I've wondered about something for a long time. What effect does luxury spending have on the economy? I suppose this falls directly in the context of my thoughts on progressive taxation, and the conservative supply-side argument. I'm sure there are entire classes in economics devoted to just this subject, but what's the point of being a layman if you can't write about it?
So supply-side says you grow the overall economy by cutting taxes on the rich, who will then invest it in the economy, via stocks, bonds, etc. Progressive taxation says, whether or not you grow the economy, you have a moral obligation to some manner of equalization, whether schools, libraries, parks, clinics, etc.
Yet could both be correct? I mean, could cutting taxes on the rich, if it stimulates the economy - providing jobs, opportunities, etc. - be worthwhile and justified save for the moral obligation part? Conservatives will argue no - that progressive taxation not only increases the tax rate, which is then spent by a wasteful & inefficient government, but it also removes that money from the investment pool, further stifling growth.
Which leads me to the point of this post: Where do the rich actually spend their money? Certainly they invest a portion of it, and this could be seen as either a good thing or a bad thing, depending on the wisdom of the investment. But they certainly spend a portion of it on luxury items. We all do this to an extent. As our paycheck increases, so do the perks we allow ourselves - maybe more cable TV options, maybe an extra dinner out, maybe a piece of art or music. Yet for the middle and lower class, such non-essential expenses are few and far between, after things such as gas, food, utilities, rent or mortgage payments are made. Hopefully we'll have enough to put away some of it for retirement, a rainy day fund or possibly even a child's college tuition. These things are all essential, and necessary to a minimum standard of living.
What I am thinking of though really goes beyond all this, into a realm of expense few of us have likely even experienced. First class flights. Five star hotels. Exotic vacations. Cleaning services. Couture fashion. Personal chefs. Etc. Etc. How much does all this cost? It must add up rather quickly, wouldn't one think? All of this cash being spent on non-essential, certainly enjoyable but somewhat frivolous excess...
Now, where does this money actually go? It is not as if four star restaurants are actually glazing and serving hundred dollar bills, or ski chalets are being insulated with them. No, these services require actual human beings to labor, sometimes skillfully, sometimes not. They are then paid and that money is injected directly back into the economy - most likely into more essential expenses like water bills or dog food. And yet what of the money the government spends on services such as healthcare, schools, or libraries? It is being used to pay for the labor of schoolteachers, principles, janitors, construction workers, landscapers, etc., who in turn are spending it on water bills and dog food. So, in this sense luxury spending is really no different than government spending.
Except in one crucial sense. When the teacher, janitor or librarian is paid, they are not only providing a service, they are creating wealth. Because when a patron of the library reads a book or magazine, they are increasing their earning potential. When the construction worker adds a new wing to the local school, he is providing a facility within which children will be taught, and ultimately increase their earning potential. When people visit a nearby park, allowing their children a sdafe, engaging place to play, they are ostensibly stabilizing family bonds and decreasing daily stress, allowing them to be more productive in their working lives. And so on. Not all government services create wealth in this way, some merely serve to provide basic sustenance or critical healthcare. Although even then, one can easily imagine how this contributes to a more productive population.
Yet luxuries, almost by definition, create no wealth at all. Sure, there is some psychological benefit to be had in many of these services, just as that gained from a walk in a public park or museum, but they are by their nature quite excessive. Does not the expense of luxury almost rise in direct proportion to their relative enjoyment? Does the psychological comfort of a first-class transatlantic flight merit a doubling or tripling in the price compared to coach? There must be studies of this sort of thing in psychological journals. But that isn't the point, is it? Some of the most expensive luxuries have little real intrinsic value, except the mere fact that they are expensive. The difference between a real diamond and a cubic zirconium, is really in the cash value each represents. And what is that cash value, but an estimation of the man hours involved in some type of labor (certainly not in the production of the thing itself, which is valued for rarity)? And so in this extreme example, we see luxury as the refined essence of wealth, yet creating nothing.
But even in luxuries that do reflect very real human exertion, we see no wealth created. For instance the man who spends his days waxing and polishing cars. He his payed for his service, but what does his service provide to the larger economy? A nice looking car. I enjoy seeing nice looking cars. I suppose you could find some way of measuring this satisfaction. Neighborhoods full of freshly waxed and polished cars certainly increase in value based on this cosmetic advantage. Among other things. But we can't really begin attributing economic stimulus to car detailing. In that case just what would be the dollar-to-shine ratio? Does the brand of wax matter? How about the angle of the sun, or cloud covering?
Then there are things payed for and provided that are not merely zero-sum transactions, but rather exponential increases in wealth, the stuff of which Adam Smith famously referred to at work within the "invisible hand". Here, the sweat of one man not only passes wealth from one hand to another, but in the process creates, by providing some new level of skill or specialized leveraging, additional economic prosperity. This may be seen immediately, as in the bus driver who maximizes efficient transportation, or over longer periods of time, as in the school teacher who teaches his students to add fractions and who then themselves provide greater skill to the marketplace.
And now one can begin to compare these two types of expenses, luxury vs. value-added, let's call it. One hundred man hours could be spent in the laborious transition of a sum of money from one hand to another, from a wealthy teenager, say, through the car wash man, to his local grocer, and aside from a shiny car, no greater wealth is created.
Or, that same one hundred hours could be spent transferring a sum of money from one hand to another, say, a local grocer, but this time at some value-added task, such as policing a street so that business can flourish, or cleaning a kitchen so that unsanitary meals won't injure restaurant guests. Sure, how much value is added through each form of employment is debatable and certainly some more productive than others. But it is theoretically quantifiable - and no doubt economists somewhere are busy at it this very moment.
One last point to make in all this, is that value-added wealth can also be measured in its loss. Would that car wash man, instead of toiling his hundred hours at nothing but a simple shine, spend his labor instead at something that does increase wealth in some way, he would be adding to the economy. Yet if he were working some value-added shift, and then decide to begin laboring for nothing but a shine, or a sweet oil, or leathered toilet-seat cover, could we not chalk it up as a loss to the economy?
In this way, I make the case that luxury not only creates no greater wealth, but actually stands in the way of it being creted by tying up more man hours in its innane charade.
Now I'm off to play GTA IV on my Xbox, which will increase my serotonin production, thereby providing a more productive teaching experience to my kindergarten class tommorrow. Or something?