Luxury Fever: Weighing the Cost of Excess

As the review title indicates, students & professors of economics, politics, psychology and other social & behavioral sciences will benefit from perusing the pages of Bob Frank's commentary on contemporary American life. Regardless of whether you agree with Professor Frank's solution to our society's "arms race of consumerism", the book makes the reader think about the materialism evident in much of the U.S. Using amusing analogies to describe human behavior related to "buying excess," Frank explains these activities with theories of psychology and economics. His insight provokes thought and entertains the reader throughout the book. Whether explaining why many middle class couples spend $5,000 for the latest Viking model gas grill for their patio, or describing how two millionaires childishly built larger and more lavish yachts just to own the biggest and best cruiser in the world, Frank delivers interesting examples which help provide an understanding for why many people do the things they do. Read this book if you are a student or teacher of the social or behavioral sciences. Whether you agree with Frank's prescription to correct societal consumerism or you don't believe America has a problem, this book entertains the reader and stimulates ideas for discussion. Well worth the read!

About 100 years after Veblen coined the phrase, "conspicuous consumption," Frank finds himself trying to make sense of outrageous consumption patterns during another era of prosperity. Why the love for expensive grills, cars and watches? The answer, in brief, is status. Because social status is measured relative to others (rather than by absolute standards), consumers step on a treadmill that finds them trying to outmeasure their peers. This treadmill doesn't lead to any greater happiness. Though individual satisfaction tends to increase with greater income and greater income slightly associates with higher satisfaction in the U.S., the elevations in per capita income within countries over time don't correspond with greater satisfaction (above some threshold). We have more stuff than our grandparents but not more satisfaction because of it. Pointing out that society as a whole would be better served by reallocating the resources wasted on individual luxury items by investing in clean air and water, paying teachers and maintaining roads, Frank shows that this conflict between individual and group interests represents a public goods problem. Though legal restrictions, social norms and other mechanisms have been advanced to solve these dilemmas elsewhere, Frank favors a progressive consmption tax for the U.S. This contention muddies the water between advocacy and the science of economics. In his support of it, as elsewhere in the book, he overgeneralizes from a few lines of evidence ("all evidence shows that...") to broad conclusions, leaving the reader questioning how completely the relevant evidence has been reviewed. Yet the clarity, readability and timeliness of this book make it well worth reading. Will it help us get off the status treadmill?

This fascinating book describes how a new virus, the luxury fever has Americans seemingly inescapably in its grip: people spend a larger and larger proportion of our money on luxury goods. And, because for most people incomes have remained static or have even declined (in the US and the UK), this extra spending was financed by lower savings and higher debts, making the economy weaker and more vulnerable. Further, most people work longer and tend to spend less time on important activities such as vacations, being with family, sleeping exercising, etc. To make things worse: Americans spend less on vital public services which leads to a deteriorating infrastructure, to higher crime, to dirty streets and parks, to water pollution, to a deteriorating education system, etc. And what about health? 40 million Americans currently lack health insurance.... This book explains how there is a competition 1) between different forms of private spending (do we buy luxury or do we spend our money differently?) and 2) between private and public spending. To expand on the latter point: a growing share of the US national income is spent on consumption and spending on vital publics services is increasingly threatened. Frank explains (on the basis of well-being research and the adaptation-level theory) that the main reason we buy luxury goods is to demonstrate to others that we can afford to thereby trying to distinguish ourselves from them. In doing so we try to achieve happiness by improving our relative status. The irony is, however, this absolutely doesn't work! The satisfaction we get from luxury spending, which Frank calls conspicuous spending, depends largely on context. The satisfaction we get from luxury spending lasts only shortly. Two examples: 1) If we buy an expensive car, this distinguishes us from our neighbour and we feel happy. If, however, next month our neighbour buys an even fancier one, our satisfaction will be largely gone. You can see how this leads to an escalation, an arms race, with no winners. 2) The satisfaction we get from luxury goods tends to decline steeply over time. We tend to get used quickly to what we have and the favourable features of the luxury good tend to fade into the background rapidly: we no longer notice the fancy features of our expensive car and our satisfaction diminishes. Bottom line: this increasing conspicuous spending does more harm than good. We have to discourage conspicuous consumption in favour of inconspicuous consumption. Frank explains that no individual or family alone can solve this problem. It has to be solved at a higher level. He proposes a simple but effective measure to discourage conspicuous consumption, a progressive consumption tax levied on consumption rather than income. Frank claims this tax can stimulate radical changes in the ways we lead our lives. Contrary to the believe of many, he convincingly argues, this progressive consumption tax would not cripple the economy but invigorate it. A fascin

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

Driving to work daily, my small but reliable Toyota Corolla is often surrounded by these massive SUV jeeps driven by single occupants. The local supermarket parking lot is littered with either yuppie BMW's or these obscene gas guzzler SUV vehicles. In my hometown of Colts Neck NJ, a very wealthy suburb of New York City, farmland is being devoured by huge 6,000 square feet mansions on 5 acre building lots. I was raised in the community when it was very rural. Now older residents of the community are being squeezed out as property taxes skyrocket to pay for paving new and bigger roads, more street lights, sewer drainage, etc. Does this luxury spending really contribute to a higher standard of living for all Americans or does this overconsumption represent collective madness?As Robert Frank mentions, America is increaingly becoming a society of overconsumption by all income groups. A secretary in my office recently purchased a $40,000 Mercedes SUV. Just as the nuclear arms race betweeen Russia and the United States represented a misallocation of resources, luxury fever as he describes also has long term negative consequences. Already the U.S. trade deficit has skyrocketed to record levels as personal bankruptcies soar with household debt levels exploding and the national savings rate imploding to a negative rate. With farmland disapearing at a record rate and manufacturing employment falling last year by 300,000 jobs, I personally can't imagine that there will be a farm acre or factory left in America in twenty years. We will have to import everything from autos to basic food essentials. In the long run, America cannot and should not continue to finance this foolish excessive level of consumption from foreign creditors. No family or even nation can continue to consume more than it earns for an indefinite period of time. Maybe I'm too old fashioned in my views, but that's the way I see things.