Playing the 'Status Game'

Excellent article in Melbourne broadsheet 'the Age' about the pitfalls of 'middle-class welfare' and the 'status game' it fuels.

The standard case against middle-class welfare is simply that it's our heavily means-tested system that does most to make Australia a low-tax country compared with the rest of the developed world. And we should take care not to weaken it.

The more government spending is means-tested, the more redistributive the budget is without requiring high levels of taxation, then the less ''churning'' occurs - taking money from the same people you give it back to. Middle-class welfare increases churning.

But what economists call middle-class welfare I prefer to call subsidising ''positional goods'' - goods whose purchase and display is intended to demonstrate to others our superior position in the pecking order.

When, rather than buying a perfectly satisfactory locally made Toyota for $30,000, for instance, we prefer to buy an imported BMW for $100,000, we're spending $30,000 on a car and $70,000 on a positional good.

We tell ourselves how much we value the Beemer's superior qualities. But, in truth, we want to demonstrate to neighbours and relatives we're doing as well as they are - if not better.

When you remember that most people in rich countries such as Australia long ago passed the point of being able to afford the necessities of life, you realise an ever-increasing proportion of our ever-rising real incomes is devoted to buying positional goods to impress other people.

I suspect the pressure on governments to keep taxes low is motivated by our desire to spend more on positional goods. We need more and more disposable income just to keep up with the Joneses, let alone get ahead of them.

It's a free country and if people want to devote their ever-growing affluence to playing such games, that's their choice. But there are some important points to note.

First, such status competitions are socially wasteful. They're a zero-sum game: those who win do so at the expense of those who lose. What's more, it's a competition that's never resolved: if you get ahead of me in this round, I stretch to overtake you in the next.

Second, if all the angst we go through to achieve greater efficiency and faster economic growth is doing little more than supplying more fuel to a never-ending status competition, it's hardly a noble enterprise.

Third, it makes no sense for governments to be compelling taxpayers to subsidise those who want to play these status games. It's likely a fair bit of the subsidy ends up in the hands of the suppliers rather than the purchasers of the private schooling or whatever.

But get this: even to the extent the subsidy achieves its obvious (but never stated) goal of assisting those who would otherwise be unable to afford the positional good to attain it, it's actually self-defeating. Why? Because, by definition, a positional good signals your superior standing only if it's something most people can't afford.

So subsidising positional goods is a politician's con: the aspirational punters are deluded into thinking they're being helped to achieve something that's actually unattainable.

When you consider how many demands there are on government revenue - particularly the looming growth in spending on health and aged care - it makes no sense for governments to be subsidising status-seeking. Especially not when they're neglecting the provision of non-positional, public goods that would deliver greater benefit, such as reducing commuting times and improving the natural environment.

Economists need to embrace a new principle of budgeting: governments should devote whatever funds they have to delivering high-quality public services in such areas as education and health, leaving those who'd prefer to buy those services privately free to do so if they can afford it.