Ch7 Efficiencies

In the beginning of this chapter again I think Frank puts down some ideas, most already understood, and lastly begins to discuss the issues with efficient policies going through any sort of law. The story regarding the flights was interesting, or at least I found it interesting, and was actually pleased that he tied it towards the end regarding policies that have failed in congress due to these efficient notions labeled as an income transfer and being considered unfair. My philosophy teacher back in high school gave the suggestion, on the topic of what to do with lobbyists, that rather than setting up picket lines, and other older ways of protesting, it would be more efficient and quite simple to outbid the lobbyists. All you have to do though is get the entire community or majority of nation to give you money (let's say an organization approved by the government to reduce fraud) and use that money to lobby against the other lobbyists.

The first thing that came to my mind was: Why do we need these lobbyists when the congressmen and women were put there to determine the best possible outcome for the entire nation/state when regarding policies. But after reading this chapter it seems to me that this idea may have to be enacted to keep certain laws tied to what Americans really want. Considering the cost benefit analysis, if the people really want a law to remain the same while a few corporations believe it's in their best interest to amend it; under the cost benefit analysis I believe a few dollars from a few million can overextend a corporations contribution margin.

Although past this thought the chapter to me seemed kind of bland in the sense that cost benefit analysis is already used quite often enough to understand. He did focus a little on how that has influenced public policy but it was short lived.

PS

It was a pleasure meeting you all and you were all very welcoming and kind to me and my GMU grad school buddy. I enjoyed the talks over dinner and for the time you gave up to spend with me at dinner. I hope to see you again in Alaska and perhaps see you at a conference. I had an incredible experience in Alaska!

Check out groups like Foundation for Economic Education, Mises Institute, and Institute for Humane Studies. Also, the Association of Private Enterprise Education has student scholarships to their annual conference (and the locations are fun too!). And if you are thinking PhD someday, think George Mason!

Again, thank you and it was a pleasure. I hope my talks made economics more interesting to the students and that my "in your face" approach was ok! :) 

Chapter 5

Hello my new friends in Alaska..apologies for the later than usual response. First, a few links for further reading:

http://www.slate.com/articles/business/moneybox/2011/12/the_progressive_consumption_tax_a_win_win_solution_for_reducing_american_economic_inequality_.html
http://www.econlib.org/library/Enc/ConsumptionTax.html
http://www.cato.org/pubs/policy_report/v29n6/cpr29n6-1.html
http://www.brookings.edu/interviews/2005/0303taxes_gale.aspx

My main issue with Frank is his argument (like on p. 67  and 72) that the rules or prohibitions of private association are viewed by Libertarians as violation of indvidual rights. No! If I choose to join a group and the  group rules are clear and upfront and I choose to join, then my revealed preference proves I am not being violated.

I understand his military arms race is wasteful argument; however, some would argue that Reagan (President when I was a kid) did the right thing by increasing defense spending because it eventually broke the Soviet Union.

In addition, he again makes value judgments as to what "wasteful spending" is and I don't know how he can do that. If I choose to spend money on my future teenager's birthday party, then I am not harming anyone else. In fact, am I not "stimulating" the economy? If I want to add an addition to my home and employ an architect and construction workers, again, who am I hurting?

As for the benefits of his tax plan and counterarguments, see the links above. I understand the main macroeconomic argument for this type of tax is that it doesn't punish work and productivity. What I don't like is his moralistic wasteful spending arguments.

If you picked World A, you are not an actual person

It seems to me that Frank is placing a value judgement on individuals decisions to sacrifice risk for income. I didn't see how he could say that more people would choose World A in the first example. That didn't make sense to me. Frank breaks down how people make decisions on the margin and then says that they have been misled into making a bad decision. He says that as more people make these decisions they will be driven toward taking riskier and riskier jobs to buy some positional good. Because everyone is seeking this positional good, the price goes up and thus the extra pay ends up not meaning much. I challenge the very premise that people behave this way. At a certain point an individual decide something is too much risk. Since this is an inherently personal decision. How can any outside individual say that it is right or wrong, too much or not enough? That goes against one of my first premises which is to not make value statements about another individual's utility function. In other words, don't judge other people for their personal and peaceful decisions. So I'm just rubbed the wrong way by this entire chapter.

Regulations as Data
Not everything is like an arms race, Frank. If we didn't have that federal regulation for kids to start kindergarden at a given age I'm more than positive that local districts or schools would have rules about it. You don't want 8 year olds with 5 year olds. It wouldn't be allowed.

He brings up the no cash on the table again. (pg 76) But once again, what is the appropriate amount of workplace safety? Apparently Frank knows.

Progressive Consumption Tax

Colleen wrote about this pretty thoroughly but I'll just reiterate and add a few points. So Frank wants people to save more. But I thought he wanted the economy to be stimulated? No matter. I'm not concerned with stimulating the economy. What I am concerned with though, are rationale choices based on bad information.
What is the appropriate amount a person should save? It is different for everyone. Each person has different time preferences. So individuals, right or wrong, make plans, good or bad, for the future, near or far, and then implement those plans. But not everyone wants or needs to save. Some people want to improve their quality of life now not later. So they buy goods and services. They consume.

But what happens when we incentivize people to either save or spend? If we reward a behavior, we'll get more of it. I'll ignore the hypocrisy of taking someone's money in order to get them to save it. How will individuals make rational decisions in the market, (what to buy, when to buy, how much to buy, when to save, how much to save, etc.) when the signals in the market keep changing or are wrong. When government steps in to try to 'fix' the economy they deny the nature of prices. There is a reason we are in a recession. The housing prices didn't match the real value. That's a bubble. Those prices, being unrealistic and therefore unsustainable, came back down. That is vital information. Let's ignore why they got so high and stayed so high for so long. How could attempts to restore prices to those levels be a good idea if they clearly didn't represent the market?

This thinking can be applied to any discussion where price is involved. What do prices tell us? They give individuals all the information needed to decide how to behave in the market. This includes savings. When we try to incentivize people to save, they save more. But is that really good? It isn't good for the individual being coercively taxed. It results in less spending in the market. That won't be good for the economy as a whole.

We shouldn't incentivize people to spend or save. The government shouldn't incentivize anything. If we want sustainable economic growth we need individuals making 'good' decisions in the market place. For people to make 'good' decisions, they need 'good' information. Prices are that information. Let's not distort them like Frank suggests.

Frivolous Factors

Up to this point, Frank has been setting-up his argument in anticipation of presenting his first proposal of what he believes as the solution to the prospective problems he has presented in the last four chapters. He's sporadically elaborated on the reoccurring themes of how individual interests often diverge with the group, concepts of relative vs. absolute consumption, positional goods, and his assumptions regarding waste. In each respect, I’ve had mixed feelings in regard to the applicability of his proposals because of their simplistic nature in a clearly more complex system. Nevertheless, Frank connects some of the logic behind his points presented in chapters past by proposing the implementation of a progressive consumption tax which could be a viable idea for the future if, and only if, it functions as successfully as Frank’s confidence seems to imply.
Firstly, something worth noting is that risk and income don't always relate in tandem as Frank represents in his examples. There are plenty of high-paying low-risk jobs in both absolute and relative terms, and while I understand Frank is merely using selected situations for analytical purposes, not every individual sacrifices safety to achieve the desired goals allowed by a larger income. Granted, a CEO's marginal physical product is difficult to measure. In those respects, their pay is bound to become more relative simply because of how difficult it is to measure physical output. Therefore, the combined possibilities an individual is presented with also manipulate their circumstance which are obviously influenced by more than just two consistent factors.

Secondly, Frank's views on waste seem rather controversial. In his mind, waste seems to be considered by many as frivolousness. Yes, consumption by social standards may seem wasteful, but in an economic context, the idea of entering a type of social arms races does little, in my opinion, to justify what may be deemed as undeniably wasteful habits. It is not uncommon for millionaires to own multiple homes. While Frank would consider this reality wasteful, the quantity of homes one possesses doesn't really say anything objectively about anyone’s personal score on any "wastefulness scale." Similarly, to assume that certain spending trends are harmful to the collective under the assumption that humans always desire to sustain a type of social arms race is purely speculative, because there are many current cases of individuals defying the upward trend of profligate luxury.

For example, consider the fact that many tourists pay large sums of money to tour Alaska. They don't come to live the life of the elite or wealthy but to encounter a classic form of simplicity which Alaska alone has uniquely been able to offer. Log cabins, Denali and the enticement of the northern lights are enough to sustain their desire to encounter the quiet beauty of Alaska. Tourists are awestruck at these timeless Alaskan classics, yet they still venture to the great north in search of solitude because of selected natural beauties. Individuals are not always pushed to accept higher or more expensive forms of existence but may in fact value simplicity simply because of how scarce it has become in Western culture. Simplicity is still valued by many even in a culture that seems to be overrun by massive spending trends.

Just because Americans have more comfortable living condition than in the past does not necessarily mean their spending is wasteful and that likewise the habit of functioning out of self-interest to "out do" their neighbor must be curbed, as Frank implies with his progressive consumption tax. Sales taxes, luxury taxes, and salary caps are nothing new as they tax individuals for their consumption which have been deemed unneeded. To my knowledge, luxury taxes were never extraordinarily successful because the idea of a luxury is yet again, a fluctuating concept. In Norway for instance, cars and chocolate used to be consider luxuries, but today they are considered a common commodity even though the tax remains intact. Therefore, the relativity of the situation really may only insure that certain objects are taxed more than others because of the past standing.

Similarly, my greatest worry with Frank's consumption tax is firstly, that he assumes instigating some form of tax will help solve governmental deficiencies. After all, how does two million tax dollars actually reduce the national deficit by an equal amount? Secondly, he assumes that promoting saving is more beneficial than spending since apparently mass spending is now considered "wasteful" even though that is hardly the case.

Ultimately, I view Frank's consumption tax as a way, yet again, to manipulate the market in ways that might sound extraordinary on paper but may ultimately stunt economic growth in the long run. Whereas before, individuals were taxed on the opportunity that they had to earn money, a consumption tax exists on the notion that they must be taxed for using resources even though they already possess the potential of their incomes to acquire those resources. But attempting to identify supposedly negative human tendencies, Frank has tried to prove that humans need government regulation because of their seemingly irrational decisions and that specifically, a consumption tax would not only be beneficial for the public but solve a myriad of the government’s problems as well. Yet again, tax dollars are money that could’ve been spent by individuals to naturally fertilize the economy, so the idea of initiating a tax to curb a digressive human nature through governmental influence seems like rather sketchy logic. Therefore, I’m leery of the implementation of a tax to stimulate a predestined economic response as there are surely to be variety of unintended consequences to accompany that assumption. To some extent, a consumption tax might be a viable option in the future, but as of now, Frank’s rather vague representations make it a little early to tell.

The very foundations of human progression through decision-making, whether those decisions be based off of simplistic or frivolous desires, relative or absolute options, suggests that pushing the whole towards one decided action, may in fact cause more unintentional consequences than Frank has yet to admit.

Steep Taxes and Shallow Thinking

Robert Frank distills the faith he has in a steeply progressive system of consumption taxes with single sentence in chapter five of The Darwin Economy. In regard to a dearth of disposable income for upper-income Americans, "By all available evidence," he claims, "this would be a good thing." His implicit claim to have read every shred of evidence aside, his explicit claim that there are no downsides to his proposal is quite interesting and, by it's very nature, wrong.

Frank's plan to put the positional comsumption beast (Frank's description of the economic phenomena where individuals seek to maximize their conspicuous consumption, i.e. "keeping up with the Joneses") on a diet is based primarily on his plan for a progressive consumption tax with a top marginal rate of 100 or more. The tax, which exempts savings and investments entirely, would induce individuals, especially those of high income, to save more and consume less. Because, according to Frank, there would be no discincentive to earning additional money as long as it could be saved tax free, Art Laffer's prediction that reported income will drop as tax rates increase would not apply. I beg to differ.

The desired end of any earnings is consumption in some form. Money, as we all know, is worthless paper if it can't be spent. Even my savings would me no good if they were subject to confiscatory tax rates as soon as I made a withdrawal. Tax rates of 100%, where a check of $100 must be cut to the Federal government every time I make a $100 withdrawal from my bank account, would devistate the incentive to work and thus reduce the available capital to save and invest. Thus, the tax would not only reduce short run consumption but also long-run earnings. Say, for example, that I'm a department manager at a paper company making $150k a year. I consume $100k and save $50k, I also have no uncertainty about my job security. Every dollar of consumption over $100k is taxed at 100%. Because my savings are already so high, I will be able to retain my current consumption levels through retirement. If, in retirement, I make the mistake of consuming more than $100K annually, then making a withdrawal from my bank account will reduce the size of my savings by double the original amount. Thus, I currently have little incentive to earn any additional money for the pupose of savings, as it will be to costly to withdraw later on.

Likewise, I could spend the money that I opted against saving, but it would also cost me a great deal. If, by spending 33% more hours at work this year than last, I earn a year-end bonus that makes my new pre-tax income $200k dollars, I may want to consume the entirety of the additional 50k. This is rational since my 33% savings rate is already extremely high. To do this would cost me the sum of my $50k bonus plus a tax payment equal to my entire year's savings. Of course, I could also just spend half of the bonus and pay uncle sam the other half. Instead of spending the money or saving it for later, option three is that I leave it to my children. Assuming that the inheritance tax, which Frank supports, exists at a similar rate, the dillema here is similar to that in parts one and two, my money would be of little use at the margins.

Knowing that, after a certain point, my additional effort is only going to reap minimal benefits for me and my family, I probably would not have opted to work harder for additional income. Maybe that's fine, after all, life isn't only about work. But it's still a trade-off that flies in the face of Frank's claim that his plan wouldn't be a disincentive to work. I hope Frank and others keep using the term progressive consumption tax. It is a term that describes itself accurately without attempting to fit into a slogan or catch-phrase. By it's name I can imagine it having all of the advantages of a consumption tax (neutral towards investment, simple) and all of the problems of a progressive tax (strong incentives against working). This view seems to be correct. A tax is a tax, and we should work on finding one that is the least bad, not making claims that one is all good.

Chapter 5

Well, he started off discussing arms races but quickly went back to some of his favorite metaphors. It's obviously true that spending the majority of a countries resources on destructive forces that would only be needed in the most dire of circumstances takes away from other worthy institutions, but it has always been the case that the country with the biggest Army/Naval force has the power to take what they want. Any country that would be a true threat isn't just going to willingly show their hand honestly. It would be wonderful if a countrie was measured in the quality of the education or healthcare, but pouring all resources into those areas could leave a hole in other areas, like defense and leave a country vulnerable.
I liked his comparison to George Steinbrenner and the Yankees. It's certainly true that without some sort of a "cap" being enforced, those who have the most money or power will end up with the best resources that can be attained. But, even though there is no salary cap in baseball, they are all playing by the same rules, and this is just part of the game. In the case of arms races, limits can be set, but what can really enforce this? Isn't that silly anyways? A country with fewer weapons of mass destruction, still has weapons of mass destruction. And by making it a priority to have them shows that the country is willing to use them under the proper circumstances, but all parties are suppose to trust that the proper circumstance will never arise? If some countries freely allow inspections for WMD's while others refuse, then they are clearly not playing by the same rules, which breeds distrust, paranoia, and the urge to 'be prepared' to deal with them when the time comes.

I'm not sure if I fully understood his general tax idea, he said that people should pay taxes on the difference between what they make and what they save? Meaning that the more you save, the less you spend on taxes? I'll just have to assume that would apply to a higher than average income bracket. I don't think very many people are in a position to save a substantial amount of money, and if they are either being forced to save money, or pay that money in taxes, when does it get spent in the market? Please correct me if I missed some key element, but it just sounds like a terrible idea that would make the poor ever poorer.
And even if it does only apply to very high income individuals, by creating that ultimatum to either save or be taxed, is still keeping that money out of the market. I guess if they are investing that isn't as bad, but owning the big mansion is still using resources and creating jobs, just like the extravagant birthday party. If an individual has the means to pay for these frivolous actions,  then let them! Living in the moment, what could be more Darwinian?

But, what about China?

Even though I agree that a progressive consumption tax is more favorable than an income tax or payroll tax, I believe Frank is excessively confident in his speculations about the consequences. All public policy has unanticipated effects; and these effects contribute a significant portion to the total impact of policy, and often times contravene what is originally intended.

Frank acknowledges that the spending boom that would precede the implementation (but following the approval) of the tax would stimulate the economy. In this particular situation he is thankful because "it would clearly be better than standing idly by while total spending remains far too low to support full employment." (pg 83) Yet, after implementation and given full employment, wouldn't a progressive consumption tax reduce household spending and in turn drop prices, wages, and employment? Wouldn't the affluent attempt to reach previous levels of consumption by levering up significantly, taking on debt at low interest rates due to the influx of capital to the banks? Or would spending truly drop, resulting in higher unemployed supported by the consumption tax?

A progressive consumption tax may increase the disparity between social classes. Low income workers will spend their money at current levels because they pay no-to-little taxes while the affluent will save their money, becoming richer in the process. The little they do spend will go towards supporting the large unemployed population laid off by the highly productive corporations that just don't need them anymore.

The point I'm trying to make is that simplistic conclusions need to be scrutinized, not that a progressive consumption tax is the wrong direction. Besides, can basing the awesomeness of our society on GDP growth be sustainable in a closed system? To the moon!

Cancer

Asking for an ideal form of taxation is like asking for an ideal form of cancer. Though a cancer of the prostate or breast (more common and treatable) could be viewed as more desirable than leukemia, what is ignored is that no cancer is preferable. Although an individual does not consent to cancer perhaps they may consent to taxation.
Initially let us assume the status quot of consent. The question is what type of taxation is desirable? Frank's assertion that a consumption tax is best seems to be in line with contemporary ideology. A consumption tax is an attractive one to any that (like myself) believe we are a wasteful society. On it's surface a consumption tax is fair; cost is incurred proportionally to consumption. But, a consumption tax is bloody difficult to enact. The bureaucratic body required to squeeze revenue from the populous' consumption would be massive. And at what point is consumption to be taxed? Final use? Value added? Final use will mean low revenue and value added will limit innovation and specialization. Of course this question is silly. As a nation we already have a consumption tax. A tax is an increase in price when measured by the consumer. So when applied across the board, as in an increase in the general level of prices, we see a massive consumption tax. When the state needs money all it must do is spend it. When the money supply is inflated and prices increase a tax is levied upon consumers and savers.

It does not matter what type of tax code the state enacts, as long as there is fiat currency there will be the most pervasive tax of all, the inflation tax. Taxation is a cancer, should we ask which cancer we want or whether we should have cancer at all?

Ch5 perhaps missing law of Demand?

I don't necessarily agree with Frank's latest arguments in this chapter. However I think there is a stance I might need to take before moving in to this post any further. No one can really deny the law of demand, and with that in mind I think he may be viewing arms races in the wrong way. The invisible hand was never mentioned to be all perfectly good for society when businesses compete, that is clearly understood as any theory could have its issues. But comparing the arms races of products to armaments I believe is a little bit more involved than Frank is putting off.

Let's say you have a neighbor in a anarchist society. The homes in this area are built not just for comfort but protection as well. But you notice that your neighbor recently bought some disturbing things such as weaponry of some sort. Since there is no official police or anything to keep the protection and law in hand, there is no absolute way for you to ensure your safety, than to buy your own weaponry (clearly for defense). Yet using Frank's example of suddenly you have the weaponry and your neighbor has less than you but he/she has toasters. And for some reason your demand for his/her toasters sky rocket. Even though you already have a toaster.

My point i'm trying to make is that the first example I believe is more plausible than the second. For the same reason why I don't buy more groceries than my roomates because i'm trying to flaunt my grocery spending in food. I do it because I would like my grocery inventory to last substantially longer so I don't have to visit wal-mart more often. Although there is one more part in this chapter that I would like to quickly discuss as well. That is the topic of Unions.

Frank states in the last bit of another example that the reason why we need government is to impose regulations to companies making the work place safer while libertarians and other invisible hand enthusiasts prefer it to be an open market and letting the risk be involved with the pay. I think he may be skipping over the fact that many Unions pop up in workplaces that especially need safety and those Unions don't run to their legislators but picket for those fringe benefits. So we don't need government to regulate every job we do because we would prefer to it be riskier for a higher wage, many Unions already achieved higher wages and the fringe benefits they need/want.

Quick Thought

This is from my former professor and dissertation chairman, Don Boudreaux

http://cafehayek.com/2012/01/frankly-baffling.html

Yes, Starve DC!

I am writing this from Alaska! I am glad to be here in this extremely warm weather :)

Frank refers to Ketchikan and the "Bridge to Nowhere" as an example of government waste (agreed). Basic public choice economics teaches us about concentrated benefits, diffused costs; rational ignornance; and rent-seeking. Moreover, just as we assume individuals maximize utility and firms maximize profit, public choice analysis assumes politicians are rational as well and want to maximize votes. All of this comes to play when people ask, "Why is there so much wasteful government spending?" Of course, if I am a House member representing a district in Napa County, I will be in favor of tariffs on foreign wine in order to "save American jobs." Now, most of you I bet do not know wine tariff policy because you are rationally ignorant. But even if you did find out that because of government intervention you are paying an additional $5 dollars for that bottle of wine, you are not going to take the next flight to DC and talk to that representative. But, of course, it is in the self-interest of special interest groups to "wine and dine" politicians and politicians in turn will respond because they know they can get campaign contributions and they know that most voters are ignorant.

 Frank is correct in pointing out that information is much more available today at a low cost so many government actions are brought to light; however, because there is so much information to digest, people will still be rationally ignorant of many policies. And, to be blunt, many voters have no clue about basic economics. This is an empirical fact (see GMU professor Bryan Caplan's work).

As for Keynesian prescriptions for the economy, I will say study some Austrian perspectives of what really caused the Depression and what really causes the boom and bust cycle (business cycle). I will also say please remember the broken window fallacy when people argue that government spending "stimulates" the economy. If you have not read Henry Hazlitt's Economics in One Lesson, do so immediately!

My main complaint in this chapter is his comparison between government waste and private waste. Government gets money by taking it from me (some would argue when government takes money it's called taxation; when a person takes money from another person, it's called theft). In the private sector, I get money by earning it doing something of value for someone else. While I might think it ridiculous to spend thousands of dollars for a birthday party, that spending isn't taking money from other people! And if I want to build a larger mansion, I am not hurting anyone else! Finally, Frank seems to be implying that he knows or can measure the utility people get when adding on to their mansions. I am not sure how he does this.