Luxury Fever

Robert Frank, a Cornell economist, argues that a large share of American consumption is positional, meaning that its value depends on comparison with what others have rather than on absolute quantity. He uses this to explain why rising incomes over decades did not raise reported wellbeing, and why spending on housing, cars, weddings and similar visible goods escalated faster than income.

The mechanism is a spending arms race. If the value of a house depends partly on its position relative to other houses in the school district, then everyone buying larger houses leaves everyone in the same relative position while consuming more resources. Frank contrasts positional goods with non-positional ones, principally free time, commuting, job security, and health and safety, whose value does not depend on comparison. He argues that individuals rationally overinvest in the first category and underinvest in the second, and that the aggregate result makes everyone worse off.

His policy proposal is a progressive consumption tax: tax income minus savings, at steeply progressive rates, so that the tax falls on what people spend rather than on what they earn. He argues this would slow the positional arms race without reducing anyone's relative position, and would raise savings and public investment. Critics dispute both the empirical claim that wellbeing has not risen with income and the practicality of the tax, and the happiness research Frank relies on has been contested since, particularly by Stevenson and Wolfers. The positional goods argument itself is now standard in economics.