Fortune issue: May 11, 1998
First Principles
ECONOMICS
Self-Help for Spenders
By N. Gregory Mankiw
Every now and then an economist writes a book to remind us that consumer spending isn't all it's cracked up to be. A century ago, Thorstein Veblen's The Theory of the Leisure Class coined the term "conspicuous consumption" to describe the human tendency to use purchasing as a way of raising social status. In the 1950s, John Kenneth Galbraith's The Affluent Society argued that the modern corporation does not so much satisfy consumers' desires as create them with advertising and needless brand proliferation. This year Juliet Schor reprises both themes in her engaging--if not completely persuasive--new book, The Overspent American (Basic Books, $24).
As Schor and many others before her have pointed out, we Americans spend our lives keeping up with the Joneses, and they with us. The result is a materialistic arms race no one can win. In contrast to most economists, who view growth in consumer spending as a sign of rising living standards, Schor sees "too little saving, a harried lifestyle, a deteriorating environment, the growth of competitive spending, and a lack of consumer control."
To the old Veblen-Galbraith story, Schor adds a new culprit: television. Not only is TV a vehicle for those pernicious ads, but the shows themselves also promote upper-class spending patterns. Few viewers can afford the lifestyle of Frasier Crane or Murphy Brown, but that doesn't stop us from trying.
One of Schor's more intriguing statistical findings is that the more television a person watches, the less he or she saves. Controlling for age, income, and other variables that affect saving, Schor estimates that each hour of television per week reduces annual saving by $208. Taken at face value, this figure says we could double U.S. personal saving by throwing away all our TVs.
Schor is surely right that keeping up with the Cranes motivates us as consumers. Evolutionary psychology teaches that status seeking is bred in the bone of the human animal--and attaining it enables us to attract mates and to pass on our genes. Perhaps once there were human beings who didn't care about their place in the community, but that line is long gone.
Viewing consumption as status seeking has potentially broad implications for public policy. As Schor emphasizes, a person who buys a Mercedes does so in part to impress his friends and neighbors. Yet because we judge our status relative to others, we are engaged in a largely zero-sum game: When the Mercedes buyer climbs up the ladder, someone else must be pushed down. Schor suggests we discourage this socially unproductive status seeking by raising the taxes on luxury cars and other conspicuous consumables.
The problem is that what looks conspicuous to one person is just a good value to another. Is a Mercedes a status symbol or simply a safe and comfortable car? Do parents send their children to Ivy League schools to give them a good education or to one-up their colleagues at work? I am not ready to give Congress the mandate to decide which types of consumption are laudable and which are not.
Advertising is another target of Schor's social engineering. On the theory that having fewer ads would dampen desires, she proposes eliminating the deductibility of advertising expenses. Yet not all ads aim at corrupting consumer preferences. Many inform customers about new products or reduced prices and are essential to a functioning market economy.
Schor is at her best when she avoids policy questions and deals with the financial attitudes of the individual consumer. Her case studies of families who have rejected consumerism and simplified their lifestyles are vivid and will resonate with many readers. But in the end, the book is less the cogent academic tract it pretends to be than an intellectual self-help book for overspenders.
If you, like Sherman McCoy in The Bonfire of the Vanities, are living hand-to-mouth on a six- or seven-figure income, you might do well by reading what Schor has to say. But let me offer one piece of advice: Don't buy the book. Borrow it from your library, and save the $24. Call it your first step toward downsizing.
__________
N. GREGORY MANKIW is a Harvard economics professor and author of Principles of Economics.