How Rising Inequality Stimulates Energy Demand. Robert H. Frank St. Gallen Symposium June 2, 2007. Which world would you choose?. World A: You and your family live in a 4000-square foot house, others live in 6000-square-foot houses.
How Rising Inequality Stimulates Energy Demand
Robert H. Frank
St. Gallen Symposium
June 2, 2007
Which world would you choose?
World A: You and your family live in a 4000-square foot house, others live in 6000-square-foot houses.
World B: You and your family live in a 3000-square foot house, others live in 2000-square-foot houses.
Which world would you choose?
C: You have 2 weeks of vacation each year, others have 1 week,
D: You have four weeks of vacation each year, others have 6 weeks?
Housing = positional good
Leisure = nonpositional good
Adam Smith’s invisible hand:
Self-interested demands will result in a socially efficient allocation.
Charles Darwin: Traits are selected because of their impact on the reproductive fitness of individuals, not groups.
Traits that benefit individuals often work to the disadvantage of groups.
Why do male elephant seals weigh five times as much as females?
The exception that “proves” the rule:
Very little sexual dimorphism in monogamous species like the albatross.
Gaining access to mates
= a positional good
Minimizing the risk of death from predators
= a nonpositional good
Robert H. Frank.“The Demand for Unobservable and Other Nonpositional Goods.” American Economic Review, 75, March, 1985, pp. 101-116.
Changes in the Before-Tax Distribution of Income
Changes in the After-Tax Distribution of Income
Fractal earnings change pattern for virtually every labor market group:
Bottom quintile: Absolute earnings decline
Middle quintile: Negligible earnings growth
Top quintile: Substantial growth
The top 1 percent
The top 1/10th of 1 percent…
Earnings of CEOs of largest U.S. corporations
1980: 42 x average worker’s earnings
2000: 531 x average worker’s earnings
Hedge fund manager James Simons: $1.7 billion in 2006 (38,000 x average worker’s salary)
Top 25 hedge fund managers: $14 billion in 2006
Context and the demand for quality
A memorable meal
An effective interview suit
A suitable gift
In a poor country, a man proves to his wife that he loves her by giving her a rose. In a rich country he must give a dozen roses.
If you were society’s median earner, which option would you prefer?
2) you save too little to support a comfortable standard of living in retirement, but your children attend a school whose students score in the 50th percentile on those tests?
The cost of sending a child to a school of average quality is linked to the price of the average house in the community.
Median size of a newly constructed house:
1980: less than 1600 square feet
2004: more than 2100 square feet
How heavy should your car be?
Honda Civic: 2449 pounds
The Progressive Consumption Tax
Consumption + Savings = Income
Consumption = Income – Savings
Taxable consumption = Income – Savings
– standard deduction
Gas Grills Then and Now
1989 Sunbeam, $90
Viking Professional, $5,000.
Talos Outdoor Cooking Suite, $35,000.