Luxury Fever: Why Money Fails to Satisfy in an Era of Excess.
Walker, Douglas M.
By Robert H. Frank.
New York: The Free Press, 1999. Pp. x, 326. $25.00.
Professor Frank's new book contains elements of his previous
works, especially his 1995 book with Cook. I was somewhat hostile to the
ideas of that book (Walker 1996), but after reading Frank's new
one, I must admit - he's convinced me! This book is well written,
effectively argued, and entertaining.
The primary focus of the book is on the importance of relative
versus absolute consumption levels in affecting consumers'
happiness. Frank reviews compelling biological and psychological
evidence that happiness is not significantly linked to absolute levels
of consumption but is linked to relative levels. (If readers are not
swayed by Frank's appeal to scientific evidence, then perhaps they
should read Seneca, Marcus Aurelius, or Boethius.) According to Frank,
this aspect of human nature largely explains why many are compelled to
spend money on luxuries just to appear to be more successful than
others. He regards the increasing amount of luxury spending as wasteful,
since these consumers could obtain the same benefits by consuming
luxuries with lower price tags, so long as the positional aspect of the
consumption remains unchanged. For example, if I am interested in
signaling my financial success to others, I may be inclined to buy a
Patek Philippe wristwatch for $20,000. But the quality of this as a
signal of my wealth is not dependent so much on the high price tag as it
is on the fact that it's a relatively expensive watch. I could just
as easily signal my wealth in a different world, where 95% of people
spend under $100 on a watch, by purchasing, say a $1,500 watch. If
relative (not absolute) consumption patterns affect happiness, then many
of the luxuries that are produced are wasteful, since much cheaper
luxuries could be produced that still retain their high relative values.
The resources currently dedicated to producing extravagant luxuries
could alternatively be used in ways that would significantly improve our
standards of living. Frank summarizes,
Considerable evidence suggests that if we all work longer hours to
buy bigger houses and more expensive cars, we do not end up any happier
than before. As for whether money could buy happiness, however, the
evidence paints a very different picture. The less we spend on
conspicuous consumption goods, the better we can afford to alleviate
[traffic] congestion; the more time we can devote to family and friends,
to exercise, sleep, travel, and other restorative activities; and the
better we can afford to maintain a clean and safe environment. On the
best available evidence, reallocating our time and money in these ways
would result in healthier, longer, and more satisfying lives (p. 92).
There is an opportunity cost to producing $3 million, diamond dream
bras.
The first part of the book is rather convincing in its point that
the conspicuous consumption that characterizes our current society is
worthy of concern and perhaps should be curtailed. Improvements (some
suggestions are noted above) can be made simply by slowing the rate of
growth in the consumption of luxuries. But if this rearrangement of
spending patterns would be so beneficial, wouldn't people already
be doing it? The root of the problem, Frank argues, is that conspicuous
consumption is akin to negative externalities problems in the sense that
it's "smart for one, dumb for all"; that is, the
conspicuous spending is rational for the individual but harmful from a
social perspective. (Frank explains this situation thoroughly, citing
cases typically discussed by economists, e.g., overuse of common
property resources.) To bring private incentives more in line with the
social, government action is required.
Obviously, free-market advocates are likely to object to any
government policy that attempts to curtail consumers' liberties.
Frank fully anticipates these objections and is very effective in
dispelling them.
The last part of the book is dedicated to explaining Frank's
policy proposal. The anticipation of this was rather exciting. By the
time he finally presents his solution, Frank has made a thoroughly
convincing case that there is indeed a problem that needs correction and
that with some very simple policy changes, the problem could be solved.
Finally, the author suggests we adopt a steeply progressive consumption
tax to replace the current system of income and sales taxes. A component
of the tax structure would be a minimum level of consumption exempted
from the tax (and possibly a lump-sum subsidy to those below a minimum
income threshold). Of course, he goes into moderate detail about the
mechanics of the tax, as well as benefits and typical objections to
consumption taxes. This presentation is accessible to noneconomists and
is effective in refuting objections and in arguing that it effectively
solves the conspicuous-consumption problem highlighted in the first part
of the book.
A sample tax rate schedule is offered, ranging from a 20% rate on
consumption spending (above the exemption) up to $40,000 to a rate of
70% on consumption spending of between $500,000 to $1 million. In such a
world, for example, half-million dollar Ferraris would become even more
rare, and "the Porsche would acquire precisely the rarefied status
of today's exotic cars, which was all that kept it from being
attractive to Ferrari buyers in the first place" (p. 218). In this
way, the wealthiest people would still have the most exotic cars, but
those cars would be less expensive than before. Wouldn't this
destroy certain firms and industries? "The point is not to put
companies like Ferrari and Patek Philippe out of business, but simply to
slow the rate at which additional resources are devoted to making all
products - not just theirs - more opulent" (p. 221).
A major benefit of the consumption tax Frank describes is that it
encourages savings. This, in turn, would enhance long-term economic
growth, as well as consumers' future consumption possibilities.
Significantly, the curtailed current spending on luxuries would make no
one worse off, since the tax would not affect the positional nature of
spending, on which the utility of consumption is (partially) dependent.
Frank is not the first author to propose a progressive consumption
tax. However, his rationale for it is, I think, unique. That this tax
could actually improve happiness is a very strong argument in its favor
and should be included in the current debate over tax reform. Overall,
Professor Frank's exposition is entertaining and controversial and
should be enjoyed by all readers interested in public policy.
References
Frank, Robert H., and Philip J. Cook. 1995. The winner-take-all
society. New York: The Free Press.
Walker, Douglas M. 1996. The winner-take-all society (book review).
Southern Economic Journal 63:550-51.
Douglas M. Walker Georgia College & State University
