Growth and Lamborghinis

Of all the ways in which American political and cultural life has become stridently polarized, perhaps the most damaging is the language surrounding the economy. Since he got elected, Obama has been portrayed by Republicans as a socialist, a vulgar form of red-baiting that would be laughable if the president didn't allow himself the occasional foray, rhetorically anyway, into class warfare.

The most recent example of this was Obama's attack on Bain Capital. And so, right on cue, comes a new book entitled Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong, by Romney's former Bain Capital partner Edward Conard. 

I haven't read the book, but if a recent review in Business Week is to be believed, Conard's thesis is tricklenomics hitched to Archie comics: Imagine if Veronica Lodge's father was a market theorist, and you might get something like Conard's book. (According to the review, Conard dislikes charity because it isn't investment, and blames liberal arts majors for America's skills shortage). But the most telling passage from the review is this one:

Conard plainly cares about investment. He also cares about yachts. Where some conservatives suggest taxing consumption rather than income, Conard rejoins: “A heavy tax on consumption will discourage increased investment by making it harder to display status.” And since, as he elsewhere argues, “the thirst for … impressive homes, sleek boats, and exotic vacations” is what largely motivates people, such trinkets of affluence must be protected.

Set aside for now the obvious rejoinder that for many investors and capitalists, the accumulation of wealth, succeeding at building something that lasts and that people like, and basically being a river to your people is deeply satisfying; Conard's focus on status is usefully flawed.

He's certainly right, that the desire for status is a huge motivator (that's pretty much the driving thesis of both The Rebel Sell and The Authenticity Hoax). But what this ignores is that all status is relative. The argument behind the tax-consumption-not-income movement, especially the faction led by the economist Robert Frank, is that a steeply progressive consumption tax would serve as a sort of arms-limitation treaty on status consumption. So instead of the hyper-rich being able to buy 200 foot yachts, they'll only have 100-foot yachts. But because status is a positional good, (i.e., relative) it wouldn't matter because those would still be the biggest yachts around.

I actually saw evidence for this during my visit to Denmark. My friend Markus took me on a tour of Hellerup, the ritzy suburb just north of  Copenhagen. Some of the biggest celebrities in Denmark have homes there, including Lars von Trier,  Mads Mikkelsen, and some internet billionaire whose ex-wife took him to the cleaners and now lives next door.  And it was certainly a nice area, with wide streets, big homes, and a great view of the ocean. But the homes were not that nice -- not much nicer than you'd see on a decent stretch of upper Westmount or Forest Hill. 

At any rate, Hellerup represents nothing like the "out-of-sight" wealth that keeps the richest Americans on a separate plane of existence from the rest of the country -- Markus and I drove around, peered over fences and wandered the streets of Hellerup completely unmolested. If von Trier had walked by with his groceries I wouldn't have been remotely surprised. The thing is, taxes are so high in Denmark (the VAT alone is 25 percent), the richest people simply don't have the cash to compete in the manner that the 0.001 percenter Americans do. But in the pond that is Denmark, they're by far the biggest fish. 

How far you can push this argument depends in part on how much the ultra-rich in places like Copenhagen compare themselves to their counterparts in places like London or New York, feel envy at their inability to compete, and look for an exit strategy for their wealth. It also depends on whether the effect of all of this taxation, especially on consumption, leads to a shortage of investment capital. 

I don't have the figures handy, and I'm not a good enough economist anyway, to answer these sorts of questions. But if we start with the end goal, namely, a prosperous high-trust society governed by and through a healthy democratic system, then Denmark is already at the finish line.