A free lunch with Robert Frank

Posted by Marc Hodak on March 6, 2008 under Economics | 5 Comments to Read

I’ve been so freakin’ busy this week, I’ve barely been able to get food and sleep, but I heard that NYU was offering a free lunch to hear Robert Frank. The irony alone would have compelled my attendance, but also I needed a break. Yeah, listening to an economist over lunch is what I consider a break.

So Frank gave his spiel on how the arms race for conspicuous consumption, or positional gain as he calls it, is economically inefficient. Everyone trying to keep up with the Joneses leaves everyone at the same place, relatively speaking. Fair enough? Actually, I don’t buy that there are no net societal gains from the dash toward nicer things, but I guess someone does because he’s selling books.

Anyway, during his talk, Frank concluded with his pet policy–a sharply progressive consumption tax. Frank basically believes in the incentive effects of this tax, which makes sense, and that otherwise diverting funds from wasteful consumption to productive infrastructure would be a great economic deal, which I consider a little more hopeful, to say the least. Frank specifically mentioned that he was hoping to hear a good libertarian rebuttal to this idea since, I guess, he hasn’t heard one yet. Well, this sounded like a personal invitation since I am NYU’s resident libertarian, though I couldn’t imagine what I might say that he wouldn’t have already heard from the GMU mafia, which I know he’s encountered.

So, question:

Stipulating that competitive pursuit of positional gain leads to economic waste, and that the consumption tax is the most efficient way of containing consumption, then to the extent that consumption taxes divert money from private consumption to public spending, wouldn’t there be an efficiency loss on those diverted dollars? And might not that efficiency loss potentially be larger than whatever efficiency gains might be had from limiting consumption in favor of overall investment? Keep in mind that Frank is not asking for anything like a flat consumption tax; he’s advocating 100 percent plus tax brackets for the Patek Philippe set.

OK, strictly speaking this is a public choice objection rather than a libertarian objection, but I still thought it was a fair question. Well, either it wasn’t anywhere near as good a question as I thought it was, or I stumped him, because he didn’t give me a better answer than, “I suppose there would be some inefficiencies to government spending.” Uh huh.

So, I decided to go anecdotal. “Did you know that New York’s MTA chief recently proposed a $29 billion program to invest in our transportation infrastructure?”

This perked him up. He loves infrastructure spending…er, investment. I told him that I, too, would love to see that investment made. God knows, New York’s infrastructure needs it.

“But you’re afraid they won’t spend the money well,” he said, trying to anticipate my objection.

Frank, I now realized, is clearly from out of town. (He, in fact, lives in the hamlet of Ithaca.) So, I told him that a few years back, the MTA insisted on spending $750 million to recreate the a Taj Mahal at Fulton Street.

Our citizens responded, “$750 million? That’s a lot of hot dogs. Do we really need to spend $750 million on one station?” But the city said the money was mostly federal, and that if we didn’t use it, we’d lose it, so we decided to spend it. Prof. Frank, kind man that he is, didn’t wince at sending his tax dollars to Gotham that we fully intended to waste on something we didn’t really need.

Then, I explained, here we are $1.2 billion later with no new Fulton Street station to show for it, with every visible adornment that was used to sell the idea to a skeptical public having been scraped away from the plan, and with no end in sight for the construction. So, yeah, we’re a little concerned with giving up private dollars for public spending.

The fairly complete lack of response that I got from Frank regarding that comment told me that I either completely missed the boat of what he was talking about, or that my concern was too puny to compare to the great economic harm that he was trying to correct. Or, that his economic model on the efficiency costs of consumption didn’t account for the public choice costs of government spending displacing private spending. Or maybe he gave me a complete and cogent explanation, but I didn’t hear it because I don’t know what time or day it is after four hours of sleep this whole week.

Oh, well, back to the salt mines. Well, actually I don’t work in a salt mine, like my not-so-distant ancestors might have. In fact, after generations of striving for a better life, I’ve been left with the kind of job my ancestors couldn’t have dreamed of–developing complex mechanisms to get highly educated managers to spend their shareholders’ money a little more carefully. And, I’m regularly elated by the fact that I’m not doing this by hand on a paper spreadsheet with a slide rule and protractor, though not as happy as I would be if I had even better tools.