Robert Frank’s radical idea

How the power of social pressure could revolutionize economics and solve our hardest problems.

I’ve known Cornell economist Robert Frank for almost 15 years. And for as long as I’ve known him, Frank has been trying to convince his fellow economists of an idea that’s simple to state, but radical in its implications: Social pressure is a fundamental economic force. We are not rational, individual economic agents; we are social animals trying to mimic, and best each other — often without even knowing it. The failure of the economics profession to see this is, in Frank’s view, a crime against public policy.

Frank’s new book, Under the Influence: Putting Peer Pressure to Work, came out shortly before the coronavirus reshaped daily life. But for that very reason, the book is extraordinarily timely: It’s an effort to show that the economics of social contagion could reshape the world, solving our hardest problems — from climate change to income inequality — and offering new ways to think about the power we have as individuals. Absent the pandemic, its argument might’ve seemed abstract, optimistic. But now we’ve seen it happen.

We are watching a version of Frank’s thesis play out right now, in real time. In the wake of coronavirus, social pressure has driven perhaps the single fastest behavioral transformation in human history. It is the example and pressure we face from each other that has made social distancing so effective, so fast. And if social pressure can do that — what else can it do?

What Frank offers in this conversation on The Ezra Klein Show is a theory of how public policy can shape peer pressure for good and for bad. Some of the ideas in this podcast — “expenditure cascades,” “positional goods” — are hard to unsee once you see them. Others — like his proposal to rebuild the tax system around a progressive consumption tax meant to curb the intra-wealthy competitions that drive inequality — would radically reshape vast swaths of the tax code.

A lightly edited excerpt from our conversation follows. The full conversation can be heard on The Ezra Klein Show.

Ezra Klein

Throughout your career, you’ve been trying to get economics as a profession to better appreciate social pressure as a force that is driving a lot of waste and a lot of problems. Could you talk a little bit about your basic theory of positional goods and expenditure cascades — and how they have created an inequality race?

Robert Frank

There are lots and lots of situations where what is in my interests to do as an individual is absolutely not in our collective interests. The most mundane example is that if you stand in front of me at a concert, I can’t see, so I stand. Soon, everyone is standing, yet none of us sees any better than if we’d all remained comfortably seated. So to stand is totally the right thing to do individually, but collectively you’d all be happier if you could figure out a way to remain seated during the concert and not leave feeling tired.

Situations like that are endemic in life. As a parent, it’s naturally near the top of our list of things that we care about that our kids get to go to good schools. What’s a good school? It’s necessarily a relative concept. It’s a school that’s better than other schools in the area. And what we know is that the good schools are located in the more expensive neighborhoods. So if you’re if you’re the median earner and your ambition is to send your kid to a school of average quality, just average quality, what must you do? You must buy access to the median-priced house for your area.

That’s where we see the cascade. What’s happened since the early 1970s is that virtually all of the income growth in the United States has gone to people at the top of the income ladder. So the people at the top have been building bigger and better. Then, people in the middle see the pictures of the yachts and the and the mansions, and they now feel like they need bigger. So they build bigger too.

You need a process like that to explain why the median new house 1970 went from 1500 square feet to 2400 hundred square feet. It’s not because the median wage earner has higher real income per hour. What’s changed is that other people like you are spending more; if you don’t spend more too, then you don’t get the house in the median school district. Nobody wants to do that. So the middle class is now working two jobs, buying houses further from the center because land’s cheaper, borrowing more, saving less. They’re working every margin they can, because that’s what it takes to keep pace set by the higher spending level at the top. That’s the expenditure cascade.

That’s the monumental failure of economic policy: In the era of the last four decades, we have allowed inequality to dictate expenditure cascades that have steered a bigger and bigger fraction of our net national income away from public investment and toward private consumption that’s not really doing anything for anybody.

Ezra Klein

In the book, you argue we can remedy a lot of this through an inversion of our tax structure. Do you want to talk about the idea of a highly progressive consumption tax and why you think that’s a good idea?

Robert Frank

What I’ve proposed for many years now, as you know, is that we scrap the income tax and replace it with a much more steeply progressive tax on consumption spending. The rates would start out low or even zero, then it would escalate much more sharply into a much higher level than under the current income tax. With income taxes, we are constrained by the fact that if we tax income too heavily at the top, we discourage savings and investment. We don’t have that worry with a consumption tax.

If we think this expenditure cascade is wasteful — if we think enlarging the mansions from 50,000 square feet to 75,000 thousand square feet not only doesn’t make the people living in them any happier, but probably even makes them less happy — then let’s make that cost twice as much as before to do. Prices matter even for people who can afford to spend it any some. We could give people a very strong signal that spending less on those things would be in people’s interest individually to do.

People would feel less pressure to spend more on themselves and it would be completely painless to avoid the next round of escalation on those types of expenditures. And the dollars that we would save in the process are dollars that we could spend on decarbonizing the economy, for instance — or research for pandemic viral diseases and vaccine development.

Since we know we’re going to confront those challenges, it makes sense to spend a much higher fraction of our national income on those things going forward. And we have enough money to do that. It’s just we don’t have the incentives to steer the dollars to those uses. But it would be very easy to create the incentives.

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