Robert Frank, Status, and Income Redistribution
Consider a firm that employs a variety of workers of varying productivity. A standard competitive model would predict that salaries would scale in proportion; if one worker produces twice as much as another, he will be worth twice as much to an employer and will end up being paid twice as much.
Suppose, however, that workers care about both absolute and relative income, the latter being defined relative to fellow workers in the firm. The low productivity worker now contributes an additional input, immaterial but real, to the firm—his presence raises the relative status of the more productive workers, making them happier. The high productivity worker contributes a similar, but negative, input, since his presence lowers the status of other workers, making them less happy. Changes that make workers more or less happy ultimately show up in the firm's bottom line, since it costs less to hire workers the more they like the job. Hence, under Frank's assumptions, the low productivity worker will be paid more than in proportion to his physical output, the high productivity worker less. The market outcome thus incorporates something that looks rather like income redistribution.
In a recent New York Times Op-Ed, Robert Frank offered this analysis as a justification for explicit income redistribution by government, writing:
"Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical. Private pay patterns suggest that our current tax code meets that test."
It is an ingenious argument, but there are at least three problems with it:
1. Frank's analysis of the effect on pay of concern with status implies that what people care about is not their status relative to the rest of the world but their status relative to those near them—in his case, their fellow employees. The more distant someone is from me, the weaker the effect—a fact some of whose implications I discussed long ago on this blog. Most of the people who benefit from income redistribution are very far from me. That does not eliminate his argument, but it weakens it. When he writes
"For starters, high-ranking members of society, who also tend to have the highest incomes, know they will be able to send their children to the best schools and have access to the best health care."
he fails to distinguish between absolute and relative values. Getting good health care is very important to me, but its value does not depend, so far as I can judge by introspection, on other people having worse health care.
2. Back when Lyndon Johnson was pushing the War on Poverty, his claim was that it would eliminate poverty, result in poor people no longer being poor. If Frank is correct, that claim should have been a death sentence for the program. On his argument, after all, I benefit by other people being poor, since it raises my relative status, and so would be worse off if they stopped being poor. The great majority of voters, then and now, are not poor, so if he is right the great majority should have viewed what Johnson claimed to be doing as hurting them, and voted against it. That isn't what happened. For Barack Obama to center his proposals for health care on making it available to the small minority of uninsured individuals should have been political suicide if Frank is right. But the bill passed.
3. The most serious problem with Frank's argument, suggested by the previous point, is that if it is correct he ought not to be making it, since its implications are ones of which he clearly disapproves. He puts it in terms of what "enlightened libertarians" think social institutions should be. But as an economist, he surely believes that people's behavior mostly reflects their perception of their own interest. The implication of his op-ed is that it is in the interest of everyone to make everyone else poorer, thus raising his relative status. The rich ought to be in favor of grinding down the poor, the poor ought to be in favor of pulling down the rich, and the people in the middle ought to be in favor of both. I do not think that describes the policies that Robert Frank, who is a nice man as well as an able and original economist, wants.