692 in 1998.

Since 1979, "70 percent of income gains have gone to the top 1 percent of income earners," in the US, Frank says.

Median wages have begun rising - finally topping 1989 levels this quarter -but more slowly than those at the top and bottom.

That's why sales of high-end luxury goods grow four times faster than overall spending, Frank says.

Others experts agree.

"The status competition that makes people buy expensive consumer goods in order to impress other people constitutes a failure of the market economy," writes Paul Krugman, an economist at the Massachusetts Institute of Technology in Cambridge, in a recent article. "The individual pursuit of self-interest leads to a collectively bad outcome."

Frank cites numerous surveys in which people say more and better material goods make them no happier, but working fewer hours, commuting less, and having a cleaner environment do.

The life of luxury

Here are some of the extravagances Americans are buying, according to Frank:

*Average new-home size has more than doubled since 1950, but family size has shrunk. The majority of those homes have central air conditioning and two-car garages.

*The price of the average new car in 1997 rose above $20,000. And 34 percent of US households own at least one car less than a year old, according to R.L. Polk. The biggest winners: sport-utility vehicles costing $30,000 and up.

*Sales of high-end wristwatches, costing thousands, rose 13 percent in 1997 to $1.1 billion, he says.

But conspicuous consumption in several categories constitutes necessity, not extravagance, Frank argues.

For instance, middle-class families may work longer hours to afford houses in expensive neighborhoods because they want their kids to attend good schools. The best school districts are generally those in communities with high property taxes.

And on roads crowded with massive sport-utility vehicles, buying a big truck may be as much a safety concern as a luxury, he says.

Frank's perspective is not shared by some mainstream economists. Critics such as Michael Cox, economist at the Federal Reserve in Dallas, argue that Americans' burgeoning consumption means most people, including the middle class, are better off, regardless of whether such spending is a need or a want.

*Send e-mail comments to evarts@csmonitor.com