Starve Which Beast?

Frank makes a definitive value judgment: “when the pressure to trim budgets starts turning asphalt roads into gravel ones, that’s a credible signal that cuts have gone too far.”

He calculates that “potholes and other road-surface irregularities cause an average of more than $100 in damage each year to every car and truck on the road, not to mention many needless deaths and serious injuries. When road maintenance is postponed by even two or three years, the cost of repairs more than doubles.” An investment into roads yields “a rate of return of more than 18% a year.”

The reason why so much cash is left on the table is the anti-tax ideology that has paralyzed governments.

Now 18% seems very high, but there are two issues here that Frank neglects to point out.

First, economists suggest ways to economize. If Smith judges the sacrifice of his private enjoyments that he would be required to make to pay the tax to be too great relative to the benefits, then he will be harmed from the tax hike. It’s not economic for him to be subject to the tax.

Second, in the free market people choose their consumption bundles freely, voluntarily. On the other hand, if I and Frank unite to outvote Smith 2:1 to increase the tax to fund the highways, then Smith is forced to pay up. It’s not worth it to him, and he would not agree to surrender the cash if he were not afraid of the IRS. He is robbed, placed under duress, coerced.

The difference between tax-supported and free market projects is that the latter discriminate between those to whom the project is worth the money and those to whom it is not, and these latter will spend their money on something else. Taxing people does not discriminate: the authorities demand payment from both the happy and unhappy customers alike.

Frank quotes a voter, Bob, who rejected a road tax proposal in his county as follows: “I’d rather my kids drive on a gravel road than stick them with a big tax bill.” I think Frank wants to dismiss Bob’s preferences as vicious, as morally perverse, as we dismiss the preferences of murderers and, as Frank himself points out, of sadists. Frank is free to do so, of course, but there is a price for it: he ceases to be an economist and becomes a philosopher, and that is not his area of expertise. At any rate, I know of no philosopher who has defended the idea of the alleged transcendent value of good highways.

Frank can again point out that taxation is a convenient revenue generating mechanism. But there are all sorts of convenient things we can do yet refrain from doing, because doing them would be wrong. It may be convenient for me to kill my aunt for inheritance money, but I do not do this. It is convenient for me to rack up a huge debt and then disappear. I don’t do that either. Frank can reply, “What else are we supposed to do?” This plea suggests that he has run out of solutions. Perhaps, if taxation were more disreputable, intelligent people would have a greater motivation to succeed where Frank has failed.

As a last resort, Frank can invoke the principle “America (or California), love it or leave it.” If I don’t like paying taxes to the US government, why don’t I go back to Russia? I don’t see why he should insist on beating me on the head with this ultimatum. The costs of leaving the US for me would be considerable. I can’t help it if most other countries are even worse than the US. In fact, this argument has force only on the local, such as city, level. It is reasonable to say, “If you don’t like the way Akron is run, then move to Canton.” Or, “If you don’t like this condominium, then sell your property and relocate elsewhere.” It is not reasonable to give me a faux choice to leave the country as a whole.

Frank’s argument is that the money for the government can come from taxing socially wasteful activities. He believes that private waste far exceeds public waste. Therefore, Smith does not, in fact, have to be coerced into paying for highways; all we need are “relatively simple, unintrusive changes in [government] incentives.” I’m eager to see what he proposes.

Positional vs. Nonpositional Goods

Frank draws a distinction between a positional good for which the buyer’s rank relative to other people matters to him and a nonpositional good where the significance of absolute position predominates.

He presents a thought experiment, asking the reader to choose between living in

world A, where “you live in a neighborhood with 6,000-square-foot houses, others in neighborhoods with 8,000-square-foot houses,”

and

world B, where “you live in a neighborhood with 4,000-square-foot houses, others in neighborhoods with 5,000-square-foot houses.”

According to his experience, most people would choose B, apparently defying economic logic.

Here is one way to interpret this scenario. A person living in A would prefer to convert it to B. This means that he’d be willing to hurt himself, so long as his neighbors hurt even more.

There are two reasons for such a horror. First, the economic reason of access to better schools. I have nothing to add to the analysis I’ve already offered: the remedy is privatize, privatize, privatize.

Second, the moral reason of envy. A version of envy might be Ok in certain situations, such as a boxing match. Smith would agree to be punched once, if that meant that he would punch his opponent Jones twice. But: (1) Boxing is simply entertainment, a spectator sport embedded within the market economy. It is as far from government interference with private lives as you can get. (2) Life is not, generally speaking, a race. Envy is not for nothing called a mortal sin. The remedy for immorality is striving to become a better person, in particular to learn to rejoice at the happiness of others, something that the imposition of Frankian taxes will certainly not bring about.

Frank’s example of a non-positional good is the probability of dying on the job. People seem to prefer to lower that probability even if the “price” of this is that their neighbors lower it still more.

May I suggest that even on Frank’s own terms, the nonpositional goods comprise the vast majority of all goods? Here, I see a UPS truck outside. Would you prefer to get your deliveries (a) in 2 days if others got them in 1 day or (b) in 4 days if others got them in 8? I’d pick (a) right away. (To be sure, (a) seems to entail that I am some sort of unique loser, which will hurt my self-esteem, but come on, this is just a didactic thought experiment.)

Could the choice of world B in the first scenario be a “cognitive error,” an irrationality that would be dispelled with a clearer head and more righteous heart?

Curing Arms Races with a Consumption Tax?

Frank goes on to argue that for many luxury goods, the rich people who buy them do so only in order not to be left behind in the competition. Thus, Bill Gates’ house is 66K square feet; while one of Larry Ellison’s properties is, say, 40K square feet. This is just a monstrous arms race which makes no one happier despite both men’s spending many millions of dollars on these goods. It’s almost scandalous that such a thing occurs.

That consumption at high amounts should be taxed becomes a value-free argument and enables Frank to avoid sounding moralistic. If the maximum house size were limited to 10K square feet, then Gates and Ellison could both have what they wanted absolutely but in addition would agree to a cease-fire relatively. If the difference between the cost of a 66K ft2 and 10K ft2 house were taxed away, then (1) no happiness of either Gates or Ellison would be lost; (2) on the contrary, they might come to enjoy some inner peace; and (3) desperately needed public funds would be generated. It’s allegedly a win-win for everyone.

I have four responses to this.

First, no one is determined to treat any good as positional. For example, Warren Buffett, unlike Gates and Ellison (this trio are the three richest men in the world), lives very modestly. His house is worth less than a million. Perhaps, psychological counseling could curb other more ambitious billionaires’ enthusiasm to participate in arms races.

Second, perhaps the race itself is a pleasure. Why do people climb mountains? Not to get to the top; that they could do by flying there in a helicopter. No, they do it for the journey; it’s a rush, a thrill, an adventure for them. The arms race quickens the heart, makes one come alive, strengthens the will to live and fight. Adam Smith points out,

It is in the progressive state, while society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the laboring poor, of the great body of people, seems to be happiest and the most comfortable.

It is hard in the stationary, and miserable in the declining state.

The progressive state is really the cheerful and hearty state of all the different orders of society. The stationary is dull; the declining melancholy.

The “inner peace” that the government tries to impose on you may feel dull, indeed.

Improving, even if it is motivated and spurred on by the presence and actions of other people, is an end in itself and can give meaning to life. And that is no insignificant effect.

Third, not all luxuries are positional. Coffee has been called “the world’s most affordable luxury,” and it is 100% nonpositional. In having my morning cup, I am not thinking about how or whether other people consume it at all. Which brings us to the most important argument.

Fourth, today’s luxuries are tomorrow’s necessities. This adage and the process by which it is fulfilled should be familiar to any economist. If the rich cannot conduct their experiments in living, then the eventual mass production of former luxuries (now of higher quality and lower price) will never come to pass. This is regardless of whether the luxuries are positional or not. But, and here is the crucial point: even if they are positional as luxuries, they will be nonpositional as necessities. When the vast majority of people can afford big yachts, yachts will no longer be status symbols but simply objects of pleasure.

Thus, the positional aspect of luxuries is a mere temporary stage, perhaps imperfect but also indispensable, in the everlasting economic progress and genuine improvement in human welfare.

And with this, Frank’s thesis falls apart.

Law and Economics of Interracial Handholding

It used to be in the South of America that a lot of whites took offense at seeing interracial couples together, especially holding hands. This was a kind of conflict that could be resolved via Coase-style negotiations. Frank puts some meat on the argument:

If the city’s 100 interracial couples were each willing to pay $100 a week for the right to hold hands in public, then the combined benefit to them of being able to do so would total $10,000 per week, and if a million of the city’s whites would be willing to pay $1 a week to avoid the sight of interracial handholding, the weekly cost of granting that right would be $1,000,000.

If it were possible for the two groups to negotiate, each of the million whites could chip in, say, $0.10 a week, for a total of $100,000 which would finance a payment of $1,000 a week to each interracial couple that was prevented from holding hands. (95-6)

And everybody would be better off after the settlement than before.

Now the Coase’s insights have been discussed very extensively, e.g., his paper “The Problem of Social Cost” “quickly became and remains the most widely cited economics paper ever published.” So, let me just offer a few quick criticisms. If negotiation is possible, then it “does not matter” in terms of the solution negotiated how the judge resolves the dispute. If it is not possible, then the judge’s decision should mimic the way the negotiation would proceed if it could. But of course, that’s a counterfactual and those are notoriously difficult to evaluate. Judges would seem powerless in both cases, yet the whole law and economics movement is intent on converting judges to its arbitration methodology.

Another problem is that judicial precedents would offer no guidelines to future judges and therefore to the disputants how property rights are to be delineated. Everything depends on the particulars of the case, such as the exact dollar amounts attached to each course of action. But presumably, it would be helpful if people could know their rights beforehand rather than having them depend on the cost-benefit analysis unique to each situation.

Another difficulty is that the utility of money can differ for the parties to the dispute. A judge might rule in favor of Smith, because it would cost Jones $5K to muffle the noise from his factory, but it would cost Smith $10K to move away from the factory (to escape the noise). However, perhaps Jones values the lesser amount more than Smith values the greater amount. In such a case, the judge’s Coase-inspired decision would be a mistake.

But these are by the way. Franks is uneasy with the result that outlawing interracial handholding seems to be recommended by Coasean reasoning. His way out is to claim that it was “completely predictable” that the whites would eventually get used to interracial couples and suffer less from seeing them hold hands.

Of course, that’s a very bad solution. A judge cannot wait until people become “better”; he has to decide now. In 20 years, it may well be that a new lawsuit will be brought, and the judge may then decide differently, overturning his previous ruling, but for now he must take into account the present valuations of the disputants.

Even if it is predictable how the personalities of whites would evolve, it need not be that they would evolve the in the direction Frank prefers. If Southerners could be expected to grow still more intolerant, then Frank could no longer appeal to this argument.

What Frank probably wants to say is that racism is morally wrong. It’s not nice for people to suffer from expressions of love between people of different races. Well, that’s a pretty deep ethical judgment. It’s out of line for Frank to advise people on matters of such intimacy.

Fear not, however; there is a way to put our intuitions into precise terms. First, let us not weaken the Coasean prescription. Cost-benefit analysis does output prohibiting handholding. But there are other considerations that incline us to the opposite conclusion. If we want to be more poetic, we can say with Mises that:

The propensity of our contemporaries to demand authoritarian prohibition as soon as something does not please them, and their readiness to submit to such prohibitions even when what is prohibited is quite agreeable to them shows how deeply ingrained the spirit of servility still remains within them. It will require many long years of self-education until the subject can turn himself into the citizen. A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.

In short, people ought to teach themselves not to be concerned with other folks’ choices of lovers and spouses. This is a moral change, too, but more limited than one demanded by Frank. Mises would only argue that people ought to allow interracial couples to hold hands in public, but he does not command them to like it. They should respect others’ rights even if they think (correctly or not) that what those people are doing is disgusting or bad or sinful.

If we want to be more precise, we can argue with Rothbard that each person owns his body including his hands, and if he wants to hold hands with another person who also owns her hands, then he has a natural right to do just that. Moreover, not being offended is not a piece of property one can own. It’s not land, consumer good, capital good, or even intellectual property. There can be no property right in the mental state of non-offendedness. Hence, the government cannot be called on to protect this right.

Making the Best of Theft

Frank argues that in a democracy, the poor will inevitably want to plunder the rich. Lamentable as that may be, we can minimize the harm by giving the “redistribution” the form of pure income transfers. But because conservatives and libertarians are opposed to such transfers on principle, the poor end up looting the rich in much less efficient ways.

Thus, a tax on gas coupled with a payroll tax reduction is superior to price controls. (Well, you know, anything is superior to price controls.)

Giving the poor people money directly via the Earned Income Tax Credit, i.e., redistributing income via the tax system, is more efficient than rent controls.

Again, we’d be better off transferring income to struggling farmers than enforcing “price supports for agricultural products.” And so on.

I have two responses to this.

First, the more efficient the non-rich are at robbing the rich, i.e., the smoother and less painful the redistribution is, the more will be stolen, i.e., the more money the non-rich will “transfer” to themselves. In the end, the damage to society from the plunder will be the same whether the government uses efficient or costly ways of stealing.

Caligula famously wished that whole Roman people had only one head, that he might cut it off at a single stroke. That undoubtedly would have been efficient but probably a bad thing.

Second, theft is indeed inevitable in a democracy somewhat by definition, as opposed to in a commonwealth, if we use this Aristotelian distinction. To quote from my book,

Aristotle considered democracy to be a corruption of “commonwealth” which is presumably a society imbued with brotherly feelings and eschewing parasitism and exploitation of minorities by majorities as a way of governing. (1241b30) Otherwise, without goodwill, democracy is, indeed, two wolves and a sheep deciding what to have for dinner.

The democratic status quo is not sacred, and perhaps instead of giving up, we should strive to impart into the masses with some moral and economic sense.

Economy’s Complexity Does Not Entail No Natural Rights

Frank wields two arguments against one’s natural right to justly acquired property.

First, “the high incomes of people in modern industrial democracies are not a consequence of their efforts alone. They’re in large measure the result of vast current and past public investment in infrastructure, education, and institutions for defining and enforcing property rights.”

In short, you’re driving on government roads and were educated in government schools. It is hypocritical of you to claim that the money you earn is your own.

Two responses. First, a reductio. Mises point out:

As soon as the economic freedom which the market economy grants to its members is removed, all political liberties and bills of rights become humbug.

Habeas corpus and trial by jury are a sham if, under the pretext of economic expediency, the authority has full power to relegate every citizen it dislikes to the arctic or to a desert and to assign him “hard labor” for life.

Freedom of the press is a mere blind if the authority controls all printing offices and paper plants.

And so are all the other rights of men.

Thus, a dissident living in the Soviet Union could be told by a member of the Politburo: “We could starve you to death simply by refusing to sell you food, all of which is government-owned. How dare you then pine for freedom? Instead, you should love the Big Brother as the source of your very life.” I hope Frank would not endorse a line of reasoning like this.

Second, the essence of hypocrisy is not practicing what one preaches. Suppose I were a beneficiary of government roads and schools. I am a bad person; I’m ashamed of myself (though not much, because what choice did I have?). That does not mean that my libertarian preaching that there ought not to be any government roads and schools is wrong.

Frank’s second argument is that “this is my money” is not merely wrong but meaningless. What is “my” money is defined by the legal system in all its considerable complexity.

Notice, however, what this entails. It is the government that writes laws. Therefore, “your money” is simply what the government chooses to leave in your hands. All money and therefore, all the resources this money can buy belong to the state, which then decides on its own whether to give anything to you and if so, then how much.

The only reason we are under the illusion that we own anything independent of the will of the Congress or Obama is that we are instinctively beholden to the (fallacious) idea of natural rights. When exposed for the sham that they are, the result is… total state, socialism.

Needless to say, that is a controversial idea, and I don’t think it is wise for Frank to build his case against libertarian political philosophy on it.

In Defense of Unequal Taxation

I have always thought that unequal taxation was robbery; progressive taxation was aggravated robbery; and head taxation was simply uneconomic.

Frank presents an argument that inverts this understanding for public goods.

Consider a public good P generally thought desirable and intended to be supplied by the government. “People’s willingness to pay for public goods generally increase with their income. The wealthy tend to assign greater value to public goods than the poor do, not because the wealthy have different tastes, but because they have more money.” (123) Unfortunately, this particular way of putting the issue seems to evoke a hearty WTF. Why bother being rich, if you have to pay more for all your goods? What’s the point of having income that’s twice as high, if all prices double, as well?

Let me rephrase. Just as in the case of many private goods, P may be a certain luxury. If it costs $700, then rich people may buy it, and poor people would not. They prefer to spend their money on something less extravagant. If all the richer folks in the community pitch in by each giving $700, the good will be produced. But because of its public nature (e.g., clean air), it’s non-excludable. The poorer people, too, will enjoy it yet pay nothing for it.

Why should the rich tolerate this state of affairs? Far cleverer of them to conspire to levy a head tax on everyone, such that the cost to each individual falls to, say, $400. But the poor would naturally resist this, insofar as even $400 is too much. This tax proposal will fail to be approved by the voters. Very well, say the rich, let’s institute instead of a head tax, a flat tax or, they even concede, a progressive tax. This way, the rich pay $600, and the poor pay $200. P is worth these prices to everyone. And the rich are stuck with a smaller bill.

Seen this way, progressive taxation is a means by which the rich ensure that the poor also pay their fair share.

Note that the argument applies to public goods, producing which privately has been deemed impractical, and the acceptable prices for which to each citizen have been assessed reasonably correctly. Unequal taxation remains robbery, if the aim is for the poorer majority to obtain private goods for themselves at the expense of the richer fellows which unfortunately is how it works most of the time.

A “Status Society” As Regards Positional Goods

It is an important condition for long-term harmony of human interests that labor is much more scarce relative to land. It’s a great big world out there, and that’s very good.

The reason is that land cannot be produced. We can erect tall buildings, but in their case, the taller the building is, the higher the cost per each floor. Physical limits do not permits skyscrapers in most locations. Unless we learn to raise islands from the bottom of oceans or travel to distant Earth-like planets, the supply curve for land is vertical.

If land begins to become scarcer, then society will change in mood. In particular, it will tend toward a status society, in which one’s relative “rank” in relation to other people will matter more. One may prefer to be a big fish in a small pond to being even a bigger fish but in a much bigger pond, because it is one’s relative bigness that will determine who will live in the best locations. This is because competition among consumers will not cause any additional supply of land to come into existence.

This is similar to how we assumed, following Frank, in the previous posts that the quality and price of schooling are fixed forever.

This may skew economic logic toward strange avenues, like, as Frank theorizes, voluntary contractually entered into “progressive taxation” in which people trade off their absolute positions for relative positions and vice versa.

Fortunately, however, land is and will remain for the near future almost a super-abundant good. Therefore, Frank’s conclusion that high-ranked positions cannot be occupied “free of charge” and are privileges does not follow. There are too few genuinely positional goods for anyone to worry about. And under laissez-faire, a “high-ranked position” can only be obtained via superior service to the consumers which by definition consists in the production of nonpositional goods. If the result of Bill Gates’ genius is that he also claims some few and far between positional goods, then I say, so be it.

For notice that the existence in a free society of a positional good whose supply is extremely inelastic even in the long-term only means that no resources will be spent on producing this good. If there are only so many habitable tropical islands out there, it may well be that a private island will always remain a luxury, never becoming a necessity. Unfortunate though this is, one result is that there is no economic problem associated with islands other than the problem of distribution. All the economic laws hold true for the rest of the nonpositional economy. And even in regard to distribution of islands, the market will still produce the best results as compared with potential rivals.

Here is my own thought experiment: suppose that all goods are positional. They are scarce and cannot be produced. It is obvious that everyone will have an incentive to kill all of his rivals, becoming a single human being in the world or at least on a territory he can successfully defend. What can we expect but a savage battle for resources followed by mutual autarky? There can be, or we can expect there to be, only one. The last men standing will enjoy the few berries and nuts and mushrooms they will be able to gather and die either quickly if those mushrooms turn out to be poisonous or eventually. Then the world’s economic problem will be solved for good.

So, Frank proves too much, namely, that economics as it has been developed by its ablest practitioners is mostly false. But we see that this claim is empirically and self-evidently false, and if it were true, then there would be no need for economics at all.

Finally, let me suggest that the idea that the world’s tax systems have been set up (as if themselves by an invisible hand, in an unplanned manner but still promoting economic efficiency) to get the top achievers pay a price for their high rank is not only false but a bit naive.

On the Non-Positionality of Most Goods

In an popular article Thomas Woods describes a “thought experiment” proposed by Donald Boudreaux: “suppose an ancestor from the year 1700 could be shown a typical day in the life of Bill Gates. He would doubtless be impressed by some of what makes Bill Gates’s life unique, but”

a good guess is that the features of Gates’s life that would make the deepest impression are that

he and his family never worry about starving to death;

that they bathe daily;

that they have several changes of clean clothes;

that they have clean and healthy teeth;

that diseases such as smallpox, polio, diphtheria, tuberculosis, tetanus, and pertussis present no substantial risks;

that Melinda Gates’s chances of dying during childbirth are about one-sixtieth what they would have been in 1700;

that each child born to the Gateses is about 40 times more likely than a pre-industrial child to survive infancy;

that the Gateses have a household refrigerator and freezer (not to mention microwave oven, dishwasher, and radios and televisions);

that the Gateses’s work week is only five days and that the family takes several weeks of vacation each year;

that each of the Gates children will receive more than a decade of formal schooling;

that the Gateses routinely travel through the air to distant lands in a matter of hours;

that they effortlessly converse with people miles or oceans away;

that they frequently enjoy the world’s greatest actors’ and actresses’ stunning performances;

that the Gateses can, whenever and wherever they please, listen to a Beethoven piano sonata, a Puccini opera, or a Frank Sinatra ballad.

Woods concludes: “In other words, what would most impress our visitor are the aspects of Gates’s life that the software giant shares with ordinary Americans. When you consider the differences that characterized rich and poor prior to the Industrial Revolution, on the other hand, the ‘capitalism-promotes-inequality’ myth is further exposed as the ignorant canard that it is.” In short, that Gates can afford a private island and most of us cannot is too trivial an annoyance to write a book about.

An “Arms Race”: SUVs

People may have an incentive to participate in vicious arms races for heavier vehicles. Frank explains: “Other things equal, when two vehicles collide head on, occupants of the heavier vehicle are more likely to survive. In a head-on collision between a 7,200-pound Ford Excursion and a 2,500-pound Honda Civic, for example, you definitely want to be in the Ford.” (183)

However, SUVs are inherently less safe in themselves (due to poorer handling, rollovers, etc.); and in addition, when two SUVs collide, the results are worse than when two cars collide.

So, the arms race is not merely wasteful, insofar as no social benefits are obtained by buying the more expensive SUVs, but downright destructive of life and happiness.

Frank’s solution is to tax vehicles by weight. I just paid $55 to the BMV to register my car for another year; perhaps, my neighbor should pay quite a bit more for his SUV. This may generate additional revenue while discouraging the arms race.

Obviously, taxing harmful activities is a policy at war with itself: the more the activity is discouraged, the less revenue flows to the treasury. But some criteria for an optimal tax rate can probably be discovered and balanced in each case.

This is an infrequent case where I agree with Frank 100%.