FALLING BEHIND
How Rising Inequality Harms the
Middle Class
Robert H. Frank
Cornell University
Adam Smith’s
invisible hand:
Self-interested
demands will result
in a socially
efficient allocation.
Charles Darwin: Traits
are selected because
of their impact on the
reproductive fitness of
individuals, not groups.
Traits that benefit
individuals often work
to the disadvantage
of groups.
Why do male elephant seals weigh five
times as much as females?
The exception that “proves” the rule:
Very little sexual dimorphism in
monogamous species.
Gaining access to mates
=
a positional good
Minimizing the risk of death from predators
=
a nonpositional good
The Conflict Between Individual
and Group
Positional goods
Nonpositional goods
=
Bombs
Toasters
Robert H. Frank. “The Demand for Unobservable and
Other Nonpositional Goods.” American Economic Review,
75, March, 1985, pp. 101-116.
Positional Externalities Are Pervasive
In a poor country, a man proves to
his wife that he loves her by giving
her a rose. In a rich country he must
give a dozen roses.
Richard Layard
Cycles of Fashion
Tattooing and piercing
Forms of Discourse:
Individual vs. Collective Incentives
Excessive formalism in economics
Bureaucratic Language
The holder [of a CAB certificate] may continue
to serve regularly any point named herein
through the airport last regularly used by the
holder to serve such point prior to the effective
date of the certificate. Upon compliance with
such procedures relating thereto as may be
prescribed by the Board, the holder may, in
addition to the services hereinabove expressly
prescribed, regularly serve a point named
herein through any airport convenient thereto.
Discourse in the Humanities
“I propose to embrace tactical strategies in
moving in disruption of the dichotomy, as
crucial to an epistemology of
resistance/liberation. To do so is to give
uptake to the disaggregation of collectivity
concomitant with social fragmentation and
to theorize the navigation of its perils
without giving uptake to its logic…”
Maria Lugones,
“Tactical Strategies of the Streetwalker”
If you were society’s median earner, which
option would you prefer?
1) You save enough to support a comfortable
standard of living in retirement, but your
children attend a school whose students
score in the 20th percentile on standardized
tests in reading and math; or
2) You save too little to support a comfortable
standard of living in retirement, but your
children attend a school whose students
score in the 50th percentile on those tests?
Launching your children
successfully in life
= positional good
Maintaining a comfortable standard of
living in retirement
= nonpositional good
Expenditure Cascades
• Top earners spend more because they
have more money.
• This shifts frame of reference for those just
below them, who also spend more.
• That, in turn, shifts the frame of reference for
those next below.
• And so on all the way down the income
ladder.
The cost of sending a child to a school
of average quality is linked to the price
of the average house in the community.
Median size of a newly constructed
house:
1980: less than 1600 square feet
2004: more than 2100 square feet
Gas Grills Then and Now
1989 Sunbeam, $90
Viking Professional, $5,000.
Talos Outdoor Cooking Suite, $35,000.
Evidence for Expenditure Cascade Hypothesis
In 100 most populous U.S. counties, those
that experienced highest growth in income
inequality also experienced highest
Growth in bankruptcy rates
Growth in long commute times
Growth in divorce rates
Frank and Levine, 2006
In 200 school districts, median home
prices are higher in districts with higher
income inequality
Ostvik-White, 2004
In OECD, over time and across countries,
higher 90/50 ratios are linked with longer
hours of work
Bowles and Park, 2003
Proposed positional arms control
agreement:
Raise tax rates on income and put
additional revenues into retirement equity
accounts for citizens.
If voters felt incapable of achieving their
savings goals without the proposed law,
on what grounds could a libertarian
reasonably object?
Taxation as theft?
No taxes, no government.
No army.
Get invaded by some
other country’s army.
Pay taxes to that
country’s government.
The Libertarian Criterion:
Taxation and regulation are
acceptable only if they are required
to prevent citizens from harming
others.
A necessary, not sufficient, condition.
Harming business rivals by cutting
prices: permitted
Driving 90 mph in school zones:
not permitted
The Libertarian Crybaby:
“You can’t tax or regulate me because that
limits my freedom to do as I please.”
An effective advocate for liberty?
Ronald Coase, 1960. “The Problem of
Social Cost”
Externalities are reciprocal:
Allowing pollution harms those downwind.
Forbidding pollution raises costs and prices.
Society’s interest lies in making total
harm as small as possible.
When transaction costs are low, affected
parties will negotiate efficient solutions
privately.
Transaction costs often make private
solutions impractical.
In such cases, policy should place the
burden of adjustment on those who can
accomplish it at the lowest cost.
Example: Smith objects to Jones wearing a
purple shirt, the sight of which, Smith claims,
causes him great distress.
Impractical to pay Jones not to wear purple
shirts.
Should the wearing of purple shirts be
prohibited?
“Get used to it, Smith! People have a right
to wear whatever shirts they please!”
Smith complains that Jones’s larger
house reduces his welfare.
Analysis-free response:
“Get used to it, Smith! Jones has a right to
build whatever size house he chooses.”
Defending any right entails benefits and costs.
Free speech: The First Amendment protects
most forms of expression, even those that
cause intensely painful effects on others.
But when the cost of speaking freely is
sufficiently high, we prohibit speech.
Yelling “Fire!” in a crowded theater.
Wearing purple shirts is permitted because
people who are offended by them can
adapt more easily than those who are told
they can’t dress as they please.
Which party can avoid harm at least cost
in the case of positional externalities?
Proponent of the agreement:
Save too little and suffer diminished living
standard in retirement (or send your child to
a bad school in a dangerous neighborhood).
Opponent of the agreement:
Live in a smaller house than you would
have chosen.
Why have economists been so slow to take
positional concerns seriously?
James Duesenberry’s Relative
Income Hypothesis:
The poor save at lower rates than the
rich because they are more frequently
exposed to consumption standards
higher than they can comfortably
afford.
Milton Friedman’s
Permanent Income
Hypothesis:
“Rich and poor save
at the same rate.”
John Maynard Keynes:
“Economic Possibilities
for our Grandchildren,”
1930:
How will they fill their
days once productivity
advances make it
possible to meet their
economic needs by
working only a few
hours a week?
“Now it is true that the needs of human
beings may seem to be insatiable. But
they fall into two classes—those needs
which are absolute in the sense that we
feel them whatever the situation of our
fellow human beings may be, and those
which are relative in the sense that we
feel them only if their satisfaction lifts us
above, makes us feel superior to, our
fellows.”
“Needs of the second class, those which
satisfy the desire for superiority, may
indeed be insatiable; for the higher the
general level, the higher still are they.”
“But this is not so true of the absolute
needs—a point may soon be reached, much
sooner perhaps than we are all aware of,
when these needs are satisfied in the sense
that we prefer to devote our further energies
to non-economic purposes.”
Context and the demand for quality
A memorable meal
An effective interview suit
A suitable gift
Regulations as Data
Why do hockey players vote in secret ballots
for helmet rules, even though they choose
not to wear helmets when there is no rule?
Rules Governing Duels
Mandatory Kindergarten Start Dates
Safety Regulation
In the abstract, you value safety at $300/wk.
Which option would you prefer?
1) You work in a safe job at $1000 a week, and
your children attend a school whose students
score in the 20th percentile on standardized
tests in reading and math; or
2) You work in a risky job at $1200 a week,
and your children attend a school whose
students score in the 50th percentile on
those tests?
Mandatory Savings Programs
Which option would you prefer?
1) You save enough to support a comfortable
standard of living in retirement, but your
children attend a school whose students
score in the 20th percentile on standardized
tests in reading and math; or
2) You save too little to support a comfortable
standard of living in retirement, but your
children attend a school whose students
score in the 50th percentile on those tests?
Limitations on Work Hours
Which option would you prefer?
1) You work 40 hours a week, and your
children attend a school whose students
score in the 20th percentile on standardized
tests in reading and math; or
2) You work 60 hours a week, and your
children attend a school whose students
score in the 50th percentile on those tests?
Why do
predominantly
male legislatures
enact statutes
prohibiting
polygamy?
Positional externalities are no
different from other externalities.
The Progressive Consumption Tax
Consumption + Savings = Income
Consumption = Income – Savings
Taxable consumption = Income – Savings
– standard deduction
Taxable Consumption
0 - $39,999
$40,000 - $49,999
$50,000 - $59,999
Marginal Tax Rate
20 percent
22 percent
24 percent
$60,000 - $69,999
$70,000 - $79,999
$80,000 - $89,999
26 percent
28 percent
30 percent
$90,000 - $99,999
$100,000 - $129,999
$130,000 - $159,999
$160,000 - $189,999
32 percent
34 percent
38 percent
42 percent
$190,000 - $219,999
$220,000 - $249,999
46 percent
50 percent
Taxable Consumption
$250,000 - $499,000
$500,000 - $999,999
$1,000,000-$1,999,999
Marginal Tax Rate
60 percent
80 percent
100 percent
$2,000,000-$3,999,999
$4,000,000+
150 percent
200 percent
Income
Savings
Taxable
Consumption
Tax
$30,000
$50,000
$1500
$3000
0
$14,167
0
$2833
$100,000
$150,000
$200,000
$10,000
$20,000
$40,000
$49,836
$81,538
$104,328
$10,164
$18,462
$25,672
$500,000
$1,000,000
$1,500,000
$120,000
$300,000
$470,000
$258,000
$458,000
$646,000
$92,000
$212,000
$354,000
$2,500,000
$3,500,000
$20,000,000
$800,000
$1,200,000
$10,000,000
$1,029,900
$1,316,400
$4,444,267
$667,100
$953,600
$5,525,733