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Published: Sunday, 8/26/2007

In uneven times, even rich people feel poorer

"That's what your house is - a place to keep your stuff while you go out and get more stuff!"

- George Carlin

A renowned economist calls it "expenditure cascade," but I've long thought of it as the Manhattan Real-Estate Game.

Sipping a cup of Sunday morning coffee, I can glance at apartment ads in the New York Times magazine and feel shrewd and thrifty.

I simply compare, say, two Upper East Side co-ops. One is a 16-room penthouse with five bedrooms and seven baths. The other has 17 rooms, including seven bedrooms and six-and-a-half baths. Both apartments are on 5th Avenue, with wrap-around terraces.

The former sells for $70 million. The latter sells for $48 million - so I choose it and instantly save myself $22 million!

Right about then, the coffee kicks in. I realize the odds of me buying a $22 million house - letting alone "saving" that amount by buying a "cheaper" house - are about as likely as me winning the Nobel Prize after I find the cure for cancer.

But economist Robert H. Frank - in his latest book, Falling Behind: How Rising Inequality Harms the Middle Class - says it doesn't matter if a multimillion-dollar New York co-op is out of my league.

It still affects my thinking.

If not me, someone is buying these places. And so it is that the uber-rich shifts everyone's frame of reference. The housing industry "expenditure cascade" helps explain why - despite the fact household earnings are barely higher now than in 1980, family size is shrinking, and the savings rate is negative - the median size of a new house today is some 33 percent larger.

And so it begins.

The undeniable connection between housing costs and school quality means middle-class families now borrow more, spend more time at work, and commute longer distances to get there, all while saving less.

Our living standards climb - even if we're not conscious of it. New houses today are often so pointlessly large they feature something called a "bonus" room - extra space with no actual purpose. Subprime mortgages and record-high foreclosure rates, indeed.

Mr. Frank's "expenditure cascade" goes beyond housing, affecting practically all consumer thinking.

It explains the New York Times story earlier this month about Silicon Valley millionaires who "don't feel rich," because "they are surrounded by people with more wealth - often a lot more." It also explains why there are more "payday" loan shops throughout Ohio today than there are all the McDonald's, Wendy's, and Burger King restaurants combined.

As a new college grad in the late 1970s, I was encouraged by my mother to apply for a credit card. Her reasoning? Using just one card sensibly - i.e., religiously paying off each month's balance - would establish good credit history.

Only a decade or so later, I gave birth to my own daughter who, by her second birthday, would receive an unsolicited, preapproved, high-limit credit card offer by mail.

And that, I'm afraid, pretty much says it all.

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