Download - How Rising Inequality Stimulates Energy Demand Robert H. Frank St. Gallen Symposium June 2, 2007
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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
Positional goodsNonpositional goods
Bombs
Toasters=
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
Bottom20%
+116%+100%
Middle20%
Fourth20%
Top20%
Top5%
Second20%
+111% +114%+99%
+86%
Bottom20%
-1%
+6%
Middle20%
Fourth20%
Top20%
Top5%
Second20%
+11% +19%
+42%
+66%
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Changes in the After-Tax Distribution of Income1979-2000
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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 1/10th 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 Consumption Marginal Tax Rate
0 - $39,999 20 percent
$40,000 - $49,999 22 percent
$50,000 - $59,999 24 percent
$60,000 - $69,999 26 percent
$70,000 - $79,999 28 percent
$80,000 - $89,999 30 percent
$90,000 - $99,999 32 percent
$100,000 - $129,999 34 percent
$130,000 - $159,999 38 percent
$160,000 - $189,999 42 percent
$190,000 - $219,999 46 percent
$220,000 - $249,999 50 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.