Again, many thanks for letting me put arguments from the book in front of Lakers, and many thanks to all who participated for your insightful comments and questions. And I want to thank Mark especially for taking the time to write such a thoughtful introductory essay.

In his review of The Darwin Economy in Slate, the UK science writer John Whitfield raised a similar objection. He complained that if big antlers were harmful to bull elk, natural selection would have long since solved that problem by weeding out any bulls whose antlers were too large. Natural selection does indeed impose a limit on antler size. We don’t see bulls with antlers spanning 40 feet and weighing 400 pounds, since such animals would never be able to lift their noses from the turf, much less compete successfully for mates. But that doesn’t alter the point that the current equilibrium antler size is dysfunctional from the perspective of bulls as a group.

The equilibrium antler size is thus problematic from the perspective of bulls in precisely the same way that the equilibrium stock of bombs in problematic from the perspective of nations engaged in military arms races. There is an equilibrium in military arms races. But that doesn’t mean that the equilibrium stocks of bombs are efficient. This is a simple and uncontroversial point. Whitfield subtitled his review, “What The Darwin Economy Gets Wrong About Evolution.” A better title: “What John Whitfield Gets Wrong About What The Darwin Economy Gets Wrong About Evolution.”

The antlers example is indeed about sexual selection. But big antlers wouldn’t explain why a species would become more likely to go extinct. As I noted earlier, there is no shortage of males in sexually reproducing species. The fact that some of them are surrounded and killed by wolves because of their big antlers does not put the species in danger of extinction.

Note that most of the examples you cite involve regulated industries. This ties in with our earlier discussion about the corrupting influence of campaign contributions. Regulators are often captured by the very industries they’re supposed to be protecting us from.

Support seems to be growing for a “Tobin Tax,” which is a small tax on each financial transaction. Financial services industry executives claim they’d all emigrate if we imposed such a tax. But evidence suggests that this problem could be managed.

More than 95 percent of all Americans currently operate under the tax system I propose. That is, most Americans already are eligible to exempt larger savings amounts than they do under existing IRAs, 401ks, and other tax-exempt retirement accounts.

But to have any hope of changing current spending patterns, the key step is to bring the very wealthy under the same system. Currently most wealthy families save more than the maximum annual exemption allowances under existing retirement savings plans.

European countries also heavily on consumption taxation, but they employ value added taxes, which are essentially national sales taxes. Those taxes are extremely regressive, a drawback those countries compensate for by having more steeply progressive income taxes and more generous social safety nets.

The attraction of the progressive consumption tax compared to luxury taxes on specific products is that it obviates the need for government bureaucrats to decide what’s a luxury and what’s not. Taxing specific luxuries has always played out poorly in the past, because people always find alternatives to buy that aren’t taxed. The tax I propose is levied on the total amount you spend and high marginal rates only apply to very high levels of total consumption. If your spending $5 million a year, probably the next dollar you spend will not be on something urgent.

Taxing fossil fuels would be something we’d want to do in addition to the general expenditure tax, because of the link between carbon emissions and climate change.

It’s an important practical question, especially since we have no direct experience with the kind of steeply progressive consumption tax I’m advocating.

That fact argues for taking a cautious approach. The U of Delaware economist Larry Seidman proposes that we start by implementing a progressive consumption surtax only on families that consume more than $500,000 a year. Under his plan, we’d keep the progressive income tax at first, then gradually replace it by reducing the threshold for the consumption surtax. This would provide an opportunity to gather data about how consumption was responding to the tax.

The liberal notion that’s my primary target in the book is that lack of competition in labor and product markets is the main reason we need government regulation.

That argument presupposes that there are vast amounts of cash on the table–that firms with market power are somehow able to coerce consumers to buy inferior products at inflated prices. But in the information age that’s surely a shaky claim.

If I’m being poorly served by an existing firm, it doesn’t take long for a rival firm to get wind of that fact and communicate to me that it has something better on offer. Network economies sometimes provide temporary shelter for firms with inferior offerings. It took a while, for instance, for rival firms to win me away from Microsoft’s stranglehold. But it didn’t take forever. Moving forward we should expect that rivals with better offerings will become even better at connecting with poorly served buyers.

But to your specific question, I didn’t mean to suggest that externalities are the ONLY important form of market failure. They are, however, far and away the most important one.

A progressive consumption tax would not cure all ills. Although it would reduce inequality in consumption spending, it would likely have the opposite effect on wealth inequality, since the rich could better take advantage of the savings exemption. Because the wealthy would die with larger estates than before, it would be important to maintain a strong estate tax as part of the system.

Most thoughtful wealthy families seem to realize that they jeopardize their children’s ability to build satisfying lives if they’re assured that they’ll be multimillionaires before they turn 30. The existing estate tax still lets wealthy families leave more money to their children than many parents deem prudent.

A better way to think about the estate tax is that it’s like a contingency contract with a lawyer who agrees to argue your case for free if you lose. Most people don’t know whether they’ll be rich or poor when they start out in life. The estate tax is in effect a promise to pay a bigger share of your wealth in taxes if you happen to end up rich. In return, you and others enjoy better public goods and services that society could afford without an estate tax.

The bigger problem, Mark, is that we’ve failed to perceive clearly why nobody benefits from our existing policies. The one percent lobby hard for lower taxes thinking that will make them happier. But that’s a faulty perception.

The one percent already have enough money to buy everything they need, and they think that lower taxes will help them buy more of what they want. But the things the one percent want are mostly positional goods–things like homesites with views, cottages on the shore, and other things that there aren’t enough of to go around. To get such things, they’ve got to outbid others one percenters who also want them. But if taxes on the wealthy go down, the outcomes of those bidding contests are completely unaffected.

Meantime, the resulting deficits force government to shortchange public goods that everyone would benefit from having.

It’s important to recognize that all consumption standards are local. When I was a Peace Corps volunteer in Nepal, long ago, I lived in a two-room house with no electricity or plumbing. Not once did I ever experience that house as unsatisfactory in any way. It was considerably nicer than the houses of my fellow teachers in the village high school. But few Americans would feel comfortable about living in a house like that here.

If my friends from Nepal could see my house in Ithaca, they’d think I’d taken complete leave of my senses. Why would anyone need such a house, they’d wonder. But you wouldn’t think that. You’d see it as a normal middle-income person’s house.

Social critics wag their fingers at the over-the-top mansions of the rich. But to the rich, such dwellings are simply normal. The attraction of the progressive consumption tax is that it gives us a way to express our collective judgment about the relative value of spending extra income to build bigger mansions as opposed to spending that same money to fix crumbling roads and bridges and to rebuild failing water and sewer systems.

I didn’t mean to portray the progressive consumption tax as an alternative for strict regulation of the financial services industry. That’s the most destructive single industry in the economy in terms of the talent it wastes and the risks it imposes on third parties. They’re involved in mostly zero-sum games that add little social value.

Using the Earned Income Tax Credit and other income-transfer tools, we can make the distributional effects of changes we make in the tax system fit whatever pattern we choose.

Data consistently show that well being, beyond some point, is far more dependent on relative income than on absolute income.

The reason we see waste is that context matters more in some domains than in others. We see wasteful military arms races, for instance, because relative armaments matter more than relative consumption. That causes expenditures races focused on arms, which are financed by taking resources from domestic consumption–by building fewer roads and hospitals. It’s the same with positional goods and nonpositional goods. Context matters more for people’s evaluations of schools for their evaluations of their workplace safety.

Someone will take a riskier job, for example, in order to bid more effectively for a house in a better school district. But a good school is a relative concept, and because of the logic of musical chairs, they’re inevitably frustrated. No matter how aggressively everyone bids for a house in a better school district, half of all children must attend schools in the bottom half of the school quality distribution. As in the familiar stadium metaphor, all stand, hoping for a better view, only to discover that no one sees any better than if all had remained comfortably seated.

As Elizabeth Warren and Amelia Tyagi Warren explained in their book, THE TWO-INCOME TRAP, that’s why people in her parents’ generation could get along with just a single paycheck, whereas now people have trouble making ends meet even though both spouses work full time. The extra paychecks went into a fruitless bidding war for the houses in the better school districts.

Politicians like to win. One with a proposal that would benefit everyone should have better prospects for winning votes.

If a consumption tax were phased in gradually once the economy was back at full employment, it would encourage saving, yes, but it would not lead to a spending shortfall since the gradual increase in saving would lead to a gradual increase in investment spending. Over time that would cause productivity and incomes to grow more rapidly. Eventually consumption would actually be higher that if we had remained on a low-savings trajectory, even though it would be a smaller portion of GDP.

In The Darwin Economy, I adopt John Stuart Mill’s harm principle, which holds that government can legitimately restrain people only when necessary to prevent them from causing undue harm to others. I don’t quarrel with the libertarian’s basic premise that the rich (and everyone else, for that matter) have a right to spend their money as they please, provided they don’t spend in ways that cause undue harm to others.

But many forms of spending cause obvious harm to others. When someone buys a 7,500 pound passenger vehicle, for example, he puts other motorists at greater risk of injury and death. In such cases, it’s completely legitimate to ask whether there are practical ways to limit harm to others without imposing restrictions that cause even greater harm.

In general, I also believe that it is less intrusive to tax harmful behaviors than to prohibit them. This was the major lesson of our early efforts to curb environmental pollution. Prescriptive regulations, such as telling electric utilities what kinds of coal to burn or what kinds of scrubbers to install on their smokestacks, were not only intrusive, they were also grossly inefficient. In almost every instance, air and water quality goals were met more cheaply and quickly when we taxed pollution than when we tried to regulate it directly. My policy prescriptions in The Darwin Economy are heavily shaped by the lessons of that experience.

Some libertarians denounce all taxation as theft. But mature adults realize that we have to tax something. I argue in the book that we can raise all the revenue we need exclusively by taxing activities that cause undue harm to others–activities that we ought to be discouraging whether or not we needed additional revenue.

When I say there’s more competition now than ever, I mean that labor and product markets are more competitive than they’ve ever been. But yes, the political system has grown more corrupt because of the dependence of elected representatives on campaign contributions.

The reason I see grounds for hope is that our current spending patterns are not only grossly inefficient, but there are also relatively simple and unintrusive changes in tax policies that would eliminate much of the current waste. And as I stress to students, whenever we can make the economic pie bigger, we can always find ways to make sure everyone gets a bigger slice than before. It shouldn’t take a master politician to sell changes that would benefit everyone.

First a brief word on what a progressive consumption tax is. Essentially, it’s a progressive income tax with an unlimited savings exemption.

You’d report your income to the IRS as before, but you’d also report your savings, much as you would for an IRA or a 401k. The difference between those two numbers—your income minus your savings—is the amount you spent during the year. That amount less a large standard exemption—say, $30,000 for a family of four—is your taxable consumption. Rates on taxable consumption would start very low, so for families in the bottom half of the spending distribution, total tax bills would be as small as or smaller than those under the current system. But rates would rise steeply as taxable consumption rises. That would not discourage savings and investment, as higher marginal income tax rates are often said to do. On the contrary, higher marginal consumption tax rates would actually encourage savings and investment.

The political prospects for passage of this tax are brighter than your question suggests, because it would serve the interests not just of low- and middle-income households, but also those of wealthy ones.

Just as an effluent tax discourages the discharge of harmful pollutants, a progressive consumption tax would mitigate expenditure cascades that cause harm to middle-income families. Consider, for example, how the tax would affect a wealthy family that was weighing whether to build a $2 million addition onto its mansion. If the marginal consumption tax rate at the highest levels was 100 percent (meaning that if the biggest spenders spent another $2 million, they’d also have to pay another $2 million in taxes), the family would have a strong motive to scale back its addition.

That simple fact reveals the fiscal alchemy implicit in this form of tax: If this family and others like it all built additions only half as big as they’d planned, the smaller additions would serve them just as well as the larger ones would have. Beyond some point, after all, it’s relative, not absolute, mansion size that matters. And when they spend less, others just below them would spend less, and so on all the way down.

The upshot is that wealthy families could put more cash away for emergencies without jeopardizing their current standard of living, because beyond some point, it’s relative spending that governs perceptions of living standards. And the revenue from the taxes paid on their smaller mansion additions could be used to help maintain the rutted roads that do so much damage to their Porsches.

This is indeed the central problem we face today. Until we figure out some way to reduce the influence of campaign contributions on how legislators vote, it will be difficult to make progress on all other issues.

Laurence Lessig has an important new book out on this subject, and it’s one I discuss at some length in chapter 4 of The Darwin Economy.