Robert Frank Knows What Is Best For You
[The Economic Naturalist's Field Guide: Commonsense Principles for Troubled Times. By Robert H. Frank. Basic Books, 2009. 234 pages.]
Around fifty years ago, John Kenneth Galbraith, in The Affluent Society, complained about the way Americans spent money. We spent too much, he alleged, on useless luxuries such as cars with high tail-fins. As a result, needed public services were starved of funds.
Frank agrees with Galbraith's conclusions but recognizes that there is a problem: Galbraith's arguments were wrong.
[Galbraith's] critics argued … that if consumers were paying high prices for goods of little intrinsic value, there would be "cash on the table," the economist's metaphor for unexploited profit opportunities. Rivals could thus earn easy money by offering slightly cheaper and better products, in the process luring exploited customers away … Galbraith's critics had a point. Indeed, his explanation for society's spending imbalance suffered from the same deficiency that has plagued arguments of social critics on the left since Karl Marx. Because it implied that greedy capitalists were leaving cash on the table, most economists couldn't accept it. (p. 78)
Fortunately, says Frank, he can now come up with better arguments for Galbraith's conclusions: Galbraith was right but for the wrong reasons. So enamored is Frank of Galbraith's anti-market views, though, that he nevertheless thinks that he deserved the Nobel Prize.
Critics of the market want more government programs and support measures to curb inequality. But, defenders of the market claim, interference with the market reduces productivity. We thus face an "equity-efficiency trade-off." Frank's good news is that the trade-off can be avoided. Some types of intervention entail no loss in efficiency and may even promote it.
Traditional economic discourse — as exemplified in the late Arthur Okun's 1975 book Equity and Efficiency: The Big Tradeoff — has conditioned us to think of efficiency and equality as competing goals. Consequently many believe that we must tolerate a certain measure of waste in the name of fairness. But I argue here for the opposite claim — that efficiency is always and everywhere the best way to promote equity. (p. 5)
In brief, Frank's argument is that certain types of consumer spending do not really advance welfare. By imposing taxes on them, we can provide funds for needed public services without a corresponding loss in welfare from those taxed. A net gain to efficiency thus results from these taxes. Frank also worries about the malign effect on efficiency of "winner-take-all" markets.
Before turning to his claims, though, it is worth examining an argument that threatens to derail Frank's reformist project before it starts. Are not people free to spend their money as they wish, regardless of Frank's efficiency schemes? Rush Limbaugh thought so, and told Frank to mind his own business. Frank responds
[y]et consider the absurdity of the claim that we have a right to spend every nickel of our pretax income. If taxes were purely voluntary, our government would not be able to raise revenue to build roads or schools. It could not field an army … perhaps those who oppose compulsory taxation should just move to a country where taxes are voluntary. But there is no such country. Given that reality, our best option is to have an intelligent conversation about what services we want government to provide and who should be taxed to pay for them. (p. 10)
Libertarian anarchists, as well as those minarchists who believe in voluntary taxation, will of course not be so ready to dismiss as absurd the view that people "have a right to spend every nickel" of their income. Let us, though, put this aside for the moment; Frank is here relying on the fact that most people do concede the necessity of a government supported by compulsory taxation. Does it then follow, as Frank thinks, that it is then up to "us," i.e., the voting public, to determine what taxes and government services we want?
I do not think that it does. If one accepts Frank's points that a government is necessary and that it must be supported by compulsory taxation (once more, of course, points I reject), all that follows is that there is a justification for the taxes required to support the minimum functions of government. Frank has not at all established that everyone's entire income is "up for grabs."
Unfortunately, Frank is one of many eminent economists who wrongly think that they are competent political philosophers as well. The notion that people have a natural right to their property apparently baffles him. Thus, he points out that in some situations people have a tendency to consider equal distribution as fair:
Imagine that you and two friends are hiking in the Canadian woods when you spot a sparkling object beneath a bush just off the trail. You pick it up and see that it is a large diamond in the rough. A jeweler you trust offers you $900,000 for it. How should this money be apportioned between you and your friends? Most people say you should share the proceeds equally… In attempting to make sense of this response, psychologists say that most people feel a strong commitment to equality as a moral norm. (p. 163)
Despite this commitment, it would be wrong to impose absolute equality of income because
that would be a recipe for economic disaster … the reason most people think complete equality is an unrealistic goal is that we need to maintain work incentives. Unless individual incomes are linked to work in some clear way, we consign ourselves to lives of abject poverty. (pp. 163–64)
Frank here ignores the fact that other examples evoke quite contrary moral intuitions. Suppose that you are prospecting for gold by yourself and discover some. Several other prospectors approach you. Are you obliged to share your gold with them? Frank's case, to the extent we find his egalitarian conclusion from it plausible, depends on the special assumption that the hiking friends are on a trip together and may be thought to have an implicit agreement to pool lucky finds. Frank wrongly generalizes from his case to a general principle of egalitarian distribution. In thinking that only efficiency considerations tell against the full implementation of equality, he shows himself tone deaf to Lockean claims that individuals can justly acquire title to unowned resources.
However much we disagree with them, the two arguments by Frank just considered are not outright disasters. The same cannot be said of another claim he advances. Seeing what is wrong with the next argument will show us why Frank's proposals would not work, even if his arguments about inefficient consumption were right.
Frank defends an estate tax, and in its support he offers this incredible argument:
Another attraction of the estate tax is that it works like a lawyer's contingency fee. Injured parties who could not otherwise afford access to the legal system can try to collect damages because lawyers are willing to work without pay if their client does not win. Similarly, the estate tax enables us to enjoy valuable public services that we would be happy to pay for if we knew we would end up wealthy, but that we might be reluctant to demand otherwise. With the estate tax, the surcharge kicks in only if we are lucky enough to be one of life's biggest winners. (p. 26)
But the lawyer who works on a contingency fee will do so because he thinks he has a good chance to win the case and earn a substantial reward for his efforts. This situation differs altogether from the situation that Frank envisions, in which people vote to provide themselves with services, knowing that there is little chance they will have to pay for them. Because the estate tax falls only on the very rich and because most people realize that they have little chance of attaining great wealth, they compel others to provide them with benefits by voting for public services paid for by the estate tax .
This brings to light a fundamental error in Frank's entire case, even if he is right that there are egalitarian measures that do not lessen efficiency. Even if there are cases where there is no "equity-efficiency tradeoff," these will be swamped by other cases where egalitarian measures are inefficient. These cases arise from the circumstance just mentioned: people can vote for programs that benefit them while shifting the burden of payment to others.
But what of Frank's main contention, i.e., that cases exist where everyone gains through taxes on inefficient consumption? An example will illustrate Frank's point. Suppose that you want to have a house at least as large as those of your neighbors. If one of the neighbors enlarges his house, you will be tempted to do likewise, in order to keep up with him. This may set off a competitive struggle, in which people enlarge their houses only to keep pace with neighbors. All of them would be better off if a consumption tax made it difficult for them to engage in such an arms races. They would be better off because the additional space does not "really" increase their utility: everyone is perfectly content if no one expands.
I have offered criticisms of this argument in earlier reviews of Frank's books and will not repeat these points here.1 Rather, let us ask a different question. Assuming that Frank has made an acceptable argument that wasteful rivalrous consumption is possible, does he show that it is an important factor in the American economy?
He fails to do so, and we can use his own words against him. In order to have a case of the kind he wants, he needs to show, for example, that people derive no direct benefit from, for example, a larger house: any gain in utility exists only because of a competitive arms race. Yet as he admits:
Perceptions of quality influence the demand for virtually every good, including even basic goods like food… There are no obvious limits to the escalation of quality standards… By placing the desire to outdo others at the heart of his description of insatiable demands, Keynes relegated such demands to the periphery. But the desire for higher quality has no natural limits. Keynes and others were wrong to imagine a two-hour work-week enabling us to buy everything we want. That hasn't happened and never will. (p. 57)
Frank does not grasp that he has here refuted his main reason for a consumption tax. By assuming that people want certain goods only because others want them, he ignores the likelihood that people consider the consumption Frank deems wasteful to be genuine quality improvements.
This is not the only instance in which Frank refutes his own arguments. Like most good leftists, Frank dislikes SUVs. People want them because it is an advantage to have a large vehicle in case of an accident. But is this not a case of rivalrous competition of just the sort Frank decries? People would not want large vehicles unless they feared that others would obtain them. Will not a tax on SUVs benefit everyone? But Frank himself says:
Nor can safety concerns explain the success of SUVs … their weight confers some advantages in head-on collisions with smaller vehicles … but their poor handling, high propensity to roll over, and longer stopping distances make them more dangerous, on balance, than cars. (p. 141)
How can Frank fail to see that he has knocked out his earlier claim that any "family that unilaterally bought a smaller vehicle might thus put itself at risk by unilaterally disarming" (p. 122)? A columnist can no doubt forget what he wrote years before; but is it too much to ask that a collection of columns be edited for consistency?