Welcome Robert H. Frank, (Robert-H-Frank.com) and Host Mark Thoma (Economist’sView.com).

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions. Please take other conversations to a previous thread. - bev]

The Darwin Economy: Liberty, Competition, and the Common Good

The Aggregate Expression of Individual Behavior

The case for government intervention in the private economy is often based upon the need to correct market failures. When problems such as monopoly power, asymmetric information, or adverse selection cause significant departures from the purely competitive ideal markets found in textbooks – departures that cause these markets to deviate in important ways from the outcomes society would prefer – government intervention can correct the problems and improve social welfare. Thus, when consumers are vulnerable to exploitation because, say, they lack information on the value of medical treatments, the government can stop shady characters from selling them snake oil through regulations that require claims to be justified by reliable evidence.

Libertarians and market fundamentalists more generally do not accept this argument. In their view, it is almost always the case that government intervention creates more problems than it solves. And who needs the government in any case? According to this view, markets will fix these problems by themselves. People selling bogus products will quickly be revealed and driven out of business, some businesses will develop a reputation as trustworthy, information on effective treatments can be provided on the web, and so on. There’s no need for government. But what if the products cause permanent damage, should we leave it to the market then? Where should we draw the line?

The proper role of government in society hasn’t been settled after centuries of debate, and this particular facet of the debate – the role of the government in ensuring that markets produce outcomes that maximize the social good – won’t be settled anytime soon either.

Robert Frank argues in his book The Darwin Economy that this is a false debate. It doesn’t matter which side is correct about the need for government to correct market failures, there’s still a strong case for government intervention into the economy – a case libertarians ought to support.

The argument is based upon an application of ideas from natural selection to economics. As Darwin explained, evolution favors changes that increase the chance that an individual organism’s genes will be passed on to the next generation. Most changes that give an individual an advantage over its rivals benefit the entire population – a mutation might make the individual faster, healthier, or stronger, and when that trait provides a reproductive advantage and it spreads throughout the population it benefits the entire group. But some things that give an individual an advantage – the book uses the example of larger and larger antlers to win battles for mates – are detrimental to the group as a whole. In this case larger antlers make it more likely the individual will win head to head battles and succeed in passing its genes along, but the larger antlers also restrict mobility and that makes the herd as a whole more vulnerable to predators. If someone – a government perhaps – could find a way to reduce antler sizes in proportion so that individual relationships were the same it would make the herd as a whole better off without changing the relative position of any individual.

Whenever the rewards for an action – profits, reproductive success, whatever – depend upon the relative performance of individuals within a group the problem of a divergence between the interests of individuals and the interest of the larger society is likely to be present. The book gives example after example of this “arms race” for positional goods, and details the waste of resources that this causes.

But the book doesn’t just identify the problem, it also points to a solution. The best way to overcome the arms race for positional goods and the associated wasted resources, it is argued, is to impose taxes that discourage this type of behavior. And the most efficient way to do that is through a progressive consumption tax.

As the book notes, it’s important to recognize that unlike the usual case where taxes result in too little consumption of desirable goods and services, taxes that discourage behaviors that are problematic improve societal outcomes. To the extent that we can fund government with taxes on wasteful, problematic behavior we will be better off. We, in effect, have the ability to control the size of our antlers.

The concepts in The Darwin Economy along with the many examples it provides explaining why people spend too much on clothes for interviews, buy houses that are bigger than they need, accept jobs with less safety than is optimal, and accept wages that are more equal than would be justified by individual productivity help us to understand how progressive taxes can make us all better off. And it also makes the important point that progressive taxation can be justified on efficiency grounds. When we use progressive taxes to redistribute income, it gives us more goods and services and greater societal satisfaction that we’d have otherwise. Thus, the case for a progressive tax structure does not have to rest solely upon consideration of equity and fairness.

When households engage in an arms race for positional goods, behavior that benefits individuals can be damaging to the group as a whole. Thus, the presence of positional goods gives markets a way to fail over and above the traditional sources of market failure discussed in textbooks. I do have a few questions and mild disagreements, we’ll get to those in the discussion, but the main idea in the book – understanding the relationship between individual maximizing behavior and aggregate outcomes – is essential in determining when and how governments ought to be involved in economic affairs. When individual behavior aggregates into what’s best for the community, there is no need for government to intervene. But when that’s not true – and this book adds to the list or reasons to suspect there are important cases when it’s not – there’s a role for government to play.

93 Responses to “FDL Book Salon Welcomes Robert H. Frank, The Darwin Economy: Liberty, Competition, and the Common Good”

BevW December 18th, 2011 at 1:50 pm

Robert, Mark, Welcome back to the Lake.

Mark, Thank you for Hosting today’s Book Salon.

Mark Thoma December 18th, 2011 at 2:00 pm
In response to BevW @ 1

Thanks, and nice to be here.

Robert Frank December 18th, 2011 at 2:00 pm
In response to BevW @ 1

Nice to be back, Bev!

dakine01 December 18th, 2011 at 2:01 pm

Good afternoon Robert and Mark and welcome back to FDL this afternoon.

Robert, I have not had an opportunity to read your book but do have a question and forgive me if you answer it in the book.

Given the current predatory nature of our national and global economies both, how do you think we can convince the economic elite that it is truly in their best interest to not try to grab everything but to work with all levels of society?

Mark Thoma December 18th, 2011 at 2:03 pm

dakine01′s question goes along with what I wanted to ask — First, I enjoyed the book. Maybe you could describe the main ideas in the book. What is it that you want readers to learn from reading this book?

Robert Frank December 18th, 2011 at 2:05 pm
In response to dakine01 @ 4

That’s indeed one of my main themes in the book.

My specific claim is that Adam Smith’s invisible hand theory will someday be seen as a special case of Charles Darwin’s more general theory about the relationship between competition and the well-being of individuals and groups, which holds that the pursuit of individual interest often leads to bad results for larger groups.

Smith’s modern disciples believe that individual and group interests coincide—that if we just get government out of the way, free markets will attend to everything. Like modern social critics from the left, Smith worried that we needed government to protect consumers and workers from exploitation by economic elites. Conservatives invariably counter, correctly in my view, that markets are far more competitive than in Smith’s day.

But Darwin’s central insight was that individual and group interests are often deeply in conflict, and that in those cases individual interests trump. So even if we have perfectly informed, rational consumers and perfectly competitive labor and product markets, the pursuit of individual interest may not serve society’s interest at all. The good news is that the Darwinian framework helps identify simple steps that would bring individual and societal incentives into much closer alignment–in ways that would enable both the one percent and the 99 percent to do better.

Mark Thoma December 18th, 2011 at 2:06 pm
In response to Robert H. Frank @ 6

Is there a good example to illustrate this?

eCAHNomics December 18th, 2011 at 2:09 pm

As Darwin explained, evolution favors changes that increase the chance that an individual organism’s genes will be passed on to the next generation

This has always been my problem with Darwin. Survival of the fittest ignores the whole aspect of why do so few species survive, why have there been so many extinctions. Seems like a verkakte model to me.

And what does that have to do with economics anyhow.

I recognize that species change in response to environmental changes. That may or may not help them survive. Depends on what the environment stimulus is, i.e. how quickly it happens, and how vulnerable the species are.

And how does that factor into economic Darwinism?

Robert Frank December 18th, 2011 at 2:10 pm
In response to Mark Thoma @ 5

One of the examples I use to illustrate the conflict between individual and group interests is the arms race that led to the massive antlers we see in modern bull elk.

To recap briefly, Darwin begins with the observation that bull elk, like males in most vertebrate species, take more than one mate if they can. If some succeed, others are left with none, so males naturally fight bitterly for mates. Antlers were the weaponry that decided those battles, so mutations that coded for larger ones were strongly favored. Mutations accreted over the generations, and the resulting arms race produced the modern animals whose antlers can span more than four feet and weigh more than forty pounds.

Such antlers make bulls less mobile in densely wooded areas, increasing their vulnerability to wolves and other predators. Their massive antlers are thus a handicap when viewed from the perspective of bulls as a group. If each animal’s antlers were smaller by half, they would be less likely to be surrounded and killed by wolves, and since it’s relative antler size that matters in battle, the outcome of each fight would be the same as before. Yet bulls are stuck with their oversized antlers, since any individual without them would never win a mate.

That doesn’t mean that big antlers are dysfunctional for elk as species. As biologists have long noted, sexually reproducing species have far more males than they need, so if many bulls are more easily caught and killed because of their large antlers, that doesn’t much threaten the survival of their species. But surely any sentient bull would find survival to a ripe old age preferable to being killed and eaten by wolves.

The equilibrium antler size is thus problematic from the perspective of bulls in precisely the same way that the equilibrium stock of bombs in problematic from the perspective of nations engaged in military arms races. There is an equilibrium in military arms races. But that doesn’t mean that the equilibrium stocks of bombs are efficient.

Scarecrow December 18th, 2011 at 2:12 pm

Welcome to you both. I’m hoping the discussion can provide the author’s framework for answering many of the questions in today’s political discourse. For example, one major criticism of today’s political structure is that it has been captured by an elite focused on preserving advantages for the elite and channeling more and more wealth to them. The game seems rigged. How would you apply the book’s perspective to this problem? Does it admit this problem and how does it help fix it?

dakine01 December 18th, 2011 at 2:12 pm
In response to Robert H. Frank @ 6

Conservatives invariably counter, correctly in my view, that markets are far more competitive than in Smith’s day.

I dunno. It sure seems that there’s a lot more areas where instead of competition there is more collusion that winds up hurting those not in on the scam. Such as between the banks and ‘credit rating’ agencies.

More an appearance of competition than actual competition

Mark Thoma December 18th, 2011 at 2:12 pm
In response to eCAHNomics @ 8

Whether or not an entire species survives when individuals maximize their own well-being without thinking about the consequences for the species as a whole is one of the points of the book.

There are times when survival of the fittest individuals does not lead to the fittest possible species as a whole. That is true in economics as well.

eCAHNomics December 18th, 2011 at 2:13 pm

How do you expect to get “progressive” consumption tax that discourages 1%ers’ antisocial activity, when 1%ers own tax making bodies.

Knut December 18th, 2011 at 2:13 pm

Good afternoon, Professor Frank. I haven’t read your current book, but the Failing Economy is one of my favorites. I assigned it to all my classes when I was still teaching economics and the history of economic thought. My very last class was intro micro, which I decided to teach after 40 years just to see whether I could do it any better than the first time. I had the students read your book and write an exam essay on it. Sad to say, most of them just repeated what I had said in class, but a couple got under its skin.

I think your point about there being a systematic bias against public goods is spot on. I’ve been trying to persuade my younger colleagues in behavioral economics to devise experiments testing the positional goods theorem.

Robert Frank December 18th, 2011 at 2:16 pm
In response to Scarecrow @ 10

This is indeed the central problem we face today. Until we figure out some way to reduce the influence of campaign contributions on how legislators vote, it will be difficult to make progress on all other issues.

Laurence Lessig has an important new book out on this subject, and it’s one I discuss at some length in chapter 4 of The Darwin Economy.

Scarecrow December 18th, 2011 at 2:16 pm

And a follow up problem — if we look at environmental issues, particularly climate change issues, standard economics might define the problem in terms of unpriced (untaxed?) externalities. That would seem to be in line with where the book heads. But is there more to this, either in defining how to tax and arguing how to get greater acceptance of the need to tax?

Mark Thoma December 18th, 2011 at 2:16 pm

There seems to be quite a few questions along the same lines. Why do you think that competition is higher now than ever? Isn’t it political influence that is high right now rather than competitive behavior, and if so, does that undercut the ideas in the book?

Knut December 18th, 2011 at 2:17 pm

Such antlers make bulls less mobile in densely wooded areas

I don’t know if your book brings this up, but what this statement implies is that significant climate change (of which there have been many since the pleistocene) puts these hyper-specialized animals at risk of extinction. I believe there are some cases of this, though I’m not sure it is true of the Irish Elk. But it raises the interesting question whether there is something in post-WWII America that made positional goods relatively more important than before in an environment that for a long time did not significantly constrain the chase for higher relative standing.

Mark Thoma December 18th, 2011 at 2:19 pm

I’m hoping Professor Frank will weigh in, but there is quite a bit of argument in the book about why libertarians ought to accept his ideas about progressive taxes — why it is in their best interest to do so, and why they would choose a society with progressive taxes if they made free, rational choices.

Thus, supporting these taxes comes with an understanding of the argument he is making, or so it is hoped.

Scarecrow December 18th, 2011 at 2:22 pm

That begs the question: how does Lessig solve this problem of capture, and do you think that solution works?

eCAHNomics December 18th, 2011 at 2:22 pm
In response to Mark Thoma @ 12

Economists have shown reasonably strong evidence of all sorts of private human activity that promotes the health of the species rather than individual dominance. The trouble is, that kind of economic behavior (or when found in other species, group behavior) is often not strong enough to overpower the alpha male model, that is the evolutionary human inheritance.

And look how well the alpha male model has performed for the chimps which are close to extinction. May we expect that humans will follow in their footsteps?

Robert Frank December 18th, 2011 at 2:23 pm
In response to eCAHNomics @ 13

First a brief word on what a progressive consumption tax is. Essentially, it’s a progressive income tax with an unlimited savings exemption.

You’d report your income to the IRS as before, but you’d also report your savings, much as you would for an IRA or a 401k. The difference between those two numbers—your income minus your savings—is the amount you spent during the year. That amount less a large standard exemption—say, $30,000 for a family of four—is your taxable consumption. Rates on taxable consumption would start very low, so for families in the bottom half of the spending distribution, total tax bills would be as small as or smaller than those under the current system. But rates would rise steeply as taxable consumption rises. That would not discourage savings and investment, as higher marginal income tax rates are often said to do. On the contrary, higher marginal consumption tax rates would actually encourage savings and investment.

The political prospects for passage of this tax are brighter than your question suggests, because it would serve the interests not just of low- and middle-income households, but also those of wealthy ones.

Just as an effluent tax discourages the discharge of harmful pollutants, a progressive consumption tax would mitigate expenditure cascades that cause harm to middle-income families. Consider, for example, how the tax would affect a wealthy family that was weighing whether to build a $2 million addition onto its mansion. If the marginal consumption tax rate at the highest levels was 100 percent (meaning that if the biggest spenders spent another $2 million, they’d also have to pay another $2 million in taxes), the family would have a strong motive to scale back its addition.

That simple fact reveals the fiscal alchemy implicit in this form of tax: If this family and others like it all built additions only half as big as they’d planned, the smaller additions would serve them just as well as the larger ones would have. Beyond some point, after all, it’s relative, not absolute, mansion size that matters. And when they spend less, others just below them would spend less, and so on all the way down.

The upshot is that wealthy families could put more cash away for emergencies without jeopardizing their current standard of living, because beyond some point, it’s relative spending that governs perceptions of living standards. And the revenue from the taxes paid on their smaller mansion additions could be used to help maintain the rutted roads that do so much damage to their Porsches.

Mark Thoma December 18th, 2011 at 2:24 pm
In response to eCAHNomics @ 21

One of the keys for a divergence between individual maximization and the social good is when head-to-head (literally with antlers) competition is important. Thus, the alpha-male model fits this framework.

eCAHNomics December 18th, 2011 at 2:26 pm
In response to Mark Thoma @ 19

Just my small, prolly unrepresentative sample, but libertarianism seems to be a religion, not at all evidence based.

Mark Thoma December 18th, 2011 at 2:28 pm
In response to eCAHNomics @ 24

The book does a pretty good job of explaining how Libertarians change the terms of the debate in order to make their argument. But even so, the argument is that on their own terms, they ought to accept it.

Robert Frank December 18th, 2011 at 2:28 pm
In response to Mark Thoma @ 17

When I say there’s more competition now than ever, I mean that labor and product markets are more competitive than they’ve ever been. But yes, the political system has grown more corrupt because of the dependence of elected representatives on campaign contributions.

The reason I see grounds for hope is that our current spending patterns are not only grossly inefficient, but there are also relatively simple and unintrusive changes in tax policies that would eliminate much of the current waste. And as I stress to students, whenever we can make the economic pie bigger, we can always find ways to make sure everyone gets a bigger slice than before. It shouldn’t take a master politician to sell changes that would benefit everyone.

eCAHNomics December 18th, 2011 at 2:29 pm

Why in the world would you exempt savings from taxes. Teh whole world imbalance since when? Reagan? is too much saving chasing too few productive assets. Which is why you have bubbles & crashes.

The global imbalance is lack of demand aka excess supply aka excess saving.

Mauimom December 18th, 2011 at 2:30 pm
In response to Mark Thoma @ 19

Welcome, Professor Frank.

When I read the portion of your book about “taxing harmful activities,” I immediately thought of imposing a financial transactions tax, specifically on the “fantasy” commodities.

Do you think there’s any argument that could be made re this?

Mark Thoma December 18th, 2011 at 2:30 pm
In response to Mark Thoma @ 25

The reasoning in my last comment was pretty circular and unclear — which I guess, at least as an illustration, is part of the point.

eCAHNomics December 18th, 2011 at 2:31 pm
In response to Mark Thoma @ 25

You must know diff libertarians than the ones I know.

Besides libertarians are such a small % of any debate, who cares what/how they think.

On edit: Or the extreme reaching for straws that even considers libertarians as part of the process.

Knut December 18th, 2011 at 2:31 pm

How does this work when the household is financing consumption out of debt or running down its assets? I understand that in the steady-state it works out, but how would the tax affect the one percent of wealth-holders whose spending affects everyone else’s sense of self-worth?

Robert Frank December 18th, 2011 at 2:34 pm
In response to Mark Thoma @ 19

In The Darwin Economy, I adopt John Stuart Mill’s harm principle, which holds that government can legitimately restrain people only when necessary to prevent them from causing undue harm to others. I don’t quarrel with the libertarian’s basic premise that the rich (and everyone else, for that matter) have a right to spend their money as they please, provided they don’t spend in ways that cause undue harm to others.

But many forms of spending cause obvious harm to others. When someone buys a 7,500 pound passenger vehicle, for example, he puts other motorists at greater risk of injury and death. In such cases, it’s completely legitimate to ask whether there are practical ways to limit harm to others without imposing restrictions that cause even greater harm.

In general, I also believe that it is less intrusive to tax harmful behaviors than to prohibit them. This was the major lesson of our early efforts to curb environmental pollution. Prescriptive regulations, such as telling electric utilities what kinds of coal to burn or what kinds of scrubbers to install on their smokestacks, were not only intrusive, they were also grossly inefficient. In almost every instance, air and water quality goals were met more cheaply and quickly when we taxed pollution than when we tried to regulate it directly. My policy prescriptions in The Darwin Economy are heavily shaped by the lessons of that experience.

Some libertarians denounce all taxation as theft. But mature adults realize that we have to tax something. I argue in the book that we can raise all the revenue we need exclusively by taxing activities that cause undue harm to others–activities that we ought to be discouraging whether or not we needed additional revenue.

Mark Thoma December 18th, 2011 at 2:36 pm

The hard part will be getting people to recognize these as legitimate and important externalities.

Is there any evidence on the extent to which positional goods exist?

madma December 18th, 2011 at 2:37 pm

“It shouldn’t take a master politician to sell changes that would benefit everyone.” It appears to me the system as it is, does not present us with the politicians that would sell changes that would benefit everyone. Such as someone like yourself, would you be willing to enter into the political world as it is?

Robert Frank December 18th, 2011 at 2:37 pm
In response to eCAHNomics @ 27

If a consumption tax were phased in gradually once the economy was back at full employment, it would encourage saving, yes, but it would not lead to a spending shortfall since the gradual increase in saving would lead to a gradual increase in investment spending. Over time that would cause productivity and incomes to grow more rapidly. Eventually consumption would actually be higher that if we had remained on a low-savings trajectory, even though it would be a smaller portion of GDP.

eCAHNomics December 18th, 2011 at 2:37 pm

When I say there’s more competition now than ever, I mean that labor and product markets are more competitive than they’ve ever been.

Disagree completely.

Labor markets have become more & more oppressed by corps, not more competitive. The power gap bet employers & employees make the use of the term ‘competitive labor market’ a mockery of anyone who really works for a living (as opposed to the rent collectors).

As long as corp profits are soaring, even under adverse econ environment, you cannot call product markets competitive. Race to the bottom is a more accurate descriptive.

Or, more simply, people who work for Walmart can’t afford to shop there.

Robert Frank December 18th, 2011 at 2:38 pm
In response to madma @ 34

Politicians like to win. One with a proposal that would benefit everyone should have better prospects for winning votes.

Scarecrow December 18th, 2011 at 2:39 pm

Suppose we were somehow able to pass tax proposals that could “raise all the revenue we need exclusively by taxing activities that cause undue harm to others . . .” Have you worked out the distributional effects of that tax? That is, would currently rich people pay more or less than now, working class more or less, poor people . . . etc?

madma December 18th, 2011 at 2:41 pm

If only they figured that out.

eCAHNomics December 18th, 2011 at 2:42 pm

Productivity, if you haven’t looked at the stats, is growing by leaps & bounds.

Productivity happens bc capital is substituted for labor, and the beneficiary is the owner of capital, not labor.

And how do expect U.S. economy (or European under wingnut leadership of Merk, Sark, Cameron) to ever get back to full employment. The whole point of their leadership is to prevent that.

eCAHNomics December 18th, 2011 at 2:43 pm

Um no, not at all. The only prospect that has any chance is the one that garners campaign contributions.

If voting mattered, they wouldn’t let us do it.

madma December 18th, 2011 at 2:44 pm
In response to Robert H. Frank @ 9

Your Bull Elk analogy is brilliant. thank you… I will be using it…

eCAHNomics December 18th, 2011 at 2:47 pm
In response to madma @ 42

One analogy does not a case make.

Mark Thoma December 18th, 2011 at 2:48 pm
In response to eCAHNomics @ 43

There are many, many more in the book…and, as I noted above, a more general framework for predicting when a detrimental arms race is likely to occur

Robert Frank December 18th, 2011 at 2:49 pm
In response to Mark Thoma @ 33

Data consistently show that well being, beyond some point, is far more dependent on relative income than on absolute income.

The reason we see waste is that context matters more in some domains than in others. We see wasteful military arms races, for instance, because relative armaments matter more than relative consumption. That causes expenditures races focused on arms, which are financed by taking resources from domestic consumption–by building fewer roads and hospitals. It’s the same with positional goods and nonpositional goods. Context matters more for people’s evaluations of schools for their evaluations of their workplace safety.

Someone will take a riskier job, for example, in order to bid more effectively for a house in a better school district. But a good school is a relative concept, and because of the logic of musical chairs, they’re inevitably frustrated. No matter how aggressively everyone bids for a house in a better school district, half of all children must attend schools in the bottom half of the school quality distribution. As in the familiar stadium metaphor, all stand, hoping for a better view, only to discover that no one sees any better than if all had remained comfortably seated.

As Elizabeth Warren and Amelia Tyagi Warren explained in their book, THE TWO-INCOME TRAP, that’s why people in her parents’ generation could get along with just a single paycheck, whereas now people have trouble making ends meet even though both spouses work full time. The extra paychecks went into a fruitless bidding war for the houses in the better school districts.

juliania December 18th, 2011 at 2:50 pm

Thank you for being here, Mr. Frank. I had the same reaction as Mauimom, in that I immediately thought of the way the ‘big antler guys’ make their money which is slicing and dicing derivatives, now apparently ongoing with respect to student loans. That doesn’t seem to go with what you say about a consumption tax, unless you are going to include what’s going on these days on Wall Street. I don’t see how that has anything to do with the normal family’s current spending patterns, which are in general just to keep head above water.

Robert Frank December 18th, 2011 at 2:51 pm
In response to Scarecrow @ 38

Using the Earned Income Tax Credit and other income-transfer tools, we can make the distributional effects of changes we make in the tax system fit whatever pattern we choose.

eCAHNomics December 18th, 2011 at 2:51 pm
In response to Mark Thoma @ 44

Yes, and like religious cherry picking from the OT, NT, Koran, I’ll wait for the stats to sort it all out.

Anyone can find examples that suit one’s priors. My Wall St. econ competitors were masters at this data mining technique.

I came to econ via science, and instead of looking for examples that illustrated my priors, I looked at the data to see what model they suggested.

Knut December 18th, 2011 at 2:52 pm

Thinking about natural selection, I wonder if there is something in the current organization of business that selects for the kind of social pathology that is driving the extreme competition for positional goods? It’s easy to understand, as Adam Smith claimed, that people will do things to advance their family’s social standing. It was his explanation for saving. But when you are a billionaire, or even say a quarter of a billionaire, your family is pretty well-provided for. It’s just pure competition, a game. I think anyone on the outside would say that it is sick. It’s not like the old European concept of honour, which a person could win on the battlefield or in some intellectual or artistic endeavor. There are a lot of outlets for ambition. Why this particular one?

madma December 18th, 2011 at 2:54 pm
In response to eCAHNomics @ 43

doesn’t mean I can’t use and enjoy it

Mark Thoma December 18th, 2011 at 2:55 pm
In response to eCAHNomics @ 48

You don’t sound like the scientific type with an open mind to the evidence, it seems your mind is already made up.

Read the book, weigh the evidence that is presented, and then you’ll be much better able to draw conclusions. As it stands, you seem more like someone with their fingers in their ears.

Robert Frank December 18th, 2011 at 2:55 pm
In response to juliania @ 46

I didn’t mean to portray the progressive consumption tax as an alternative for strict regulation of the financial services industry. That’s the most destructive single industry in the economy in terms of the talent it wastes and the risks it imposes on third parties. They’re involved in mostly zero-sum games that add little social value.

eCAHNomics December 18th, 2011 at 2:55 pm

I also can’t understand why economics Darwinism won’t be used, under the same process as social Darwinism, as the same defense of the 1%ers. They’re richer bc they’ve made the most money, which proves they are better than the 99ers.

madma December 18th, 2011 at 2:55 pm
In response to Mark Thoma @ 44

It made me think of the book Jack Nelson-Pallmeyer is writing about the death of our empire.

eCAHNomics December 18th, 2011 at 2:56 pm
In response to Mark Thoma @ 51

I’ll take that as an insult.

madma December 18th, 2011 at 2:58 pm

that is why I enjoyed the statement by Rocky Anderson that he does not consider himself a 3rd party because right now we only have 1 and that one is corrupted by the money and they do do a number on 3rd parties.

Knut December 18th, 2011 at 3:00 pm

I recently had a personal experience of this. I rent an apartment downstairs to a professor of French at the university where I used to teach. They are wonderful tenants and I wanted to sell to them, because I knew they would stay so that their daughters can attend the school across the street (we live in a city), which is one of the most prized elementary schools in the city. I had it appraised, and it was worth close to $100,000 more than I thought when I first contemplated putting it on the market to finance our retirement. They couldn’t afford it on a single income. At the same time, putting two incomes into it stresses the family, although the wife is also an academic with an advanced degree in Greek and Latin. When I purchased the building, I could do it on an assistant professor’s salary. He’s a full prof, and can’t afford just a part of the building. Schools have a lot to do with it, though there are a lot of private substitutes in our neighborhood.

It strikes me that one by-product of the driving up of house prices is to greatly increase the fixed cost of operating a family.

Mark Thoma December 18th, 2011 at 3:01 pm

It sounds like the political arena is one place where the interests of individuals diverge from the interests of the larger population (more than sounds like, it is…).

Traditional models would interpret this as an agency problem and assign the usual market failure.

Is there a way to interpret this divergence in individual/aggregate interests as a positional goods arms race within politics, i.e. along the lines of the book?

Robert Frank December 18th, 2011 at 3:03 pm
In response to Knut @ 49

It’s important to recognize that all consumption standards are local. When I was a Peace Corps volunteer in Nepal, long ago, I lived in a two-room house with no electricity or plumbing. Not once did I ever experience that house as unsatisfactory in any way. It was considerably nicer than the houses of my fellow teachers in the village high school. But few Americans would feel comfortable about living in a house like that here.

If my friends from Nepal could see my house in Ithaca, they’d think I’d taken complete leave of my senses. Why would anyone need such a house, they’d wonder. But you wouldn’t think that. You’d see it as a normal middle-income person’s house.

Social critics wag their fingers at the over-the-top mansions of the rich. But to the rich, such dwellings are simply normal. The attraction of the progressive consumption tax is that it gives us a way to express our collective judgment about the relative value of spending extra income to build bigger mansions as opposed to spending that same money to fix crumbling roads and bridges and to rebuild failing water and sewer systems.

juliania December 18th, 2011 at 3:05 pm

My apologies. I thought you were saying that it was better to tax than to regulate. Still, isn’t the problem more the one I was describing than that our current spending patterns are out of whack? I realize folk are being persuaded to get the latest fancy phone, just as in earlier days it was the latest pair of sneakers, but do we really need to make adjustments on that front in order for society to be well served? Maybe education and a revitalized news media that serves the public as part of its modus operandi would do better to help us change our habits.

As to buying a bigger house, I really do think it was chicanery on the part of the sellers and those advising buyers that was the culprit in that mess. Taxing the buyers more would not have helped; they were swindled. But I apologize; it’s quite likely I misunderstand your message since I haven’t yet read your book.

Mark Thoma December 18th, 2011 at 3:07 pm
In response to Mark Thoma @ 58

To answer my own question, if all candidates raise more money, make more promises to donors, etc., the system is compromised, but nobody gains anything in relative terms. It simply takes more to play the game (excluding many).

Campaign war chests are the Bull Elk’s antlers.

Tammany Tiger December 18th, 2011 at 3:07 pm

A question for the author. Before you arrived at the idea of a consumption tax, did you consider a tax on wealth itself, and if you did, what persuaded you that it would be less effective?

Knut December 18th, 2011 at 3:09 pm

I agree completely. One of the insights I drew from your book concerned that notion of ‘normal’ consumption as context specific. Think of our Congress. There are very few members who are not millionaires and all of them (or almost all) have to consort with the rich to secure the funds they need to compete in elections. If I were spending most of my time in the company of very wealthy people, I would begin to think it was normal, too. I think that is why there is so little empathy among the political class for ordinary people at the median income or even to the 80th percentile. They just aren’t there except as objects of political advertisement, and problems if they get out of hand.

Robert Frank December 18th, 2011 at 3:11 pm
In response to Mark Thoma @ 58

The bigger problem, Mark, is that we’ve failed to perceive clearly why nobody benefits from our existing policies. The one percent lobby hard for lower taxes thinking that will make them happier. But that’s a faulty perception.

The one percent already have enough money to buy everything they need, and they think that lower taxes will help them buy more of what they want. But the things the one percent want are mostly positional goods–things like homesites with views, cottages on the shore, and other things that there aren’t enough of to go around. To get such things, they’ve got to outbid others one percenters who also want them. But if taxes on the wealthy go down, the outcomes of those bidding contests are completely unaffected.

Meantime, the resulting deficits force government to shortchange public goods that everyone would benefit from having.

Mark Thoma December 18th, 2011 at 3:18 pm

One theme in the book is that the debate between libertarians and progressives over government intervention in the economy is a false one. You argue that libertarians ought to support government intervention to stop the “arms race” for positional goods since the race wastes resources without providing any benefit to those engaged in the contest.

But the ideas are presented as correcting both libertarian and progressive views. One thing I want to ask is why you sees your ideas as standing in opposition to traditional ideas about market failure that many progressives use to justify government intervention rather than enhancing and complementing them (this gets at the why do you think competition is higher today than ever, which you’ve already partly answered — but, still, why not present the new ideas as reinforcing the case instead of replacing it?).

Knut December 18th, 2011 at 3:18 pm

I think your more basic point in this connection is the ‘trickle-down’ effect. It’s because so many people lower down the scale are competing for their own positional goods that makes it so hard for the public to purchase collectively what it is impossible for all but a tiny minority to purchase privately. To me that is the true meaning of ‘trickle-down’ economics.

Robert Frank December 18th, 2011 at 3:20 pm
In response to tammanytiger @ 62

A progressive consumption tax would not cure all ills. Although it would reduce inequality in consumption spending, it would likely have the opposite effect on wealth inequality, since the rich could better take advantage of the savings exemption. Because the wealthy would die with larger estates than before, it would be important to maintain a strong estate tax as part of the system.

Most thoughtful wealthy families seem to realize that they jeopardize their children’s ability to build satisfying lives if they’re assured that they’ll be multimillionaires before they turn 30. The existing estate tax still lets wealthy families leave more money to their children than many parents deem prudent.

A better way to think about the estate tax is that it’s like a contingency contract with a lawyer who agrees to argue your case for free if you lose. Most people don’t know whether they’ll be rich or poor when they start out in life. The estate tax is in effect a promise to pay a bigger share of your wealth in taxes if you happen to end up rich. In return, you and others enjoy better public goods and services that society could afford without an estate tax.

Mark Thoma December 18th, 2011 at 3:30 pm

How can we tell when taxes are progressive enough? I realize there’s no exact answer to this question, but just curious if this framework give us any guidance on this question?

juliania December 18th, 2011 at 3:30 pm

This may seem a silly question, but who would decide the relative values of various consumables? I am thinking that we currently seem to have a problem in this country switching to renewable fuels that could be solved if the ones which so pollute the atmosphere and our lives were heavily taxed – does that fit into what you are suggesting?

Robert Frank December 18th, 2011 at 3:31 pm
In response to Mark Thoma @ 65

The liberal notion that’s my primary target in the book is that lack of competition in labor and product markets is the main reason we need government regulation.

That argument presupposes that there are vast amounts of cash on the table–that firms with market power are somehow able to coerce consumers to buy inferior products at inflated prices. But in the information age that’s surely a shaky claim.

If I’m being poorly served by an existing firm, it doesn’t take long for a rival firm to get wind of that fact and communicate to me that it has something better on offer. Network economies sometimes provide temporary shelter for firms with inferior offerings. It took a while, for instance, for rival firms to win me away from Microsoft’s stranglehold. But it didn’t take forever. Moving forward we should expect that rivals with better offerings will become even better at connecting with poorly served buyers.

But to your specific question, I didn’t mean to suggest that externalities are the ONLY important form of market failure. They are, however, far and away the most important one.

Robert Frank December 18th, 2011 at 3:36 pm
In response to Mark Thoma @ 68

It’s an important practical question, especially since we have no direct experience with the kind of steeply progressive consumption tax I’m advocating.

That fact argues for taking a cautious approach. The U of Delaware economist Larry Seidman proposes that we start by implementing a progressive consumption surtax only on families that consume more than $500,000 a year. Under his plan, we’d keep the progressive income tax at first, then gradually replace it by reducing the threshold for the consumption surtax. This would provide an opportunity to gather data about how consumption was responding to the tax.

BevW December 18th, 2011 at 3:39 pm

Robert, Mark, Has a “progressive consumption tax” been used in other countries, at other times? What were the results?

Robert Frank December 18th, 2011 at 3:41 pm
In response to juliania @ 69

The attraction of the progressive consumption tax compared to luxury taxes on specific products is that it obviates the need for government bureaucrats to decide what’s a luxury and what’s not. Taxing specific luxuries has always played out poorly in the past, because people always find alternatives to buy that aren’t taxed. The tax I propose is levied on the total amount you spend and high marginal rates only apply to very high levels of total consumption. If your spending $5 million a year, probably the next dollar you spend will not be on something urgent.

Taxing fossil fuels would be something we’d want to do in addition to the general expenditure tax, because of the link between carbon emissions and climate change.

Kelly Canfield December 18th, 2011 at 3:44 pm

If I’m being poorly served by an existing firm, it doesn’t take long for a rival firm to get wind of that fact and communicate to me that it has something better on offer. Network economies sometimes provide temporary shelter for firms with inferior offerings. It took a while, for instance, for rival firms to win me away from Microsoft’s stranglehold. But it didn’t take forever. Moving forward we should expect that rivals with better offerings will become even better at connecting with poorly served buyers.

I simply can’t agree with that. For instance I have exactly 4 choices for Internet service that simply aren’t comparable by price or service level: Dial-up $10, Cable $45, Sattelite $55 and Fiber-optic $95.

In Europe you need a spreadsheet to determine among like providers to choose the one that will work best for you; a highly regulate market.

Likewise there is one choice for power to my home; and it’s privatized. And with commodity products, there is no escaping the rents extracted by speculators – see gasoline, coffee, etc.

dakine01 December 18th, 2011 at 3:44 pm

Would it be feasible to have a “progressive consumption tax” on financial transactions – especially the computer generated ones that seem to push a lot of the daily trading volume these days.

I.e., the more transactions made by an entity, the higher the tax goes.

Wouldn’t this return stability to the markets and the old “buy the stock for the long term” and halt a lot of the churning and short term emphasis?

Robert Frank December 18th, 2011 at 3:46 pm
In response to BevW @ 72

More than 95 percent of all Americans currently operate under the tax system I propose. That is, most Americans already are eligible to exempt larger savings amounts than they do under existing IRAs, 401ks, and other tax-exempt retirement accounts.

But to have any hope of changing current spending patterns, the key step is to bring the very wealthy under the same system. Currently most wealthy families save more than the maximum annual exemption allowances under existing retirement savings plans.

European countries also heavily on consumption taxation, but they employ value added taxes, which are essentially national sales taxes. Those taxes are extremely regressive, a drawback those countries compensate for by having more steeply progressive income taxes and more generous social safety nets.

Robert Frank December 18th, 2011 at 3:48 pm
In response to dakine01 @ 75

Support seems to be growing for a “Tobin Tax,” which is a small tax on each financial transaction. Financial services industry executives claim they’d all emigrate if we imposed such a tax. But evidence suggests that this problem could be managed.

Mark Thoma December 18th, 2011 at 3:50 pm
In response to dakine01 @ 75

Interesting idea. It’s hard to find the social value of very high frequency trades, and a tax that discourages them would also help to discourage the destabilizing behavior that sometimes come with this activity. But we don’t want to penalize the infrequent trader who is not part of this fast paced trading. Having a tax that varies according to frequency, e.g. zero up to a threshold and then positive after that, would match the underlying problem.

RaggMopp December 18th, 2011 at 3:50 pm
In response to madma @ 42

The bull elk analogy is absurd. It represents sexual selection, and may help explain why some species go extinct.

Robert Frank December 18th, 2011 at 3:50 pm
In response to Kelly Canfield @ 74

Note that most of the examples you cite involve regulated industries. This ties in with our earlier discussion about the corrupting influence of campaign contributions. Regulators are often captured by the very industries they’re supposed to be protecting us from.

dakine01 December 18th, 2011 at 3:51 pm

Financial services industry executives claim they’d all emigrate if we imposed such a tax.

I think a lot of us would respond “Don’t let the door hitcha …”

dakine01 December 18th, 2011 at 3:53 pm

But most of those “regulated industries” have been deregulated over the last ten to twenty years.

The twin pillars seemingly have been deregulation and privatization

BevW December 18th, 2011 at 3:54 pm

As we come to the end of this Book Salon,

Robert, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book.

Mark, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Robert’s website and book

Mark’s websites (TheFiscalTimes) and (EconomistsView)

Thanks all, Have a great week and Happy Holidays.

The next Book Salon will be Saturday, January 7th.

If you want to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

Mark Thoma December 18th, 2011 at 3:54 pm

Thanks everyone.

Robert Frank December 18th, 2011 at 3:56 pm
In response to RaggMopp @ 79

In his review of The Darwin Economy in Slate, the UK science writer John Whitfield raised a similar objection. He complained that if big antlers were harmful to bull elk, natural selection would have long since solved that problem by weeding out any bulls whose antlers were too large. Natural selection does indeed impose a limit on antler size. We don’t see bulls with antlers spanning 40 feet and weighing 400 pounds, since such animals would never be able to lift their noses from the turf, much less compete successfully for mates. But that doesn’t alter the point that the current equilibrium antler size is dysfunctional from the perspective of bulls as a group.

The equilibrium antler size is thus problematic from the perspective of bulls in precisely the same way that the equilibrium stock of bombs in problematic from the perspective of nations engaged in military arms races. There is an equilibrium in military arms races. But that doesn’t mean that the equilibrium stocks of bombs are efficient. This is a simple and uncontroversial point. Whitfield subtitled his review, “What The Darwin Economy Gets Wrong About Evolution.” A better title: “What John Whitfield Gets Wrong About What The Darwin Economy Gets Wrong About Evolution.”

The antlers example is indeed about sexual selection. But big antlers wouldn’t explain why a species would become more likely to go extinct. As I noted earlier, there is no shortage of males in sexually reproducing species. The fact that some of them are surrounded and killed by wolves because of their big antlers does not put the species in danger of extinction.

Kelly Canfield December 18th, 2011 at 3:57 pm
In response to dakine01 @ 82

Right. Seems to me that energy policy would be better served if energy was “in the commons” and profit out of the equation.

As for Internet connectivity, I maintain my previous example vis-a-vis Europe. It’s more regulated for the ISPs there and there is more choice than here.

hackworth1 December 18th, 2011 at 3:58 pm

Moving forward we should expect that rivals with better offerings will become even better at connecting with poorly served buyers.

Currently, the richest corporations can more effectively market their products – even if they be inferior or more costly. They can and do stifle competition in myriad ways.

How can competition be nurtured when fat cats run the tables? They won’t let it happen under any circumstances if they can prevent it.

Robert Frank December 18th, 2011 at 3:59 pm
In response to BevW @ 83

Again, many thanks for letting me put arguments from the book in front of Lakers, and many thanks to all who participated for your insightful comments and questions. And I want to thank Mark especially for taking the time to write such a thoughtful introductory essay.

juliania December 18th, 2011 at 4:08 pm
In response to Kelly Canfield @ 74

Same thing goes for most folk in lower income brackets who see themselves priced out of various markets. They don’t have a choice where they shop since there is only one megamarket (who shall remain nameless.) Without regulation against monopolies, we’re getting monopolies. I think the lack of regulation, sorry libertarians, is really what has sent us into a tailspin. I just can’t see taxes as providing sufficient clout without regulations to prevent that when we have billionaires roaming about, though I’d love to go back to Eisenhower percentages.

Perhaps it is the first point that Knut made that really tells the story. If we are setting priorities according to a Darwinian model, something is being left out. The bull moose ultimately, as you said, Professor Frank, wants to survive – he’s not thinking about survival of his species. But if an economy does need to factor in species survival, I’m not clear how we transition to that, as it seems thinking in economical mindset is best done by those who are good at it, in a dog eat dog kind of way. So, any economic solution is surely going to be gamed by these folk, whereas a regulatory system operates on different mechanisms entirely and takes the long view that the bull moose can’t. Sorry, I know I’m not expressing that well. I’d better go read your book!

bigbrother December 18th, 2011 at 4:15 pm

Taxes a simple trade tax on electronic trades in the shadow markets could reduce burdens on the low income by providing a safety net for the poor and needy.

RaggMopp December 18th, 2011 at 5:07 pm

Punctuated equilibrium is difficult for the members to discern. Elk have been extirpated from most of their former range. They very well may be on the brink of extinction. Check the Irish Elk. I’m sorry I led us into this swamp.

My real objection is your statement that the proper role of government in society hasn’t been settled after centuries of debate. It’s no mystery. We merely view (in much less than Darwinian terms) a slice of the seesaw battles of class warfare. Feudalism was very satisfactory to the barons, the serfs didn’t find it so nice; we progressed to the French Revolution. Yuk! Nobody wants that again, I hope. However, I think we liked our republic for a couple hundred years.

I know I sure did.

longtooth December 18th, 2011 at 5:49 pm
In response to Mark Thoma @ 2

“The proper role of government in society hasn’t been settled after centuries of debate, …”

Key word here is “proper”. In real terms gov’ts are formed and maintained by a minority that has the power and exercises it to place limits (control) people’s behavior, actions, and within the geography it can successfully defend and its fundamental purpose is to prevent or arrest chaos / anarchy.

In order to maintain itself the controlling gov’t must provide sufficient means for and desires of the bulk of its citizens to support it else revolution &/or widespread insurrection occur. Keyword “sufficient”… that which avoid widespread disruptions of that which benefit the controlling interests of gov’t.

Thus “proper” is a subjective term with no real meaning other than those which benefit those that seek to define it.

When “proper” is defined or asserted to mean anything which usurps the rights and privileges of those that control the gov’t, then by definition it is an “improper” role of gov’t (aka, those that control it). To believe that the general voting public plays a significant and material part in how the gov’t behaves or treats its citizens is to believe that those in control will voluntarily give up that control.

Hence the “centuries of debate” have simply been a debate between those in control with those that aren’t. It’s a useless debate since the outcome is determined by those in control. In that sense the debate gives “hope” to those that aren’t in control that they may increase their control… and “hope” is essential and necessary ingrediant for those not in control to accept existing “sufficient” conditions as they are… hence the reqiured component of those in control maintaining it.

davidfetter December 18th, 2011 at 8:52 pm
In response to Robert H. Frank @ 6

With all due respect, have you actually read An Inquiry Into the Nature and Causes of the Wealth of Nations? Contrary to the right-wing crew, it’s not a paean to unrestricted free markets, even slightly, and the “invisible hand” phrase is neither important nor, when mentioned, laudatory.

Please let’s get off Adam Smith’s back. He was very enlightened for his time, certainly more than any Republican.

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