When people bump up against one another in the course of pursuing their goals, it is in everyone's interest to resolve any resulting problems in the least costly ways possible.

We're in a classic demand-shortfall recession. There aren't enough jobs because total spending is too low. Consumers won't lead the way because they're busy paying down debt and are fearful they'll lose their jobs, if they haven't already. Businesses, which are currently sitting on mountains of cash, won't spend either, because they already have sufficient capacity to produce more than people are willing to buy.

No one could argue with a straight face that the couples getting married today are much happier just because their wedding celebrations cost three times as much as those in 1980. Bigger mansions and costlier parties are wasteful in the same sense that larger antlers on all bull elk are wasteful. The good news is that simple changes in the tax system can eliminate much of this waste without having to deny people the right to decide for themselves how best to spend their money.

The private sector is first of all much larger than the public sector. The waste we see in that sector does not result from the fact that people spend their money carelessly. Mostly, it occurs because what one family must spend to achieve its goals often depends heavily on what other families spend.

All parents want to send their children to the best possible schools. But because a good school is a relative concept, a family cannot achieve its goal unless it outbids similar families for a house in a neighborhood served by such a school. Failure to do so often means having to send your kids to a school with metal detectors at the front entrance and students who score in the 20th percentile in reading and math. Most families will do everything possible to avoid having to send their kids to a school like that. But because of the logic of musical chairs, they're inevitably frustrated.

In short both the things we feel we need and the things available for us to buy depend largely—beyond some point, almost entirely—on the things that others choose to buy.

When the rich build bigger, they shift the frame of reference that shapes the demands of the near rich, who travel in the same social circles. Perhaps it's now the custom in those circles to host your daughter's wedding reception at home rather than in a hotel or country club. So the near rich feel they too need a house with a ballroom. And when they build bigger, they shift the frame of reference for the group just below them, and so on, all the way down.