01/07/2015 03:08 pm ET Updated Mar 09, 2015

Unequal and Unhappy

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Over the past 35 years, Americans have become $27 trillion wealthier. That's an extra $90,000 per person, or $360,000 for a family of four. But it doesn't seem to be making us better off. Accompanying this impressive increase in wealth has been an increase in the number of anxiety disorders. Stress-induced obesity has exploded. One in ten people experience depression. Scholars who study happiness find that in spite of our greater wealth there has not been in increase in aggregate happiness. Why hasn't more wealth improved our subjective well-being?

Part of the stagnation, if not decline, in well-being is traceable to the fact that most Americans got none of the massive increase in wealth. The top one percent took half of the total wealth gains and the richest 40 percent took the remaining amount, leaving virtually nothing for the bottom 60 percent, who have seen stagnant incomes since the 1970s.

A prejudice among most economists and many political thinkers is what is called a Pareto improvement. This claims that society is better off if someone is made better off without someone else becoming worse off. Accordingly, if the rich are richer but others are not less rich, then society is presumed to be better off. However, this principle -- so central to orthodox economic theory -- ignores the fact that we are thoroughly social beings and we live in political worlds. Humans are strongly affected by their relative economic and social position. In fact, a substantial body of research in psychology, especially in what has come to be called "happiness research," finds that above a fairly low threshold, subjective well-being does not correlate with higher incomes or higher levels of consumption.

Although it has been found that average levels of satisfaction are considerably lower in very poor countries than in rich ones, after a certain income level has been attained, further increases in income do not seem related to higher levels of subjective well-being. In terms of income and consumption, what appears to be important is one's relative position. The importance of relative standing was made strikingly clear in a study that found that when people were presented with the question of whether they would prefer to live less-well-off in a rich society or near the top in a poorer society, 50 percent claimed they would give up half their real income to live in a society where they were better off than most others.

The impact of rising inequality is starkly evident as wealthy families move into gated communities, send their children to private schools, and play in country clubs. The result is that political, and thus financial support for public goods such as safe neighborhoods, good public schools, and public recreation facilities declines. The wealthy, who also possess disproportionate political power, will have little interest in these public goods. As former Secretary of Labor during the Clinton Administration, Robert Reich put it, "members see no reason why they should pay to support families outside the gates when members are getting everything they need inside." As public goods deteriorate, others will struggle to also move into gated communities, send their children to private schools, and play in country clubs. As they do so, often at the cost of falling deeply into debt, the quality of public goods will continue to deteriorate in a downward spiral.

A second manner in which people are affected by the behavior of others is more psychological. This was explored over a century ago by Thorstein Veblen in his classic work, The Theory of the Leisure Class. People gauge their position in the social hierarchy by comparing themselves to those just above themselves and those below. As inequality has exploded in a high-tech world where the consumption of the very rich is on display for everyone to see, it has expanded the frames of reference for what constitutes a good life for all consumers. Increasingly, households feel pressure to increase their consumption to maintain their relative social respectability. As this process cascades down the income scale, households that have seen stagnant incomes for the past four decades -- approximately 60 percent of the total --must work longer hours, take on more debt, or deplete their savings to meet family needs and mimic the consumption of those above them. This struggle leaves them time-starved, stressed, insecure, and apparently less happy.

As the top one percent, with ever exploding wealth at their command, compete among themselves for the very pinnacle of status, they flaunt their wealth through conspicuous consumption in such highly visible goods as mansions, helicopter commuting, clothes, and jewelry. Those immediately below them on the income ladder emulate this consumption to maintain their relative social status. So if Jamie Dimon buys a new 400-foot yacht, it puts pressure on other top earners to upgrade their 350-foot yachts. And those who own 300-foot yachts will likewise have to upsize lest they fall further behind in what becomes a consumption arms race.

Not unexpectedly, this intensified competition and insecurity concerning one's relative position creates anxiety, stress, and even depression. Thus, thanks to exploding inequality, even if people have more material goods and services than ever before, they nonetheless seem to be less happy. As if this isn't bad enough, the consumption arms race that is being fueled by inequality is a prime cause of ecological devastation.

Fortunately, we have become more aware of the extreme explosion in inequality that has occurred over the past four decades and the severe damage it is doing not only to our potential for happiness, but also to our democracy. This inequality can be reversed through such measures as implementation of a wealth tax, more progressive income taxes, guaranteed employment, and a higher minimum wage. All that's needed is political will.