Luxury Fever

1. Conspicuous consumption drives a wasteful spending race

The increase in the amounts we spend on appliances is part of the broader change in spending patterns that has been occurring in America, Europe, and elsewhere.

Luxury fever. As top earners accumulate more wealth, they spend increasingly on visible luxury goods like mansions, sports cars, and designer clothing. This sets new standards that ripple down the income ladder, pressuring others to upgrade their own consumption to maintain relative status. The result is an arms race of wasteful spending that leaves most people no better off, while diverting resources from more beneficial uses.

Escalating standards. Examples of this phenomenon abound:

• Average new home size has grown from 1,100 sq ft in the 1950s to over 2,000 sq ft today
• Luxury car sales growing 4x faster than overall auto sales
• Cosmetic surgery procedures up 178% in just 5 years
• High-end appliances like $5,000 BBQ grills becoming commonplace

This cycle of competitive consumption yields little lasting satisfaction, as people quickly adapt to new baseline standards. Meanwhile, it leaves less for saving, public goods, and addressing social issues.

2. Relative position matters more than absolute wealth for satisfaction

H. L. Mencken once defined a wealthy man as one who earns $100 a year more than his wife's sister's husband.

Context is key. Numerous studies show that people's satisfaction depends far more on their income and consumption relative to others, rather than absolute levels. This helps explain why average happiness has remained flat in developed countries despite dramatic increases in material living standards over decades.

• Subjective well-being correlates strongly with relative income within countries
• But shows little correlation with absolute income levels across countries or over time
• People consistently report they'd prefer lower absolute income if it meant higher relative position

This relativity of satisfaction creates a "positional treadmill" where people must keep spending more just to maintain their relative status. It also means across-the-board increases in consumption yield little net benefit for society.

3. Adaptation diminishes the joy of material gains over time

Many wines costing less than $10 today are superior, in absolute terms, to the wines drunk by the kings of France in centuries past. Yet in many social circles today, a $10 bottle of wine is simply not an acceptable way to mark a special occasion.

Hedonic adaptation. Humans have a remarkable ability to adapt to changed circumstances, including higher material living standards. While a new purchase or upgrade may provide an initial thrill, we quickly grow accustomed to it and return to our baseline level of satisfaction. This adaptation applies to many domains:

• Lottery winners report no higher happiness after a few years
• People in very different living conditions report similar life satisfaction
• Even major life changes like disability show substantial adaptation over time

However, adaptation is not uniform across all types of experiences. Many forms of "inconspicuous consumption" - like time with family or engaging work - show less adaptation over time. This suggests redirecting resources toward these areas could yield more lasting well-being.

4. Inconspicuous consumption often yields more lasting satisfaction

If we all cut back, we do better; but someone who cuts back unilaterally often does much worse.

Beyond material goods. While conspicuous consumption often provides fleeting satisfaction, research indicates several categories of "inconspicuous consumption" tend to yield more enduring improvements in well-being:

• Time with family and friends
• Engaging and meaningful work
• Physical health and exercise
• Sleep and relaxation
• Natural environment and green spaces
• Learning and personal growth

Collective action problem. The challenge is that unilaterally cutting back on conspicuous consumption to invest in these areas often leaves an individual worse off relative to peers. This creates a collective action problem where everyone would benefit from shifting resources, but individual incentives push in the opposite direction.

Addressing this misalignment of incentives is key to unlocking more sustainable paths to well-being and social progress. Policy interventions like consumption taxes could help overcome the prisoner's dilemma of wasteful competitive consumption.

5. Individual incentives often conflict with collective well-being

Competitive forces hone exquisite physical and behavioral adaptations, both in the animal kingdom and in human societies. In the animal kingdom, these adaptations typically serve the interests of individual organisms and may either help or hinder the interests of larger groups. And the same is true in human societies.

Smart for one, dumb for all. Many individual choices that are rational from a personal perspective lead to collectively wasteful outcomes when adopted widely:

• Job seekers buying expensive suits, neutralizing any individual advantage
• Parents working longer hours to afford houses in better school districts, leaving less family time
• Consumers taking on debt to maintain appearances, reducing financial security
• Companies advertising heavily, mostly to offset competitors' ads

This dynamic mirrors other collective action problems like overfishing or pollution. The key is recognizing that many consumption choices have negative externalities by raising societal standards or depleting common resources.

Winner-take-all markets. The spread of winner-take-all markets in many professions amplifies this dynamic. Small differences in relative performance can yield enormous differences in rewards, intensifying positional competition.

6. Progressive consumption tax could realign incentives and boost growth

A progressive consumption tax can help free us from the grip of luxury fever. In the least coercive possible way, such a tax, phased in gradually, would cause an across-the-board reduction in the rate of growth of expenditures on conspicuous consumption.

Tax design. A progressive tax on consumption (income minus savings) rather than income would:

• Encourage saving and investment
• Reduce incentives for wasteful conspicuous consumption
• Generate revenue to invest in public goods and address inequality
• Preserve individual choice while aligning incentives with collective interests

Growth effects. Contrary to trickle-down theory, evidence suggests a more progressive tax system could actually boost economic growth by:

• Increasing savings and productive investment
• Reducing wasteful zero-sum competition
• Improving human capital through better public investments
• Promoting social cohesion and reducing costly social problems

The key is recognizing that much luxury consumption is driven by relative position, so across-the-board reductions have minimal impact on satisfaction while freeing up resources for more productive uses.

7. Redirecting resources from luxury to public goods benefits all

We could have eliminated the budget deficit quite easily without paring even a single nickel from the expenditure column. The primary cost, had we followed this strategy, would have been a reduction in the rate of growth of luxury consumption spending.

Neglected investments. While luxury consumption has boomed, many valuable public investments have been neglected due to perceived budget constraints:

• Crumbling infrastructure (roads, bridges, water systems)
• Environmental protection and public health measures
• Education and childcare
• Scientific research and technological innovation
• Poverty alleviation and economic opportunity programs

Win-win opportunity. Redirecting even a fraction of luxury spending growth toward these areas could yield enormous social returns. Because much luxury spending is zero-sum positional competition, the cost in terms of lost satisfaction would be minimal.

This represents a rare opportunity to dramatically improve collective welfare without requiring painful sacrifices. The challenge is overcoming entrenched interests and misperceptions about the relationship between consumption and well-being.

8. Current economic policies are based on flawed assumptions

Although the fundamental premise of trickle-down economics is widely and firmly held, there appears to be little theoretical or empirical support for it. On the contrary, there are coherent theoretical reasons for expecting that higher tax rates on top earners would lead to higher, not lower, rates of economic growth.

Trickle-down fallacy. Many current policies are based on the flawed assumption that reducing taxes on the wealthy will boost growth and eventually benefit all. However, evidence suggests:

• No clear link between top tax rates and growth rates across countries or time periods
• Growing inequality often associated with slower growth and various social problems
• Excessive focus on financial incentives ignores other important economic motivations

Rethinking incentives. A more nuanced view recognizes that:

• Relative position often matters more than absolute rewards
• Many top earners are in winner-take-all markets where total compensation could be reduced with minimal impact on effort or innovation
• Extreme inequality can reduce opportunity and social mobility, hindering growth

Policies should aim to harness competitive impulses for collective benefit, rather than assuming unfettered self-interest automatically produces optimal outcomes.

9. Addressing inequality and providing opportunities is affordable

With national income in the United States now more than $8 trillion a year—an average of almost $30,000 for every man, woman, and child—it is ludicrous to pretend that we cannot afford to repair our infrastructure and provide better opportunities for the poor, or that we cannot afford more time for our families and friends.

False scarcity. Claims that we cannot afford to address pressing social needs ring hollow given overall wealth levels. What's lacking is not resources, but proper allocation:

• Even modest reductions in luxury consumption growth could fund major public investments
• Current policies often penny-wise and pound-foolish (e.g. deferring infrastructure maintenance)
• Many social programs yield high returns (e.g. early childhood education, preventive healthcare)

Opportunity costs. The real question is not whether we can afford to act, but whether we can afford not to:

• Neglecting infrastructure and education undermines future growth
• Poverty and lack of opportunity waste human potential and fuel social problems
• Environmental degradation imposes mounting costs on society

Reframing the debate around opportunity costs and long-term returns, rather than short-term budget impacts, could help build support for more balanced and forward-looking policies.

Last updated: October 3, 2024