Sunday, March 23, 2008

Frankly Dumb

[Robert Frank, Journal of Public Economics, forthcoming:]

"A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated. For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful. In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill, who wrote the state may not legitimately constrain any citizen's freedom of action except to prevent harm to others. I argue that many positional externalities appear to meet Mill's test, causing not just negative feelings but also large and tangible economic costs to others who are ill-equipped to avoid them...Those conditions are precisely analogous to the ones that make military arms races between equally matched rival nations wasteful...No libertarian would think to object to a military arms control agreement on the grounds that it limited each side's freedom to spend as much as it pleased on arms. Since that was precisely the objective each sought by entering into the agreement, such an objection would be absurd on its face...I have argued elsewhere that a simpler, more promising, approach would be to abandon the current progressive income tax in favor of a more steeply progressive general consumption tax...Taxpayers would report their incomes to the tax authorities just as they do now. They would also report how much they had saved during the year, much as they do now in order to exempt money deposited in retirement accounts. People would then pay tax on their 'taxable consumption,' which is just the difference between their income and their annual savings, less a standard deduction. Rates at the margin would rise with taxable consumption. If the tax were revenue neutral, marginal rates at the top would be significantly higher than current marginal tax rates on income...Proposals to generate additional income tax revenue by raising top marginal rates invariably summon concern about possible negative effects on the incentive to save and invest. Under a progressive consumption tax, by contrast, people's incentives would be to save and invest more, even if top marginal tax rates on consumption were extremely would lower the marginal costs of self-insuring against lost earning power and of leaving bequests...And given the apparent importance of context, the indirect effects of a progressive consumption tax promise to be considerably larger than the direct effects. Thus, for example, if people at the top save more and spend less on mansions, that will shift the frame of reference that influences the housing expenditures of those just below the top. So they, too, will spend less on housing, and so on all the way down the income ladder...Liberals and conservatives alike agree that our failure to save has had damaging macroeconomic consequences, that we would all be better off if we all spent less and saved and invested more. But no individual has the power to alter the aggregate savings rates...In the absence of detailed empirical evidence, a plausible conjecture is that the first expenditures that high-end consumers would reduce in response to a steeply progressive consumption tax are the same ones they have recently been increasing in response to their growing incomes. In the US, some of the most spectacular increases in high-end consumption in recent years have occurred in housing and the events families use to mark special occasions. By all accounts, such expenditures are hyper-positional."

Good lord. Robert Frank has "discovered" rent-seeking. Many of the signals that people give in interviews (arriving on time, dressing well, etc.) are not purely wasteful. They are signals of unobservable features correlated with likely performance.

But, if lazy folks could form a lobby, and lobby for the benefits inherent in BLOCKING smart, energetic people from being able to work hard to give good signals, how much would that be worth? A lot! So, even lazy people might work on that. Or pay somebody to work on it for them.

The problem is that EVERYTHING Frank points out as a cost is FAR less costly than the rent-seeking orgy he wants to start instead. Giving out the bennies he thinks are "good public policy" would cause a riot of rent-seekers. "Make smart people talk slower." "Yeah, and they don't get to wash their hair. I don't wash my hair, so people who DO wash their hair have an unfair advantage. Legislate that away!"

Rent-seeking is what people do to obtain favorable regulation. The competition for the kind of benefits Frank wants to give out would DWARF, in terms of costs, the tiny effects he claims to be worried about.

And he doesn't even realize that Tullock and Krueger pointed all this out 40 years ago. Yeesh.

As Kashdan and Klein say: "Assume the positional!" And give us taxpayers a little KY first.

(nod to KL, who likes to assume the positional, or so I hear)

1 comment:

Tom said...

"Robert Frank has 'discovered' rent-seeking."

Now he needs to discover the paragraph break. ...somewhat sooner than his next 653 words, one hopes.