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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.

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how rising inequality stimulates energy demand

How Rising Inequality Stimulates Energy Demand

Robert H. Frank

St. Gallen Symposium

June 2, 2007

slide2
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.

slide3
Which world would you choose?

C: You have 2 weeks of vacation each year, others have 1 week,

or

D: You have four weeks of vacation each year, others have 6 weeks?

slide4
Housing = positional good

Leisure = nonpositional good

slide5
People care about relative consumption, more in some domains than in others.
  • 2. Such concerns lead to expenditure arms races focused on positional goods--those goods for which relative position matters most.
  • 3. Positional consumption is more energy intensive, on average.
  • 4. Inequality stimulates positional consumption and energy use.
slide6
Adam Smith’s invisible hand:

Self-interested demands will result in a socially efficient allocation.

slide7
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.

slide14
The exception that “proves” the rule:

Very little sexual dimorphism in monogamous species like the albatross.

slide15
Gaining access to mates

= a positional good

Minimizing the risk of death from predators

= a nonpositional good

the conflict between individual and group
The Conflict Between Individual and Group

Robert H. Frank.“The Demand for Unobservable and Other Nonpositional Goods.” American Economic Review, 75, March, 1985, pp. 101-116.

slide19
Fractal earnings change pattern for virtually every labor market group:

Bottom quintile: Absolute earnings decline

Middle quintile: Negligible earnings growth

Top quintile: Substantial growth

slide20
College graduates

Dentists

The top 1 percent

The top 1/10th of 1 percent…

slide21
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

slide23
A memorable meal

An effective interview suit

A suitable gift

slide24
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.

Richard Layard

slide25
If you were society’s median earner, which option would you prefer?
  • You save enough to support a comfortable standard of living in retirement, but your children attend a school whose students score in the 20th percentile on standardized tests in reading and math; or

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?

slide26
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

expenditure cascades
Expenditure Cascades
  • Top earners spend more because they have more money.
  • This shifts frame of reference for those just below them, who also spend more.
  • That, in turn, shifts the frame of reference for those next below.
  • And so on all the way down the income ladder.
slide29
How heavy should your car be?

Honda Civic: 2449 pounds

Ford Excursion:

7648 pounds

slide30
The Progressive Consumption Tax

Consumption + Savings = Income

Consumption = Income – Savings

Taxable consumption = Income – Savings

– standard deduction

slide33
Gas Grills Then and Now

1989 Sunbeam, $90

Viking Professional, $5,000.

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