$700k watches

Robert Frank on income redistribution (Tax cuts ...):

... there is little reason to expect large tax cuts for wealthy families to have resulted in a more efficient allocation of our nation's scarce resources.

For one thing, not all of the dollars used to finance these tax cuts would have been spent wastefully by government. Most of the money recently cut from the food stamp program, for example, would have been spent by poor families to buy food at fair market prices. And even though government does buy some items at inflated prices - body armor whose price includes a profit margin large enough to finance a $10 million birthday party? - many of these items serve vital purposes.

In contrast, most of the tax cuts financed by recent budget cuts will go to families that already have everything they might reasonably need. This money will be deployed in the quest for "something special." Yet because special is an elastic concept, the number of families that succeed in this quest will be little different from before.

The idea is that rich people don't really know how to spend "their" money any better than the government does. Alpha males buy $700k watches and the best mommies and daddies spend $10 million on birthday parties for their 13 year old. Raging against silly spending by rich people is a loser's game ... but Frank makes a different point, if the spenders are trying to buy prestige and if everyone does it, no one breaks away from the pack and so the marginal utility of the extra spending is close to nil. Ouch.

Comments

[ivan]

Of course the overwhelming part of the tax cuts are not financed by budget cuts. Silly spending by the rich is matched with silly spending by the government.

[paulchambers]

In "Winner-Take-All-Society:..," Robert Frank & Phillip Cook mention the phenomenon of competitive body modification. Through tattoos, individuals attempt to distinguish themselves by belonging to a tribe. As tattoos become more common (some of my college students belong to the same tribe as the grandmother cashier at our Wal-Mart), the level of body modification increases.

The Nash equilibria of the positional goods games (status birthday parties and "tribal" tattoos) have a heck of a lot of ink & dang big birthday parties.

Bring on the dancing ponies and the dermal punches!