On the Ezra Klein Show: Frank says social pressure – peer pressure – is “a fundamental economic force.”
We are not rational, individual economic agents; we are social animals trying to mimic, and best each other — oftentimes 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 pandemic hit the US. But the pandemic demonstrates Frank’s principle. Tens of millions of us stayed inside when we could, and wore masks when we were out among other people. This is a radical transformation, it happened lightning-fast, and largely without government coercion – very few people have been arrested for violating orders.
Frank: Laws banning smoking were put in place because of the threat of secondhand smoke, but that threat is small. The real value is that smoking breeds smoking; if smoking is seen as acceptable behavior, more people will smoke. By driving smoking out of the public sphere, smoking becomes less common.
Also, for me, public smoking bans make smoking more inconvenient. I was a heavy smoker until 1991 or so; a big reason behind my quitting is that it was getting harder and harder to find places where smoking was acceptable.
Frank argues we should replace income taxes with consumption taxes, to encourage people to consume less. In particular, consumption tax could help make housing more affordable, by reducing the bidding wars that drive prices up. In real estate as in other areas, people don’t just want something nice, they want something nicer than their neighbors. If everybody lives in a 2,000-foot home, an ambitious person will be happy with a 3,000-foot home. But if everybody lives in a 3,000-foot home, that same person won’t be happy until they have a 4,000-foot home. The absolute value hasn’t changed, but the relative value has. Real estate costs aren’t driven up because housing has become scarce; they’re driven up because the rich are in bidding wars between themselves for the nicest homes.