Here’s a letter to Paul Krugman:
On your blog recently you wrote that conspicuous spending by the rich “imposes negative externalities on the rest of the population” (“Having It and Flaunting It ,” Sept. 24). You are here, I assume, endorsing the argument made by Cornell economist Robert Frank  that when ordinary people see rich people consuming conspicuously they suffer mental distress – and they deal with this distress by working too hard, spending too much, and going into excessive debt in order to try to mimic the consumption patterns of the rich. Also, like Prof. Frank you propose to rid society of this negative externality by taxing the incomes of the rich much more heavily.
I’ve some questions for you.
– In other of your writings you complain that the economy suffers from too little total spending. Isn’t it possible that the negative externalities mentioned in your post are offset or even swamped by the positive externalities that such rat-race spending generates in the form of economic stimulus?
– You rightly worry about negative externalities. So why do you overlook the negative externalities created by empowering government officials to tax and spend other people’s money? The costs imposed on taxpayers in such cases are not internalized on the officials who tax and spend. Do you have theory or evidence demonstrating that the costs of the negative externalities that you believe to justify higher taxation are greater than the costs of the negative externalities that are created by giving Jones more power to take and spend the money of Smith?
– You believe that people suffer at the mere sight of others’ greater spending power. Surely, then, people suffer also at the mere sight of others’ greater political power. So can you be sure that the greater concentrations of political power that your policies create will not be sources of envy and distress even more agonizing for those with relatively little political power than are the concentrations of wealth for those with relatively little spending power?
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Of course, a large number of other questions also can be asked about this blog post of Krugman’s, not least a question inquiring about its consistency with Krugman’s most recent NYT column .