There's been an interesting volley back and forth between Brad DeLong and Greg Mankiw on, essentially, conspicuous consumption (buying stuff to show how rich you are, basically). DeLong's first shot:
On the other hand, I'm enough of a touchy-feey sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor: the happiness America's working poor and middle class derive from the compensation distribution--given their compensation, the compensation of the rich, and the lifestyles of the rich and famous--seems to me to be certainly less than that of their counterparts back in 1973.
In Brad's world, a rich person conveys a type of negative externality, like pollution. High taxes on the rich can be seen as Pigovian. Economists like me complain that high tax rates on high earners discourage their hard work and entrepreneurship. The Veblenesque Pigovian economist replies, "Precisely!"
He misses the import of the phrase "conspicuous consumption." It's not the hard work and entrepreneurship that is to be discouraged. Make inventions, build enterprises, donate money for hospitals and libraries--that is all extremely meritorious and praiseworthy. It's the conspicuous consumption that is the problem.
Brad seems to see the rich as especially mean and spiteful. I see them as some combination of more talented, hard-working, and lucky than average but otherwise like everyone else. (Or maybe Brad views everyone as mean and spiteful and the rich as having more opportunities to exercise these vile attributes.) I wonder if our varying perspectives on human nature can partly explain our different positions on public policy.
In this exchange we see what, I think, are the two extreme views of "the rich." Both clearly believe that the "rich" population contains both types of individuals although Professor DeLong's distribution is weighted more towards the snotty than is Dr. Mankiw's. Whatever the true distribution is, to the extent that others get utility from making others feel small, there is an certainly an externality problem here. But is this something that government officials can and should control?
A big problem that with the idea of limiting conspicuous consumption with taxes (or whatever the policy tool du jour may be) is definitional: what is conspicuous consumption? Who is going to determine what consumption is conspicuous and what is not? Back in the early 90's, I worked at a drug store in a low-income part of Omaha. It was not uncommon on the days around the time that welfare checks came out for our store to sell a lot of boomboxes. Was that conspicuous consumption? Is it conspicuous consumption to buy an Ipod? Is it conspicuous consumption to buy an automobile? Depends on the type? Well what type, then?
How are the conspicuousness police and rules to adapt to changes in the demand and supply of consumer goods? Consuming an automobile back in the early 1900's was probably considered by many to be conspicuous. Today it's not. Back in the early 1900's it was. Is it conspicuous consumption to spend $400,000 on a home? How about in Santa Barbara, CA. where $400,000 will get you a nice trailer (albeit in a beautiful area).
And lest we forget, politicians are human beings too and can fall "victim" to the same sorts of fallibilities that affect us unelected mortals - including buying things to send status signals to others, if the gleaming publicly-financed sports stadiums and convention centers that dot the landscape are any indication.
This passage is also telling:
Political operative Joyce Aboussie "had received a copy of the Baltimore Sun from a friend in Baltimore who wanted to gloat that his city was en route to securing an NFL team - the Los Angeles Rams - while her city had failed."
This not to say people don't buy things just to show their wealth (they do) or that some people like to make others feel inadequate (they do). My point is that folks who want to enact policies to limit conspicuous consumption need to consider what it is they want to limit and to think of the long run as well as the short run.
Update: Doc gets it too!
My own somewhat jaundiced view is that the desire for conspicuous consumption is inherent in humans. Also, it provides a drive for people to work harder, innovate, stimulate productive growth etc. Those positive effects are pretty important over the long run.
This is perhaps the same point, but doesn't the government lack the kind of information needed to tax conspicuous consumption efficiently?
It would be inefficient to tax conspicuous consumption when it makes noone unhappy. But even if it makes someone unhappy, it seems that it should go untaxed if it makes the consumer happier than it makes the "audience" unhappy. That is, if the consumer's surplus exceeds the social cost, the tax would be inefficient. How will the government ever know this?
The government's other informational problems are, as you eloquently point out, determining when consumption is "conspicuous" and thus calculated to cause envy.
Finally, it seems that the amount of disutility caused an individual by conspicuous consumption depends on that individual's future prospects. If my neighbor buys a fancy car, I won't care if I could afford the car too. But even if I can't, I might not care very much if I think I'll be wealthier in the future.
I just don't see how the government could ever levy a tax without knowing it was causing more harm than good.
Posted by: AustinContrarian | September 06, 2006 at 09:22 PM
Looking back over my comment, I see an obvious response to my first point: If the tax is set exactly equal to the social cost, the consumer will still consume the product if his surplus exceeds the social cost, or he will move on to a different product with greater "net" surplus.
Duh.
Posted by: AustinContrarian | September 06, 2006 at 09:44 PM