Lake Washington Isn't Getting Any Bigger 

Lake Washington Isn't Getting Any Bigger 

Lake Washington Isn't Getting Any Bigger 

Policy made plain.
April 4 2000 3:00 AM

Lake Washington Isn't Getting Any Bigger 

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Traditionally, one nice thing to do for yourself if you live in Seattle and have a lot of money is to get a house on Lake Washington, a lovely body of water with views of sundry mountain ranges and an easy commute to work. Trouble is, thanks to companies like Amazon and Microsoft and RealNetworks, there are a lot more people in Seattle with a lot of money than there used to be, but meanwhile Lake Washington is the same size as ever. True, there are places along the shore where one house has turned into two or three, but there are also places where a really tremendous amount of money has turned two or three houses into just one. No matter how rich Seattle gets, the number of people who can enjoy a house on Lake Washington will stay about the same. What increases, of course, is the price.

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People watching the New Economy boom from the sidelines, and feeling annoyed, might take some comfort in noting that at least some of what might be called the new new money (in honor of Michael Lewis' best-selling and phrase-making book about cyberculture, The New New Thing) doesn't buy anything new. Instead, it melts away as a consequence of its own existence.

A couple of years ago, Bill Gates paid $30 million for a Winslow Homer—three times what anyone had ever paid before for an American painting. There was only one Winslow Homer in private hands, and $30 million later there still is only one.  Whatever happiness comes from owning a Winslow Homer is roughly the same as before, but the dollar cost of that amount of happiness went up. In effect, Gates paid perhaps $15 million for the painting, $5 million for being famously rich himself, and another $10 million because he helped to make so many other people very rich as well.

It's like a wealth tax, except the money goes to owners of desirable property and paintings, who are unlikely to be needy, rather than to the Treasury. And sometimes it's a tax on merely intending to be wealthy. A young Slate colleague recently quit to take a job in Silicon Valley. It's the usual: a pre-IPO dot-com startup with options up the wazoo. He'll be rich soon enough, probably, but meanwhile he's already paying $1,800 a month for a 450-square-foot studio apartment.

Real-estate horror stories may even have replaced IPO instant-riches stories in Silicon Valley top-this-one small talk. Doghouses going for seven figures, mansions being torn down and replaced before they're even built, and so on. "It's beyond crazy. It's madness," a real-estate agent named RoyAnne Florence told Katherine Seligman of the San Francisco Examiner (displaying a capacity for subtle distinctions rare in her trade).

It's not madness to economists—it's probably the most dramatic illustration ever of a concept they call "positional goods." The concept and the term were both invented in the 1970s by a British writer named Fred Hirsch. Positional goods are desirable things that by their very nature cannot be enjoyed by everyone. Sometimes the limit is psychological.  It's conceivable that a society could get so rich that everyone could afford to own an authentic $400 FooFoo scarf (or whatever). But if everyone did own one, much of the pleasure of owning such a thing would disappear, and it wouldn't be worth $400 anymore. Sometimes the limit is physical. A house on Lake Washington would be nice no matter how many other people were able to share that pleasure, but there's only room for so many. The scarcity is physical, yet it's still a positional good. And sometimes the limit is human. Personal service is a positional good, because everyone can't avoid scrubbing floors by hiring someone else to do it.

As people get richer, more and more of the things they want are positional goods of one sort or another. The categories start feeding off one another: Property that's desirable and scarce for objective reasons becomes prestigious and therefore even more desirable—and expensive.  People who perform personal services can't afford to live anywhere near people who want to buy them, making personal services more expensive, therefore more prestigious, therefore more expensive again. And so, as more and more people get rich, the positional goods they want keep moving just beyond their grasp.

This would be a cheering story for all but the most saintly of those who haven't gotten rich, except for one thing: In a sense the U.S. economy has turned into one big positional good. Corrected figures released last week reveal that the U.S. production of goods and services expanded at an annual rate of over 7 percent in the last quarter of 1999. That is staggering. Yet millions of middle-class investors would be extremely disappointed if their portfolios only increased in value by 7 percent in a year.

Those portfolios are IOUs for real goods and services. But the economy has been generating IOUs a lot faster than it has been increasing its capacity to supply those goods and services. What happens when people try to turn those IOUs  into goods and services? Like houses on Lake Washington, there won't be enough to go around. 

Michael Kinsley is a columnist, and the founding editor of Slate.