A standard argument among behavioralists is that goods that are “positional” in nature cause social welfare losses. What the heck does this mean?
There are some goods whose value derives partly (or wholly) from how much you have of it relative to other people. Beauty is a positional good. Speed in a running race is a positional good. And so on. Let’s not debate what is or is not a positional good, but rather let’s examine what people also commonly cite as a positional good – education. The idea is that a “good education” is one where you are at, say, a top 10% school. In other words, what makes an education “good” is that it is better than other educations you might have obtained. Now, this may or may not have any empirical validity, but just accept it for the time being.
How, in America, does one make sure that your kid is enrolled in a top 10% school? You must move to a school district that is home to a top 10% school. But this action, acting in the interest of your children, may produce “bad” outcomes. How? Well, only 10% of the families can be enrolled in the top 10% of schools. And competition to get into these schools is fierce. But it does not happen at the admissions offices of the public schools, not at all. The “admissions offices” of the public schools resides at the National Association of Realtors (who LOVE the idea of a public schooling monopoly). People compete to live in the neighborhoods where the good schools are. Such competition, it is argued, is destructive. Why? Because all it serves to do is to bid up the price of houses in good school districts, but at the end of the day, still only 10% of the students end up in good schools. Wouldn’t it be better, it is argued, if people could spend less on houses and we’d still have the same 10% of the people end up in good schools? Wouldn’t people be happier because with all of the money they are not spending on wasteful housing competition they could be going on more vacations, or building more roads, or donating more to our University, or making more campaign contributions to make sure a high-speed rail station stops in their back yard?
The standard policy response from the behavioralists is to either institute a more aggressive progressive income tax, or to impose a wealth tax on expensive housing. The idea is that these taxes would induce people to spend less on houses, and still have kids get into the top 10% of the schools, and leave the homeowners better off. Ignoring whether that would work (for example, if people cannot compete for housing on price, then one can only imagine how they would compete to get into those schools – the sad truth is that more than 10% of the people want to go to the top 10% of the schools, and we in economics have good ways of dealing with that problem), can we pause for just a tiny moment to reflect on why this is a problem?
It is a problem precisely because the public school monopoly creates the situation where we have to compete in destructive ways like this. It is no more natural to argue that we should tax the rich or tax houses more as a solution to this problem than it is to argue that we ought to eliminate public schooling entirely, or to introduce a fully-functioning school voucher system. Again, think like a good economist. If the problem is, “people bid up the price of houses because the only way to get into a good school is to live near a good school,” it does not follow that the best way to address that problem is to, “take income from people,” or “raise the barriers to securing a house in a good school district.” It makes no more sense to argue this than it does to argue that the only way to prevent people from doing steroids is to raise taxes on steroids.
One more thought on this issue. Since school funding comes in part from local property tax collections, which themselves are a function of the price of houses, it seems to follow that property tax revenues are larger because of the competition we are talking about above. Indeed, see how school spending increased nationwide during the housing boom of the 2000s. But if this were true, and we take the positional goods people seriously, then aren’t they implicitly arguing that school spending is too high? Or at least high enough to be able to survive the decline in tax revenues that limiting positional competition for housing implies? I doubt that the Venn diagram shows any overlap for people who believe positional goods consumption is a problem and those who believe schools are overspending. That is mildly curious, no?