Expenditure Cascades - Possible Solutions To The Problem of Positional Externalities

Possible Solutions To The Problem of Positional Externalities

Frank suggests that a progressive income tax or a progressive consumption tax could remedy the dilemma posed by positional externalities. By increasing the progressivity of the current tax structure, the wealthy would pay a larger share of taxes. Simultaneously, the poor and middle class would pay taxes that would be more equitable to their income. A result would be an equal playing field for all the classes. Frank uses the housing market as an example. He states that people at the top should save their earnings and spend less on housing. In turn, their savings would alter the context that influences housing expenditures of people directly below top earners. This would result in a reverse expenditure cascade that would encourage higher savings.

The fact that Americans had a negative savings rate in 2005, further proves the need for incentives to save money rather than increasing relative spending. The key to creating a genuine impact on spending and saving habits is the collective effort of everyone invested in the economy to cut back on spending. Should a deficit continue, the poor and middle classes will suffer disproportionately to the top earners.