A Cure For Conspicuous Consumption
By Pat Regnier

(MONEY Magazine) – With $1,000 watches selling briskly and luxury SUVs crowding the better suburbs, it's getting tougher to keep up with the Joneses. Cornell University economist Robert Frank warns that Luxury Fever, as his new book is called, is pushing the middle class toward financial disaster. Staff writer Pat Regnier asked Frank to explain his fears.

Q. Why the big increase in luxury spending?

A. The richest 1% have captured 80% of all earnings growth since the late 1970s. When people at the top spend more, that sets a standard for people down the ladder. As the largest new houses grow to 40,000 square feet, people a little lower down feel that they've got to build 10,000 square feet. Even in tract-housing developments, the largest entries are now 6,000 square feet, from 3,000 feet 10 years ago.

Q. Most people would say that having bigger houses just means life is better.

A. But people in the middle don't have more money than before. They're spending out of reduced savings. One family in 70 went bankrupt last year.

Q. So do you recommend that people close their wallets?

A. If you spend less, you still pay a price. If you buy an older, smaller house, you may also end up in a dangerous neighborhood with poorer schools.

Q. So what should be done?

A. We could shift to a progressive consumption tax. All savings would be tax exempt and tax rates would remain low, but once you get up over, say, $200,000 to $500,000 a year, the tax on additional consumption goes up steeply. You'll radically change people's decisions about how big a mansion to build.