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How Rising Inequality Stimulates Energy Demand Robert H. Frank St. Gallen Symposium June 2, 2007
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World B: You and your family live in a 3000- square foot house, others live in 2000-square-foot houses. Which world would you choose? World A: You and your family live in a 4000- square foot house, others live in 6000-square-foot houses.
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Which world would you choose? C: You have 2 weeks of vacation each year, others have 1 week, or D: You have four weeks of vacation each year, others have 6 weeks?
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Housing = positional good Leisure = nonpositional good
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1. People care about relative consumption, more in some domains than in others. 2. Such concerns lead to expenditure arms races focused on positional goods--those goods for which relative position matters most. 3. Positional consumption is more energy intensive, on average. 4. Inequality stimulates positional consumption and energy use.
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Adam Smith’s invisible hand: Self-interested demands will result in a socially efficient allocation.
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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.
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Why do male elephant seals weigh five times as much as females?
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The exception that “proves” the rule: Very little sexual dimorphism in monogamous species like the albatross.
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Gaining access to mates = a positional good Minimizing the risk of death from predators = a nonpositional good
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The Conflict Between Individual and Group Robert H. Frank. “The Demand for Unobservable and Other Nonpositional Goods.” American Economic Review, 75, March, 1985, pp. 101-116.
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Changes in the Before-Tax Distribution of Income 1949-1979. 1979-1999
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Changes in the After-Tax Distribution of Income 1979-2000
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Fractal earnings change pattern for virtually every labor market group: Bottom quintile: Absolute earnings decline Middle quintile: Negligible earnings growth Top quintile: Substantial growth
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College graduates Dentists The top 1 percent The top 1/10 th of 1 percent…
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2000: 531 x average worker’s earnings Earnings of CEOs of largest U.S. corporations 1980: 42 x average worker’s earnings Hedge fund manager James Simons: $1.7 billion in 2006 (38,000 x average worker’s salary) Top 25 hedge fund managers: $14 billion in 2006
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Context and the demand for quality
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A memorable meal An effective interview suit A suitable gift
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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
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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?
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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
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Expenditure Cascades Top earners spend more because they have more money. And so on all the way down the income ladder. That, in turn, shifts the frame of reference for those next below. This shifts frame of reference for those just below them, who also spend more.
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How heavy should your car be? Honda Civic: 2449 pounds Ford Excursion: 7648 pounds
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The Progressive Consumption Tax Consumption + Savings = Income Consumption = Income – Savings Taxable consumption = Income – Savings – standard deduction
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Taxable ConsumptionMarginal Tax Rate 0 - $39,99920 percent $40,000 - $49,99922 percent $50,000 - $59,99924 percent $60,000 - $69,99926 percent $70,000 - $79,99928 percent $80,000 - $89,99930 percent $90,000 - $99,99932 percent $100,000 - $129,99934 percent $130,000 - $159,99938 percent $160,000 - $189,99942 percent $190,000 - $219,99946 percent $220,000 - $249,99950 percent
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Taxable Consumption Marginal Tax Rate $250,000 - $499,000 60 percent $500,000 - $999,999 80 percent $1,000,000-$1,999,999 100 percent $2,000,000-$3,999,999 150 percent $4,000,000+ 200 percent
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Viking Professional, $5,000. 1989 Sunbeam, $90 Gas Grills Then and Now
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Talos Outdoor Cooking Suite, $35,000.
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