The Rich and Their Effect on the Cost of Living

Posted on October 05, 2014. Filed under economics

I’m not an economist, but I’m fairly confident in a couple of economic principles.

I read an article (How the ‘creative class’ is dividing U.S. cities) that I think illustrates an end result of that: the relatively well-heeled “knowledge workers” are demanding more and more residential living in the downtown core, which is raising rents and pushing the lower class out of downtown.

The housing options of the disadvantaged are invariably defined by what’s left over. If the wealthy want to live on the waterfront, the poor are driven inland. If high-paid professionals want to live close to the subway — picture the popular orange-line corridor in Arlington — then low-paid cashiers are pushed farther from transit. If upper-class college graduates want to live downtown, as is increasingly the case in many big cities, the poor are priced out to the periphery.

I recently saw this same thing in Sioux Falls.  Across from the only downtown grocery store, several low-rent homes were torn down to build new loft apartments.  I assume those homes had people living in them – eyesores that they were, the houses still fit the economic needs of someone.  I further assume those people can’t afford the apartments which replaced their homes, and that they were therefore evicted and pushed somewhere else.  (As of this writing, you can still see the homes on Google Maps.)

I think there’s a secondary concept at work here – the existence of people with far more wealth ends up indirectly draining the finances of the lower-class.

The fact that someone can afford $2,000/month in rent means there’s a  market for that type of apartment, and its existence will eventually come at the expense of more affordable housing and bring average rents up.  The willingness of the upper class to pay large sums of money for things has the tendency to drag costs up overall – they inject more money into the system and increase demand.

This isn’t a problem if the people below them on the wealth ladder are moving up too – inflation raises costs overall, for everyone. The real problem comes when the the cliché becomes true – “the rich get richer and the poor get poorer.” When this happens, the rich getting richerdrag costs up with them. Even if the poor stay where they’re at, their costs go up. If they’re not advancing economically, they’re worse off by just staying in place.

Put another way, Bob the Banker’s willingness to drop $1 million on a house has a negative, trickle-down effect on finances of Mike the Meatpacker. Mike’s rent edges up in response to the demand and the excess money injected into the local economy by Bob. If Mike doesn’t get a raise, he has a problem.

(But Mike might get a raise. Bob’s money goes into the local economy, and – if trickle-down economics is true – that means there’s more money floating around to pay Mike. Yay, capitalism!)

Assuming Mike gets screwed, is this Bob’s fault?  Not really. He’s not doing this intentionally, and his role in this drama is just as accidental as Mike’s.

And what’s the solution?  I honestly have no idea.

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