on June 28, 2007
Professor Frank has written a thought provoking book that is both entertaining and also raises some deep questions that are generally ignored by economic theorists.
He makes a strong case that rising consumption spending in North America (bigger houses, bigger cars) has not produced more happiness, and it is akin to a positional arms race. "As in the familiar stadium metaphor, all stand to get a better view, but when all stand no one sees better than when all were seated."
In effect, there is a negative externality to certain consumption choices. If person A buys a large car, it affects person B, who will feel the need to have a larger car to be safe in the case of a collision with Person A. Frank makes a detailed argument with numerous examples to show that these views of what is the "adequate level" of consumption, while influenced by the consumption of others, has nothing to do with envy. One of many examples he cites is orthodontics. In centuries past, this was not available even to the very rich, and people were happy with slightly crooked teeth. Once orthodontics becomes widely adopted, there is a stigma to having crooked teeth.
In particular, he infers that rising income inequality has forced the middle class to even work harder (more hours, longer commutes) to emulate the high consumption levels of the wealthy. As a consequence, this inequality leads to a reduction in national welfare in a utilitarian sense. He advocates a progressive consumption tax as a solution. Something this radical is unlikely to be adopted any time in the near future, but his general argument raises a plausible case in terms of economic theory about why inequality matters for economic wellbeing, and has important implications for public policy.