My reading these days is done in snatches on the bus, but while stuck in traffic last week, I finished Robert Frank’s brilliant small book Falling Behind: How Rising Inequality Harms the Middle Class.
Frank opens with an intriguing thought experiment:
You’re given the choice between two worlds: World A in which you own a 4,000 square foot house but everyone else owns a 6,000 square foot house and World B, in which you own a 3,000 square foot house but everyone else lives in a 2,000 square foot house.
According to “the standard, neoclassical model of choice”, Frank argues, World A, in which everyone can consume more, is the obvious logical choice.
Yet most people, when asked, choose World B.
In chapters whimsically illustrated by graphs, photos, and cartoons, Frank demonstrates that there is much more at stake here than simple envy or greed. He acknowledges the psychic reality: that with ever-more lavish consumption at the higher ranks, the costs of simply “adequate” has risen, and the bar at which people feel relative deprivation is set ever higher (even while he also argues that owning many things does not make the wealthy happier).
Yet in times of limited access to important goods, decisions about buying a house are also decisions about whether one’s children will attend the best schools or merely mediocre schools, whether streets will be in good repair, whether drinking water will be clean, whether fire fighters will be well-equipped.
And as long as a relatively small number of people at the top of the income ladder can easily afford to outbid most everyone else for access to homes where all of these services can be taken for granted, those clamoring for their place on the rungs below will find themselves paying ever more for housing (and for cars that will be safe in collisions with the luxury vehicles of the wealthy, and for interview clothes that will position them as “one of us” on first impression).
The consequences, Frank argues, are that the middle class is working longer hours, commuting longer from more “affordable” neighborhoods, going further into debt, and withdrawing their support for public services so that more of their income can go to personal consumption rather than to taxes.
With sales of $2000 watches growing at double digit rates, Frank suggests, taxing consumption rather than income could help to level the playing field. Persons who might otherwise build an 80,000 square foot house, he argues, would suffer little if they instead lived in 60,000 square feet, but dampening the competitive frenzy for owning The Most could free up resources for rebuilding a crumbling national infrastructure, for reinvesting in public education, for personal leisure among the frenzied workforce.
I find his argument compelling, and a welcome perspective to deliberations about inequality that are more conventionally framed only in moral terms.
But I am certainly not an economist. So I wonder: is a consumption tax workable? Are there arguments against a consumption tax that Frank is missing? Are there other viable options for ending the frenzy of competitive consumption?