Economist Robert H. Frank has written a stimulating book that integrates research from psychology, evolutionary biology, and economics to address the raging "luxury fever" that is needlessly consuming precious resources in "overdeveloped" economies. Frank documents how luxury consumption in western industrialized countries has been rising at an astronomical rate, even though the latest psychological research shows that there is scant correlation between this consumption and levels of stated life satisfaction. Why, then, are wrist watches costing $20,000, huge houses of 10,000 sq. ft. and more, and myriad other forms of conspicuous individual consumption rapidly increasing, even as social spending on education, infrastructure, the environment, and other things that would raise the average level of life satisfaction in society decreasing? Frank describes how this perverse "luxury fever" occurs when individuals pursue their strong individual incentives to increase their relative position in society by consuming more than their peers. But when everyone does this, relative consumption (and perceived life satisfaction) remain constant, while absolute consumption (and related negative impacts on natural resource use, the environment, education spending, etc.) soars. Luxury fever is one of a class of phenomena known by various names in different disciplines, including: negative externalities, social traps, social dilemmas, the prisoner's dilemma, and the tragedy of the commons. Frank cleverly labels these phenomena as situations that are "smart for one, but dumb for all." Once one begins to look, there are clear examples of these situations everywhere, ranging from drug addiction to pesticide overuse to arms races to environmental pollution and even women's fashions. While economists have recognized these phenomena, they have largely been relegated to the status of interesting but relatively minor anomalies. But Frank clearly points out just how pervasive, important, and wasteful they are, and how eliminating them can save literally billions of dollars while actually improving welfare. The "invisible hand" of the market cannot be relied upon to solve these problems, because, as Frank notes: "Far from being a principle that applies in most circumstances, the invisible hand is valid only in the special case in which each individual's rewards are completely independent of the choices made by others. In the rivalrous world we live in, precious few examples spring to mind." (pp 271) Frank's solution to luxury fever is a strongly progressive consumption tax. This could be done in the US with a simple one-line amendment in the tax code to exempt all savings from income taxation. With this modification, the income tax would tax only consumption, without having to specify which consumption was "luxury consumption" and (because of its steep progressivity) without adversely affecting the poor. This consumption tax would have the effect of increasing the costs to individuals of conspicuous consumption (and thus reducing it), while freeing up significant resources to pursue increased "inconspicuous consumption" - things like education, infrastructure, environmental protection, and family time. Given the psychology of relative consumption and satisfaction noted above, this could occur with absolutely no decrease in welfare. In fact, average life satisfaction would increase because relative individual consumption would not change and the neglected forms of social consumption could be increased with the resources from the tax. Why has so obvious a "win-win" move not already occurred, and what are its chances in the future? Frank answers the first part of this question with the famous joke about the economist who sees a ten dollar bill lying in the street and concludes that it couldn't really be a ten dollar bill because if it were someone would have already picked it up. The first step is to clearly and convincingly lay out the problem and the solution as Frank has done - in effect to point out the existence of the $10 bill just lying on the ground. But the idea of a broad consumption tax (and the reasons for it) has been around for many years. It was first proposed by Thomas Hobbes in 1651 and has surfaced many times during the last 300 years. Frank concludes that it will just be a matter of time before the obvious benefits of such a tax are recognized and the plan is implemented - after all, most political changes have a significant gestation period. But there are also obvious impediments to implementing such a tax in the current political climate. In political systems run more and more by special interests it is difficult to implement any policy that might hurt even one of those interests - even if only in the short run. Overcoming the political impediments to any form of meaningful tax reform will require "government by discussion" rather than by interest groups and media manipulation. If social issues of the importance of those in Frank's book can be discussed rationally by the society at large then such obvious social "win-win" solutions as ecological tax reform and a progressive consumption tax can be appreciated and implemented. In a few countries this kind of social discussion occurs reasonably well, but in most it is a far cry from the current political reality. Just as it is very difficult for an animal caught in a trap to free itself, it is also very difficult for a society caught in a social trap to free itself, even when the nature of the trap and the way out has been clearly identified. Lets hope we don't have to bite off our social foot to escape the invisible hand.
