Robert Frank is a Cornell University economist who has written a series of books and articles kvetching about the enormous social damage allegedly wrought by competition in American life.
One of Frank’s more remarkable arguments is that “expenditure cascades” initiated by the rich have “caused undue harm to others.” An example of such harm occurs in bidding for a house in a superior school district. Frank’s story goes something like this. In the U.S., the best schools are usually located in more expensive neighborhoods, mainly because local property taxes fund a lion’s share of a school’s budget. In order to get its children into a school of average or better quality, therefore, a family must outbid at least one-half of the families with children of school age for a house in a more expensive neighborhood. This is a matter of simple arithmetic, as Frank admits, because half of all schools must be of average or lower quality. But this is meaningful nonetheless, he argues, because school quality is defined in a relative sense: a “good school” generally means one that compares favorably to others. Thus prices of homes in more expensive neighborhoods with better schools get driven up even further. But such consumption spending is purely wasteful. Like a military arms race, the spending by the competitors does not change their relative positions: one-half of all students will still attend above-average schools and the other half will be trapped in below average schools
But how do the rich figure into all this? They exacerbate the problem of expensive neighborhoods by unleashing an expenditure cascade on society. You see, the top earners in the U.S., who, according to Frank, have captured the largest share of income gains for the past three decades, have been purchasing larger and more expensive homes. Now this would be okay, or at least not socially harmful in itself, except that this behavior “shifts the frame of reference” for those of slightly lesser means moving in the same social circles as the rich. These almost, nearly, wannabe rich begin to feel that they too must now build larger homes to maintain their social position. And so the frenzy of spending on over-sized housing cascades downward to the upper- and middle-middle classes who rush to build McMansions. Of course, no one is any happier though because — you guessed it — relative housing sizes and social positions of the various classes have not changed much. The only effect of the expenditure cascade is an enormous waste of scarce resources which could have been used to improve social welfare but have been irretrievably sunk in unwanted and underused housing capacity. Read More→