Falling Behind

Robert Frank’s Falling Behind is an elegant and compelling description of how rising economic inequality hurts Americans. In the preface, Frank poses two thought experiments:

1. Would you prefer World A -- where you have a 3,000 sq. ft. house and all other houses are 2,000 sq. ft. or World B -- where you have a 4,000 sq. ft. house and everyone else has a 6,000 sq. ft. house?

2. Would you prefer World C -- where you get 4 weeks of vacation per year and all of your coworkers get 6 or World D -- where you get 2 weeks of vacation per year and all of your coworkers get 1?

Frank finds that most people would prefer World A, where they have a relatively large house, and World C, where they get absolutely more vacation.

Hence, a dichotomy: Some items are strongly linked to their context, these Frank deems positional goods; other items simply follow a dictum of more is better – like vacation time.

The central argument of the book is laid out in 4 propositions:

1) Context matters in some domains more than others

2) Sometimes, positional arms races occur

3) Positional arms races divert resources from non-positional goods, causing welfare loss

4) For middle class families, losses from positional arms races have been made worse by inequality

Here is one example of how the argument plays out: Parents want their kids to go to good schools. Good schools are related to good neighborhoods which are related to high house prices. Therefore, a family might reasonably sacrifice other important types of spending (travel, gifts to charity, recreation) to buy a house that they can barely afford. But here’s the rub, only half of all students can go to above average schools. If everyone reacts equivalently - buying a more expensive house to get their child into a better school district - everyone’s child goes to the same quality school as before, but there are lot fewer resources to devote to other things that make us happy.

Frank’s main policy suggestion is to replace the current income tax system with a progressive tax on consumption – i.e. income minus savings. Such a tax would de-incentivize conspicuous consumption broadly, as opposed to excise taxes which tend to transfer ridiculous spending from one domain to another. Charitable contributions, expenditures on health care or education, or other activities could be exempted from the consumption tax. This approach seems quite reasonable to me. It makes little sense to tax something that is good – i.e. work via income – when we could tax things with negative consequences – e.g. energy use or positional consumption.

Falling Behind is short and insightful; if you’re library has a copy of it, I highly suggest it.