 The idea here is how big and expense do you feel you need to undertake to achieve your goals? And here the Darwinian central insight was that life's graded on the curve. It's amazing to me that several hundred years after Adam Smith, traditional economic models take no note of that fact. They assume that your utility depends on your absolute consumption. In fact, context matters and it matters in a transparently obvious way. I was a Peace Corps volunteer in rural Nepal years ago. I lived in a two room house with a grass roof that leaked, no plumbing, no electricity. If any of you lived in that house, you wouldn't want anyone to know where you lived. If you had kids, they wouldn't want their friends to see where they lived. They would be ashamed. I never felt ashamed of my house in Nepal. It was actually a pretty nice house in the context I was living in. Other high school teachers in the school where I taught lived in houses that weren't nearly as nice as the one I lived in. I entertained people with no thought that people would think ill of me for living in that house. If my friends in Nepal saw the house I live in in Ithaca, they would think I'd taken complete leave of my sentence. Why would anyone need such a grand house? You wouldn't think that. But to assert that context doesn't matter in the shaping of consumption demands, that's to talk about a world completely unlike the world that we live in. And so what we've seen in this country is a shift in where the money goes. Unlike the three decades right after World War II, we saw all the income growth go to the people at the top of the income ladder since about the mid-70s. That's a subject Phil Cook and I wrote about in the Winter Tech All Society. But it's largely market force driven, although, yes indeed, securing political regulatory favors has played a role in some industries that's quite conspicuous too. So you've got money concentrating at the top. The people at the top have spent more. That's the natural response when you have more money. Many people wag their fingers at the lavish purchases. They see people at the top making. But that's a failure of perspective. The standards are local in social groups. 70,000 square feet doesn't seem too big. If you travel in a certain circle. But what we do know is that when everybody builds bigger, the effect is merely to raise the bar that defines how big a mansion people in that circle feel they need. I would wager my entire retirement account that if the correct answer were in an envelope, I would wager everything I own that the answer would say people are less happy when everybody has 70,000 square feet than when everybody had 40,000 square feet. It's a nuisance to have so much more space to keep track of and have staff to manage. Why do you need so much more square footage? Because you've got to entertain in the style that's become the custom for your group. Now your daughter's wedding reception in your circle is held at home, not in a hotel. So you need a ballroom. People in the middle don't get angry. They see pictures of the mansions. That's cool. Maybe I'll have one someday. They say themselves. The rich are a different league. We're not competing with them. So we're not offended when they have neat things. We look to them as entertainment, really more than as objects of envy. The people just below the rich though, they're in the same social circle as the very rich. And so that next level down builds bigger because their frame of reference has been shifted by what people at the top do. And then people just below them and so on all the way down the income ladder. Now the new house built in the United States in 2007 had 2,300 square feet plus of living space. The median new house in 1980 had 1,600 square feet. So 50% increase in house size. The real hourly wage rate for men during that period was actually lower in 2007 than in 1980. Why are the people in the middle spending more? And the only coherent answer is there's been an expenditure cascade spawned by higher spending at the top. You could say as many people did indeed say during the 2008 campaign that, well, people shouldn't be buying a house if they can't afford it. The middle class has no more money. How can they afford to buy a house 50% bigger than before? Here's the rub. If others like you are buying 2,300 square feet and you buy the 1,600 square feet that you can comfortably afford, it's your kids who will go to below average schools. Does anyone not know that the good schools are in the more expensive neighborhoods? That's true in every country I've ever visited or read about no matter what school budget formulas say. The more expensive neighborhoods are the ones served by better schools. All parents want their kids to go to the best possible schools. If I'm the median earner, what must I do to achieve that goal? I must outbid 50% of all other bidders to get a house in at least average quality school district. And if any parent didn't have at least that ambition, we'd think ill of her. So parents bid to the extent they can. And because others are spending more, they feel they've got to spend more. They commute longer distances, they work longer hours, they're under more financial stress to be sure. I think that's what a lot of the OWS movement is about. There are people who have huge debt burdens they're not gonna be able to cope with. They're not sure why they're saddled with these debt burdens. There's not a cogent theory guiding their thinking about this process, much less a plan for what to do about it. But I think that's the root of the malaise that's kindled this social movement. I don't offer any prediction about where it will go. I think the one thing we've learned is that we can't predict where movements like this are gonna go. Nobody saw the Arab spring coming. Nobody saw the fall of the Eastern European governments in 1989 where it goes is anybody's guess at this point. But what we also know is that there are things we can do about it. When everybody's engaged in a fruitless bidding war that drives up the prices of the houses in the better school districts, nobody gains anything from that. Half the kids still go to bottom half schools the same as before. When people rob their savings to bid more aggressively for houses in better school districts and everybody does that, we bid up the prices of the houses in the better school districts. The same kids go to the same schools as they would have if none of us had done that. It's the conflict between individual and group interests again. If we all stand to see better, nobody sees any better than if all had remained comfortably seated. There's no presumption. Once you grasp Darwin central insight, there's just no presumption that group interests and individual interests coincide. And if you wanna try to change incentives that individuals face, I think the most promising cue to lean on for how to proceed is the lessons of the environmental movement. We learned that command and control detailed prescriptive regulation wasn't a very efficient way to get the smoke out of the air. When I first got to upstate New York, there were articles every day about acid rain. Acid rain was falling on the Adirondacks because companies to the west of us were emitting SO2 into the air from their smokestacks. Why were they doing that? Because there was no charge for emitting SO2 and it was expensive to filter it out. Finally, we adopted in the 1990 Cleat Air Act a permit system, a system whereby firms have to have a permit for every ton of SO2 they discharge into the air. SO2 levels quickly were brought under control for about one eighth of the estimated cost that would have taken to achieve the same air quality targets under the command and control approach. Don't tell people they can't do what they wanna do. Some of them have no alternative but to do what they're doing. Others have very attractive alternatives and can switch. If you make people pay a fee that represents the harm they're causing to others, they'll look for the most efficient way to escape paying that fee and will pay it only if there isn't an efficient way. So taxing consumption doesn't tell you you can't build a bigger mansion. It just says recognize that when you spend more on a coming of age party, the CEO who spent 10 million on his daughter's coming of age party raised the bar for others in his circle. Now, Americans spend an average of $28,000 per wedding. In 1980, in real terms, the corresponding figure was $11,000. Does anyone think that the people getting married now are happier because we're spending more? What a bizarre view that would be to try to defend. The bar has simply been raised that defines what's an acceptable way to mark a special occasion. That's self-cancelling these expenditures. If we channel those same dollars into other uses, it would be pure gain. Nobody would be any less happy. So think about the guy who's thinking about building a $2 million addition onto his mansion. He's spending already $4 million a year. The marginal tax rate is 100% on the next dollar. That just means if he spends a dollar, he has to spend only that dollar but a dollar of tax on that dollar. Somebody satirized my proposal as the 99-100 plan. Okay, I accept that. If you put it in context, it's not the 99 part but the 100's accurate. So I'm gonna build a $2 million addition. Oh, now Frank's persuaded the Congress to impose this tax. That's gonna cost me $4 million. And what we know is that the rich scale back when things get more expensive. Some people don't believe that. Go to New York and compare the living space the rich live in in New York with the living space they live in in Wyoming. The higher real estate prices in New York induce the rich to build smaller living spaces. And somebody thinking about building a $2 million addition onto his mansion would say in response to this tax, hold it, I'm gonna scale back to a $1 million addition. That way with the tax it'll end up costing no more than I was planning to spend. And if we all scale back, and here's the alchemy inherent in the tax, if we all scale back, none of us is any of the worse for where. It's relative mansion size at some point that matters. If we each build smaller additions, nobody's any less happy than if we'd each built bigger ones. And in the meantime, the government's got a million dollars worth of tax revenue and the high end spenders have a lot more money in their tax exempt investment accounts to help the economy grow and the tax revenue can help pay down debt and rebuild bridges and roads and so on. So it's a free lunch, basically. We're so grossly inefficient now because we can't have a intelligent conversation about tax policy and spending policy that we've kind of painted ourselves into a corner where we're on a collision course with bankruptcy. We seem to have no place to turn. But the ironic thing is that there's a very good place to turn. A very simple set of steps we could take that would get us out of this mess.