Tuesday, 19 May 2009

Positional goods: remove all the vices

One argument for income redistribution is that income is largely a positional good; folks then spend more time on work and less time on leisure than would be optimal. Curtis Eaton presented a paper in our Department a couple of years back showing that the addition of a Veblen good (ie a positional good) crowds out civic engagement and other kinds of public good production. I was rather critical in the seminar, first because the addition of any private good to that kind of optimization problem has the effect of reducing time allotted to any other particular element of the utility function, but more importantly because if humans are status-seeking, closing off status-seeking on any one dimension (by heavy income taxation, for example) may force it over to less productive dimensions: at least the pursuit of income generates real wealth; the pursuit of other status markers may be relatively inefficient. But I didn't have data on the relative positionality of different activities.

Robin Hanson yesterday provided a listing of the relative positionality of different types of activities. Veblen goods are everywhere it seems. While 48% of survey respondents listed an income increase from $200K to $400K as being positional, lots of other things also rated as being at least as positional, including hours studying for a test (57%) and hours training for athletic competition (48%). Another survey found gains in your child's education to be as positional as gains in your income, with gains in either your own or your child's attractiveness being more positional than income.

Today, Hanson calls for those advocating heavy income taxation based on the negative externalities of status-seeking to be consistent:
Some policy implications of this data on positional effects seem easy for folks like Frank to swallow. While our evidence so far is tentative, it does seem to support subsidizing health, including air quality and device safety (though not necessarily medicine if it has little relation to health). It also supports subsidizing insurance more generally; bads being less positional than goods gives a new reason to avoid inequality from bad outcomes, such as crime. Our evidence also supports taxing work relative to leisure, though since we already have large taxes just like this, this evidence does not obviously support larger work taxes.

Many other policy implications, however, seem much harder for Frank to swallow. Since sport effort seems especially positional, should we tax sports, instead of subsidizing them as we often do now? Since education seems to be at least as positional as income, should we drastically reduce educational subsidies, or even tax it? And since government spending seems far more positional than income, shall we greatly reduce our unprecedented levels of such spending?

Perhaps Frank would suggest that other compensating side effects justify vast government spending as well as sport and education subsidies. But what about personal beauty, which our evidence suggests is one of our most positional goods? Yes, exercise also improves health, but it is very hard to see any large compensating side effects justifying makeup, hairdressing, and nice clothes. Will folks like Frank at least agree that severely taxing beauty aids is one of the clearest policy implication of our evidence on positional effects?

Also, we observe huge amount of variation in who sees what to be how positional. This suggests that perhaps policy can influence this distribution of envy. Shouldn't it be a top priority to find ways to influence folk's attitudes toward the gains of others, so that they don't feel as envious of such gains?
If student grades are positional and we tax them accordingly, what's the equilibrium of the game? Commenter Nazgulnarsil there sums up my general view, calling for the appointment of Robert Frank as Handicapper General.

If humans are status-seekers, which seems highly likely given how sexual selection works, then high marginal tax rates just push status-seeking onto the other dimensions identified by Hanson. Which then gives us some testable hypotheses: do countries with heavy income redistribution see greater spending on education, more time investment in sport, more money and time spent on personal beauty and exercise (all normalized for income, of course)? I wouldn't know where to start looking for the data, but I'd be keen to see the results.

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