how rising inequality stimulates energy demand
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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. - PowerPoint PPT PresentationTRANSCRIPT
How Rising Inequality Stimulates Energy Demand
Robert H. Frank
St. Gallen Symposium
June 2, 2007
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?
World A: You and your family live in a 4000-square foot house, others live in 6000-square-foot houses.
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?
Housing = positional good
Leisure = nonpositional good
1. 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.
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
The Conflict Between Individual and Group
Positional goodsNonpositional goods
Bombs
Toasters=
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
1949-1979.
1979-1999
Bottom20%
+116%+100%
Middle20%
Fourth20%
Top20%
Top5%
Second20%
+111% +114%+99%
+86%
Bottom20%
-1%
+6%
Middle20%
Fourth20%
Top20%
Top5%
Second20%
+11% +19%
+42%
+66%
Changes in the After-Tax Distribution of Income1979-2000
Fractal earnings change pattern for virtually every labor market group:
Bottom quintile: Absolute earnings decline
Middle quintile: Negligible earnings growth
Top quintile: Substantial growth
College graduates
Dentists
The top 1 percent
The top 1/10th of 1 percent…
2000: 531 x average worker’s earnings
Earnings of CEOs of largest U.S. corporations
1980: 42 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.
Richard Layard
If you were society’s median earner, which option would you prefer?
1) 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?
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
• Top earners spend more because they have more money.
• And so on all the way down the income ladder.
• That, in turn, shifts the frame of reference for those next below.
• This shifts frame of reference for those just below them, who also spend more.
How heavy should your car be?
Honda Civic: 2449 pounds
Ford Excursion: 7648 pounds
The Progressive Consumption Tax
Consumption + Savings = Income
Consumption = Income – Savings
Taxable consumption = Income – Savings – standard deduction
Taxable Consumption Marginal Tax Rate
0 - $39,999 20 percent
$40,000 - $49,999 22 percent
$50,000 - $59,999 24 percent
$60,000 - $69,999 26 percent
$70,000 - $79,999 28 percent
$80,000 - $89,999 30 percent
$90,000 - $99,999 32 percent
$100,000 - $129,999 34 percent
$130,000 - $159,999 38 percent
$160,000 - $189,999 42 percent
$190,000 - $219,999 46 percent
$220,000 - $249,999 50 percent
Taxable Consumption Marginal Tax Rate
$250,000 - $499,000 60 percent
$500,000 - $999,999 80 percent
$1,000,000-$1,999,999 100 percent
$2,000,000-$3,999,999 150 percent
$4,000,000+ 200 percent
Viking Professional, $5,000.
1989 Sunbeam, $90
Gas Grills Then and Now
Talos Outdoor Cooking Suite, $35,000.