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Luxury Fever

by Robert Frank

 

“Which material gains are no longer worth the price of social tension and individual upheaval?” --Edward Luttwak

 

Despite the creativity talk from libertarians, it is amazing how hackneyed libertarian arguments are. I can guess beforehand the slant of almost every libertarian article I see. Must be nice to magically know the answers to issues before arguments exist. When the religious fundamentalist claims something because the sacred text says so, people laugh. When the economics fundamentalist claims something because the text says so, the same people acquiesce. Robert Frank, thankfully, has some new, good ideas.

 

Luxury Fever begins with a wearying string of anecdotes, followed with a splendid overview of winner-take-all markets. Frank faults public policies for increasing greed, causing a staggering increase in consumer debts.

 

Marshalling an impressive array of research, Frank finds that we sacrifice many goods in the misguided pursuit of status, a zero-sum or negative sum activity. Current policies encourage a status arms race, yet we can only have high status if we are above others. The pursuit of conspicuous consumption improves the lot of a few, but makes the overall lot worse. The “economy-as-free-for-all” is better than socialism, but it is worse than good arrangements. Power markets are efficient--at producing luxury goods, but little else.

 

Frank explains the tragedy of the commons well, “Smart for one, dumb for all.” Fishing to excess, wearing high heels, having cosmetic surgery, red shirting athletes, increasing team sizes are some examples of these negative sum activities. Increasing team sizes in professional sports does not make teams more competitive because every team increases in size. The total number of wins minus the number of losses always zero, no matter how large rosters are, how much players earn, how fancy the taxpayer subsidized stadiums are--all in the name of “competitiveness.”

 

 

Frank takes this argument too far, though. Frank's claim that “main effect of each [tobacco] company’s advertisements is to offset its rivals’ ads[,]” is a questionable. Tobacco advertising gets many individuals to buy cigarettes rather than other goods. Advertisers do more than shift brand loyalties. They persuade individuals to spend more and to buy one type of good rather than another. Juliet Schor writes elsewhere, “the Avon ladies who paddle down the Amazon River inducing poor women to spend large fractions of their meager incomes on cosmetics” are not shifting buying from brand X to brand Y.

 

Frank explains why savings matters, how small investments multiply. The $100 billion the government pays foreign holders of U.S. debt is $100 billion less in American pockets. He explains the bad tradeoffs we make. We arrange society to find status rather than safety and other goods.

 

Poverty is partly comparative, partly geographic, and partly total resources. You can live on an income of $15,000 much better in Costa Rica than in Santa Barbara. Power marketers make great efforts to tell us how important status is ads, but their political ideology tells us what matters is total resources, especially bells and whistles.

 

Markets do not succeed because everyone always pursues their self-interest. They succeed because a heck of a lot of individuals act in non self-interested ways at least part of the time.

 

Jonathan Rowe and Edward Luttwak write elsewhere, “Why conduct the economy as though the sole purpose is to pile up more stuff in the garage?” And “[w]hile the natural environment is increasingly safeguarded by severe limits on business as well as personal activities... the social environment is increasingly left to the free fire zone of private business... a corporation can incur a big fine if it dumps its atmospheric toxics outside the school. But it can dump its commercial toxics inside the school through vehicles like Channel One, with total impunity.” The market is “a means to an end but not an end in itself.” Many social goods and bads should be counted, even in purely economic terms.

 

Neither ultra-conservatism nor third-way centism confront the issues raised by Frank and others. The third way represents an aptly named compromise among the wealthy and various interest groups. If you earn ten cents an hour, or seven dollars an hour, do not be surprised if the third way has little for you.

 

Frank recommends increased investments in pollution prevention, meat inspection, road maintenance, teacher pay, smaller classrooms, drug prevention, and drug treatment. Judging from the arguments Frank offers, the cases for road repairs and meat inspection appear to be strongest, with benefits that greatly outweigh costs, saving thousands of lives in the process. The arguments supporting his other investments are weak. In the case of smaller classrooms, a small study may show decent results, but as national policy it fails because huge numbers of additional teachers have to be drawn from the pool of the poorly qualified. Other factors matter more than classroom size.

 

Frank claims traditional “paternalistic” liberals advocate government action (censorship?) to protect us. Most liberal consumption critics I have seen do not advocate censorship. What is paternalistic about criticizing Joe Camel, the Swoosh, and other cultural icons? Criticism and paternalism are not remotely the same.

 

Luxury Fever suggests a progressive income consumption tax on income not saved is a better answer. One counterargument says that taxing the wealthy more would harm the wealthy too much and lead to other harms. This claim is unlikely. The years of best growth during the past half-century were correlated with extremely high taxes on the wealthy. This does not prove that high taxes on the wealthy are optimal, but it does prove high growth and high taxes can occur together.

 

A progressive consumption tax would probably increase growth. It would increase efficiency and reduce wasteful consumption, increasing human capital. It would increase savings, which would spur private investment and increase productivity. The incentive for individuals to pursue winner-take-all careers would decline, which would also increase productivity. Surveys suggest the number of aspiring engineers would increase while the number of aspiring actors, lawyers, and athletes would decline. An economy with 990 aspiring engineers and ten aspiring figure skaters grows more than an economy with ten aspiring engineers and 990 aspiring figure skaters. Making the winner-take-all problem worse: Individuals reek at judging their own talents. Surveys suggest at least 90 percent of us think we are above average drivers. Numerous surveys indicate other self-inflating biases. Almost everyone, for example, thinks they are better than average at making friends. Progressive consumption taxes would increase beneficial competition, reducing destructive competition, especially harmful spirals of career arms races. Athletes practice umpteen hours a day because they must do so to compete, not because it benefits the economy. Opportunity losses and undeserved inequalities would decline. Resources would go where they would do more good.

 

A progressive income consumption tax is a good idea, however, several reasons indicate that a progressive value-added tax (VAT) is better than an income consumption tax. (A VAT resembles a sales tax on each step of production.) The value-added tax is easier to administer and enforce. The General Accounting Office reports that a value-added tax would reduce the costs of tax administration, better targeting shirkers who hide income, including those who earn income from criminal activities. It encourages a broader array of investments. It increases exports and reduces trade deficits. It provides greater work incentives and greater investment incentives. It creates better economic growth. It makes tax loopholes and other tricks more difficult, thus shifting workers from parasitic to productive activities. It is simpler and encourages decisions for long-term benefit.

The counter argument against a value-added tax is that people will cross borders to buy goods. But that problem can be easily solved. We can increase the costs of buying elsewhere by creating and enforcing fines, and searching more vehicles at border inspection stations. Better yet, we should encourage Canada and Mexico to adopt a progressive VAT.

Another counter argument says a value-added tax would hurt domestic tourism. Good! Tourism is a seasonal junk industry with economic and noneconomic costs unpaid by tourists. Tourism slows overall American economic growth and increases overall unemployment. It wastes human talent. With less tourism, workers would shift to more productive sectors as citizens spend more of their incomes on other goods. A progressive value-added tax is also better than a progressive national sales tax because a national sales tax creates black markets.

 

Other flaws with Frank's work: The income tax brackets are too steep. A 70 percent top bracket expects too much from the rich. It encourages tax avoidance schemes. Frank's $7,500 standard deduction per person, mixed with his tax brackets, would be roughly equivalent to a $1,500 tax credit for lower-income workers and their dependents but over $5,000 for top earners and their dependents. Frank’s plan applies primarily to savings. Many other beneficial investments would get taxed.

 

Frank puts too much emphasis on quantity of leisure time rather than quality of living time. Leisure has little lasting value. If leisure is constantly on your mind, you should make some changes. If you are an unhappy, lifeless drone at work, the solution is not more vacation time. His plan does nothing about payroll taxes. Intriguingly, according to poll results I saw somewhere, 38 percent of employees claimed to enjoy work more than leisure in 1955. By 1991 that number had fallen to 18 percent.

 

Frank says the reason for the status arms race is cultural, leaving it at that, but merely saying it is cultural lacks explanatory power. How did culture get that way? How can we improve culture? It is intriguing how policies change “cultural” values and cultural values get all the credit. Taiwan had low-growth and low-savings, then changed policies to increase savings. Suddenly, when growth increased, “Asian values”--which are little different from Victorian values--got the credit.

 

Frank makes a number of notable points. Some claim that reducing consumption might harm the economy or cause a recession. Frank counters that many who create products for consumption will be shifted to the production of capital goods and this will increase long-term growth. A consumption tax will increase the forms of consumption that most benefit humans (celery, for example) and reduce spending on Rolexes and stolen art works. Human energies will be put to better uses. Less effort will be made building gold plated compasses for yachts. Consumption taxes lead to better choices that lead to better lives. The more vodka costs, the fewer alcoholics and drunk drivers we have.

 

Others claim that as long as one does not physically assault someone else, the government never has the right to use incentives and disincentives. This claim is baloney. It ignores indirect causes that create harms that have far worse consequences than a punch in the nose—for example, wars that could have been avoided. Citizens have a right, notes Joel Feinberg elsewhere, to create incentives and disincentives if one cannot predict which individuals will use products to cause harm. There is a general ban on private ownership of nuclear weapons, though most citizens would not misuse them. When the expected value of a product is sufficiently harmful, citizens have the right to disincentives affecting their use.

 

Individual punishment as a preventative of vile behavior alone is not morally or legally adequate, in part, because:

·        Many, if not most, individuals are terrible at weighing the expected value of rare events such as drunk driving murder.

·        They are terrible at employing will power to prevent low probability-high cost harms.

·        The costs to other individuals and the violations of their rights far outweigh—“far outweigh” meaning numbers with lots of zeros--any punishment that can be delivered.

·        Depressed, addicted, hate-filled, callous or otherwise screwed up individuals care little about costs to others or punishments. They do not operate like “economic man.”

 

The no incentive-disincentive rule is also contradicted by all the government incentive and disincentive creating done on behalf of power marketers—such as “social engineering” done by The Fed--though they try to label their incentive and disincentive creating as “natural,” as if losing your job because The Fed is more worried about inflation than your livelihood has no social effects. Recommended.

 

Book review by J.T. Fournier, last updated July 26, 2009.

 

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