Wednesday, September 24, 2014

Having It and Flaunting It.

Paul Krugman - New York Times Blog

David Brooks is getting some ribbing for suggesting that the wealthy should “follow a code of seemliness”, not living the lavish lifestyles they can afford. I don’t want to join in the jeering; instead, I want to talk a bit about the economics of flaunting your wealth (which was actually a topic I was working on before David’s last column.)
The first thing to say is that expecting the rich not to flaunt their wealth is, of course, unrealistic. If your sense is that the rich were more restrained in the 50s and 60s, well, that’s because they weren’t nearly as rich either absolutely or relatively. The last time our society was as unequal as it is today, giant mansions and yachts were every bit as ostentatious as they are now — there’s a reason Mark Twain called it the Gilded Age.
Beyond that, for many of the rich flaunting is what it’s all about. Living in a 30,000 square foot house isn’t much nicer than living in a 5,000 square foot house; there are, I believe, people who can really appreciate a $350 bottle of wine, but most of the people buying such things wouldn’t notice if you substituted a $20 bottle, or maybe even a Trader Joe’s special. Even really fine clothing derives a lot of its utility to the wearer by the fact that other people can’t afford it. So it’s largely about display — which Thorstein Veblen could, of course, have told you.
So why go after this display, as opposed to taxing away some of the income? You could say that taxes reduce the incentive to get rich; but so would sumptuary laws, which would undermine the point of getting rich, and so, in fact, would a “code of seemliness”, which would again reduce the fun of flaunting it, which is a lot of what people want lots of money for.
Wait, there’s more. If you feel that it’s bad for society to have people flaunting their relative wealth, you have in effect accepted the view that great wealth imposes negative externalities on the rest of the population — which is an argument for progressive taxation that goes beyond the maximization of revenue.
And one more thing: think about what this says about economic growth. We have an economy that has become considerably richer since 1980, but with a large share of the gains going to people with very high incomes — people for whom the marginal utility of a dollar’s worth of spending is not only low, but comes largely from status competition, which is a zero-sum game. So a lot of our economic growth has simply been wasted, doing nothing but accelerating the pace of the upper-income rat race.
And now it’s time for me to make my seemly way to the office, on foot and mass transportation, where I will gloat in my moral superiority and sneer at people who haven’t won as many academic honors. Oh, wait.

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