Falling Behind: How Rising Inequality Harms the Middle Class. By Robert H. Frank. University of California Press, 160 pages.

Does a rising tide lift all boats? Since John F. Kennedy announced that it did, conventional economic theory has maintained that inequality matters less than general prosperity. If middle class families are better off now than in, say, 1900, who cares that a few hedge fund titans spend millions of dollars on yachts?

We should care, says Robert H. Frank, a Cornell University economist, in his new book Falling Behind: How Rising Inequality Harms the Middle Class. “Increased spending at the top of the income distribution has imposed not only psychological costs on families in the middle, but also more tangible costs… in particular, it has raised the cost of achieving goals that most middle-class families regard as basic.”

Long a chronicler of America’s increasingly uneven income distribution (previous books include The Winner-Take-All Society), Frank maintains that when the rich get richer, they set off an “expenditure cascade” that changes the definition of adequate all the way down the line. This isn’t just a matter of envy. Some goods are “positional,” meaning their value stems in part from how they compare to other people’s goods in this category. People experience real losses when they fail to keep up.

If you’re driving a small, cheap car, you run a much higher risk of dying in a crash with a giant, expensive, SUV. If your interview suit doesn’t look as nice as the other candidates’, you might not get the job. These are real economic losses. So people engage in an arms race.

Housing is one such case. As the rich get richer, they spend more on housing, to the point where Microsoft founder Bill Gates is now the proud owner of a 40,000 square foot mansion in Washington state. This doesn’t matter to most of us, but it does to the near-billionaires who inhabit Gates’ social circle. So they spend more on housing, causing the next tier of folks to build bigger houses, and so forth—the median size of a new house grew from 1,600 square feet in 1980, to 2,100 square feet in 2001. Unfortunately, real middle class incomes haven’t risen by that same percentage. So families take on more debt to afford their modest castles. Meanwhile, since property tax revenues support good schools, families with children have an added incentive to spring for pricier homes, in better (and better-schooled) neighborhoods—reinforcing a cycle of price escalation.

Likewise, today’s small cars run a lot better than the small cars of 30 years ago. But if you’re driving a small, cheap car these days, you run a much higher risk of dying in a crash with a giant, expensive, SUV. If your interview suit doesn’t look as nice as the other candidates’, you might not get the job. These are real economic losses. So people engage in an arms race. We each spend more on positional goods, and divert resources from non-positional goods, such as vacation time, which matter more for their absolute than relative value. (Vacation is not a positional good because most of us prefer a set-up where we get four weeks of vacation and others get six, vs. a world where we get two and others get one.

So what is to be done? Frank is no raving left-winger (he co-authored the textbook Principles of Economics with Fed Chairman Ben Bernanke). He notes that today’s rich people have largely earned their wealth by providing goods and services that people want. Consequently, while he takes a few swipes at the tax cuts of President Bush’s first term, Falling Behind is no soak-the-rich screed. Rather than an income tax, Frank prefers a progressive consumption tax that exempts savings. If you wish to spend ridiculous amounts on housing in such a system, you may, but the marginal tax rate goes up the more you spend. This will counter the expenditure cascade, and may even help rich people, he notes, tongue-in-cheek. After all, maintaining a 40,000 square foot home is exhausting.

This is an engaging argument, and Falling Behind has something for everyone. Liberals will love Frank’s progressive tax scheme (200% marginal rates on extreme spending!). Conservatives will note that despite the progressive veneer, total tax rates for multi-millionaires would still consume just 25-30% of their income, given their high savings rates. Free-market types may not like all the inequality talk, but most infinitely prefer consumption taxes to income ones (the late Milton Friedman himself once sent Frank some fan mail).

The book has two drawbacks. First, engaging as Frank is, Congress is highly unlikely to substitute a consumption tax for an income tax anytime soon. And second, at 125 pages, Falling Behind is awfully slim for its $19.95 price tag. One could be forgiven for wondering if Frank wants a spending cascade of his own.

Laura Vanderkam is the author of Grindhopping: Build a Rewarding Career without Paying Your Dues (McGraw-Hill).