Monday, October 17, 2011

Robert Frank's Wacky Economic Ideas

I saw a rather chilling exchange last Friday on Bloomberg television. On the network's midday program hosted by Tom Keene, Cornell's Robert Frank spewed some incredible economic nonsense. Here's his personal website.

On it, for example, is this passage,

"My conversation with Rachel Maddow on the lunacy of not extending long-term unemployment benefits"

On Keene's program, Frank went even further. For example, he berated Herman Cain's flat consumption tax, insisting it had to be made progressive. He naively claimed that by spending federal money now to build roads, we'll get a benefit of lower materials costs and lower labor costs because the latter are unemployed.

Hasn't Frank heard of the Davis-Bacon Act, which can add as much as 20% to the cost of such projects? Why must the federal government take on these projects? Why not state and local governments with, if need be, federal loan guarantees?

Frank also railed against libertarians, but used a straw man to do so. He began by pontificating about how ludicrous it is to consider taxes as 'theft' and oppose all government spending. I don't know of anyone who holds those positions, save perhaps Robert Nozick in his theoretical texts.

A more reasonable and pragmatic example of modern, real world libertarianism is the Tea Party movement. Those people want less government intrusion into the economy, lower spending and taxes. I never saw anyone at a Tea Party event at the Capitol arguing for no federal government whatsoever, or zero spending.

But straw men are easier to lampoon caricature. Frank, as a Cornell economics professor, should know better.

Frank's latest book is The Darwin Economy, reviewed here on Slate. Keene mentions it on his program occasionally. Here are a few paragraphs from the Slate review which provides a sense of Frank's arguments,

"Frank bases his argument on the Darwinian notion that life is graded on a curve. How much is enough depends on what others have got. Most people, for example, would rather live in a 4,000-square-foot house that was bigger than their neighbor's than a 6,000-square-foot house that was the smallest on the street. Economists call these positional goods, and contrast them with things that aren't so relative, such as safety at work, where most people think it's better to be safe in absolute terms than the safest worker in a hazardous factory.

Positional goods lead to waste, says Frank, because people end up living in bigger houses than they need to, throwing lavish parties, and spending money on pool cleaners. This pressures other people to do the same, and so takes money from the better uses that might be predicted by Smith's rational model.

Frank's elk vs. gazelle example may not be so useful, but in exploring the tension between natural selection and the common good, he touches on the toughest question in evolutionary biology: How has natural selection, which drives individuals to compete with their own kind, nevertheless produced so many examples of cooperation and altruism?

Frank's economics are implicitly group-selectionist. He wants to maximize the good of society as a whole by reforming the tax system so as to deter what he sees as antler-like arms races. To reduce positional spending, for example, he wants to replace income taxes with consumption taxes, calculated on the difference between what people make and what they save."

Elsewhere, even the liberal reviewer on Slate admits that Frank misapplies Darwinism in his quest to apply it to economics.

I find two things very troubling in Frank's work. First, his move to group welfare maximization, an old utilitarian concept which the US Constitution rather explicitly negates in its promise to protect individual rights, among which, from the Declaration of Independence are liberty and the pursuit of happiness.

In effect, Frank presumes the Progressive movement's objective of collective welfare as given. That's just wrong.

Secondly, sloppy and seemingly-inventive borrowing of a concept such as natural selection and evolution, and injecting it into economics, is extremely suspect. I'd have a lot more tolerance for such clearly self-serving nonsense if Frank was on record citing numerous controlled experiments which support his contentions. But nobody, including Frank, mentions them, which would seem to indicate they are non-existent.

However, Frank does touch on something that I think is important, and for which there is some historical precedent. When the wealthy members of a society possess some extreme proportion of that society's wealth, and behave in a way that leaves the poorer segments of that society at or below some threshold level of poverty, then the latter will rise up and forcibly seize the former's property.

Whether you choose Communist Russia or the French Revolution, or even point to the Magna Carta, this is a real human phenomenon. But blind, unfettered progressivism which simply makes the wealthy pay "more" of society's burden isn't a fair solution.

If a society, through its government, serves notice on its wealthier members that their share of societal expenses will be higher if certain metrics of distributional welfare levels are not met, that's fine. Perhaps a government would even prohibit certain investments which move employment overseas under such conditions.

But such conditional rules and taxation schemes merely add to uncertainty in the business sector. Which typically results in reduced investment and production, all other things held constant.

In short, you can dress up socialism however you like. But it seems true that the wealthy ignore extreme income and welfare disparities at their peril, while governments ignore the effects of punitive legislation directed at those who create society's wealth and income, at that nation's peril.

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