Wednesday, May 12, 2010

Robert Frank's Reply to My Reply to ...

[Received from Robert Frank, and posted with his permission]

Many thanks to David for his spirited reply. In responding to it, I’ll begin with another attempt to clear up some issues I thought had been settled in our first exchange.

For example, David again spends considerable energy arguing that health care is not a positional good—that what matters primarily is its absolute quality, not its relative quality—and emphasizing that we can raise its absolute quality by devoting more resources to it. Well and good. But so what? As my original response to David’s comment made clear, I am well aware that the demand for health and safety is among the least positional of all demands. And I agree completely that the absolute quality of it is what matters. But those points do not challenge the fundamental claim on which my argument rests—namely, that high social rank has substantial instrumental value.

When a serious health problem strikes, a person wants the highest absolute quality of care possible, but because the quality and quantity of care are limited at any given moment, not everyone seriously ill patient can have the best. My claim, which is surely completely uncontroversial, is that someone with high social rank is more likely than others to get the best care.

Access to the best care is of course not the only reason that high social rank has instrumental value. It also commands access to the best education. In David’s response, he again devotes considerable energy trying to establish that the absolute quality of education matters. But here, too, I ask myself, why would anyone think I disagree? If everyone were better educated, our economy would be more productive. Our incomes would be higher, and that would be a good thing! In the 19th century, a family with five children typically saw several of them die before reaching their 10th birthday. That this no longer happens is primarily a consequence of the fact that our absolute incomes are so much higher now, which is in part a consequence of better education. So of course the absolute quality of education matters.

But the relative quality of education also matters. In modern labor markets, the absolute salary gap between the best-paying jobs and other jobs is larger than at any point in history, and there are almost always many more applicants for the top jobs than employers could possibly interview. Surely it is uncontroversial to note that educational credentials are one of the most important screens that employers use to whittle their applicant lists. For a candidate even to land an interview, his absolute educational quality must be high, yes. But that’s not enough. It must also compare favorably with that of other applicants. So unlike the health care domain, in which absolute quality is the main concern, the educational domain is one in which both absolute and relative quality matter. But here, too, the important point for my argument is that persons of high social rank are more likely than others to be able to send their children to the best schools. That point is completely uncontroversial.

The health and education domains are hardly the only ones in which high social rank has instrumental value. That value is the basis for my claim that in the libertarian’s ideal world of zero transaction costs, people would not be able to claim positions of high social rank for free. As in the analogous case of high-ranked positions in private work groups, they would command positive implicit prices.

David’s health care and education objections, as noted, seemed clearly settled in our original exchange. I am therefore puzzled by his decision to again make them the focal points of his critique. I have responded to these objections. Simply repeating them will not give them additional force. Unless David has new evidence that persons of low social rank have greater access to the best health care and greater access to the best educational opportunities, I hope he will abandon these objections.

He does raise another objection, however, that merits detailed consideration. He begins by conceding my claim that the interpersonal comparisons that really matter to people are those with others like themselves. That claim implies that the non-poor don’t gain self-esteem from the knowledge that others are poor. But that fact, David argues, destroys the rationale for my claim that high-ranked members of society are taxed to compensate the low-ranked members of society without whose presence high social rank would not exist. If the rich don’t benefit from comparisons with the poor, he asks, why should they be willing to compensate them for the burdens of low social rank?

This objection sounds much more promising. But it, too, falls short on closer inspection. I agree that high-ranked members of society receive no direct benefit from comparing themselves with the poor. Also true (though this may seem less obvious) is that the poor do not seem to suffer direct damage by comparing themselves to the rich. On the contrary, low-income people appear to have a vigorous appetite for media coverage of the lifestyles of the rich and famous.

But the poor are nonetheless adversely affected by indirect externalities spawned by expenditures by the wealthy. I refer to a process that I have elsewhere called “expenditure cascades.” The lion’s share of all income gains in recent decades have accrued to top earners, and their spending on housing and other goods has risen accordingly. Despite the finger-wagging of social critics, that’s hardly a moral indictment of the rich. All groups in society, after all, spend more when their incomes rise. Although there’s no evidence that the poor or middle class are upset by the bigger mansions at the top, those same mansions shift the frame of reference that defines acceptable housing for those just below the top, who travel in many of the same social circles. And so they, too, have built bigger, which has shifted the frame of reference for others just below them, and so on, in a cascade that extends all the way down the income ladder.

That cascade has raised the cost to poor and middle-income families of maintaining their places in the educational hierarchy. A good school, again, is one that compares favorably with other schools. To gain access to such a school, a family must bid for a house in the neighborhood that surrounds it, and that’s what has gotten more expensive. For example, in 2007 the median new house built in the United States had almost 50 percent more floor space than the corresponding house in 1980, notwithstanding the fact that median real household income had risen little during the intervening years. People could have abstained from trying to keep up with the housing expenditures of their peers, but that would have meant sending their children to worse schools than before.

In short, notwithstanding the fact that the most important interpersonal comparisons are local, the poor have experienced substantial costs because of the additional spending of the rich. Far more than difficult-to-document claims of psychological damage used by inequality, it is these concrete costs that constitute grounds for saying that in a world without transaction costs, high-ranked positions in the social hierarchy would not be available free of charge. The rich are not paying for the right to compare themselves directly to the poor. They are paying to maintain a social structure from which they benefit greatly.
Everyone gains, for example, from greater opportunities for specialization and exchange. But as international experience amply demonstrates, social stability cannot be taken for granted when income and wealth inequality grow beyond a certain point. Diverse societies are efficient, but will not remain stable unless the terms of the social contract are perceived as fair. And as every country on the planet has decided—implicitly or explicitly—part of such a contract entails income transfers from rich to poor.

To the libertarian’s objection that such transfers are morally unjust, I have argued that they are consistent with the libertarian dictum that the best social arrangements are those that mimic as closely as possible the arrangements people would have negotiated in a world of zero transaction costs. I continue to invite attempts to rebut that argument in its own terms.

19 Comments:

At 4:26 PM, May 12, 2010, Anonymous Anonymous said...

All Robert seems to be saying is that rich people can buy more stuff (including medical care) than poor people. Well, so what? How does this advance the argument?

Robert repeats that schooling is partly about status, something that David has already agreed with. Robert didn't say whether he would support political measures designed to reduce spending on schooling.

Robert ends with the "without income redistribution poor people will rise up and kill you" argument, which is off topic.

 
At 4:44 PM, May 12, 2010, Anonymous Eli said...

For purposes of this comment, let me concede that the best social arrangements are those that mimic as closely as possible the arrangements people would have negotiated in a world of zero transaction costs. Income transfers do not get us closer to this optimal state of affairs. They take us further from it. They do so by destroying wealth. Unless taxation and redistribution are done in a lump-sum fashion, they have significant deadweight loss associated with them. If you want to use coercion to redistribute income on these grounds, you have the burden of proof to demonstrate that the gains from doing so outweigh the losses. I think this is unlikely to be true.

Furthermore, if to institute these transfers we must create a government powerful enough to carry them out, then we must live with a government that is powerful enough to do many other illiberal things. Unless some system is devised to constrain this government, giving it the power to transfer income is likely to have many other costs.

 
At 5:14 PM, May 12, 2010, Anonymous Anonymous said...

Robert,

Everyone seems to agree that education and medical service have a status component. However, what does that imply in practice?

To put up one straw man, redistributing doesn't help. If A is wealthier than B, and therefore buys their way into more education- and medical-based status, then redistributing from A to B doesn't help. A will still have more than B.

Overall, there's good reason for economic policy to focus on material wealth. It's something it can effectively influence.

-Daublin

 
At 5:39 PM, May 12, 2010, Blogger Nick Weininger said...

"People could have abstained from trying to keep up with the housing expenditures of their peers, but that would have meant sending their children to worse schools than before."

This conflates the absolute and the relative. They would have sent their children to *relatively* worse schools than before. There is no evidence adduced here that they would have sent their children to *absolutely* worse schools. Making it harder for someone to go to "the best" school or hospital does *not* impose a cost on them if the definition of "the best" changes so that what they can get instead is better, in absolute terms, than the old "best".

Moreover, it is not true that in a world of zero transaction costs and individual freedom, people would have to pay for higher social rank. This may rest on a misunderstanding, accidental or otherwise, of libertarianism. Individual freedom is primary; negotiation in a state of zero transaction costs is secondary. And in a state of freedom no one would ever have to compensate the envious for their envy, because inducing envy is not an externality. If somebody builds a bigger house than yours, and that "shifts the frame of what defines acceptable housing" for you, the frame shift is your own damn fault. You could have chosen to continue to be content with what you had before and continue to have. That you did not is your failure, and can never justify forcing someone else to compensate you.

 
At 7:37 PM, May 12, 2010, Blogger Mike Hammock said...

"To the libertarian’s objection that such transfers are morally unjust, I have argued that they are consistent with the libertarian dictum that the best social arrangements are those that mimic as closely as possible the arrangements people would have negotiated in a world of zero transaction costs."

That is a Coasean argument, but I don't see anything particularly libertarian about it. Libertarians are not necessarily interested in mimicking efficient bargains. That's not to say that such an arrangement is undesirable--I just don't see why Robert Frank thinks this argument should appeal to libertarians, particularly since it involves the coercive power of the state to impose the simulation of efficient bargains.

 
At 9:27 PM, May 12, 2010, Blogger HispanicPundit said...

What about the argument from revealed preferences: if what professor Frank is saying is correct, than why is immigration always in the reverse direction - poor people migrating to rich countries. Doing precisely what Professor Frank argument implies they wouldn't do.

 
At 11:43 PM, May 12, 2010, Anonymous Nathan said...

Robert Frank writes: "For example, in 2007 the median new house built in the United States had almost 50 percent more floor space than the corresponding house in 1980, notwithstanding the fact that median real household income had risen little during the intervening years. People could have abstained from trying to keep up with the housing expenditures of their peers, but that would have meant sending their children to worse schools than before."

Of course, income is only one half of the puzzle. Cost is the other half. The average personal computer is way, way more than 50% faster than one made in 1980. But people are buying more computers not because they're trying to keep up with the Joneses, but because they are also much cheaper than they were 30 years ago.

I don't know off hand if there are similar factors at work in housing, but it seems quite possible to me that you might be able to build houses more cheaply today due to improvements in technology, construction techniques, etc., such that for the same amount of money (inflation adjusted) you could get 50% more house than you could in 1980.

And it's not like a house exists purely for conspicuous consumption. You actually do get benefits from having more square footage: each kid gets their own room, you have more closet space, etc.

Finally, I suppose the idea of eliminating school districts and separating where you live from where your kids get to go to school is too radical to even contemplate.

 
At 11:59 PM, May 12, 2010, Anonymous Henry said...

But the poor are nonetheless adversely affected by indirect externalities spawned by expenditures by the wealthy. I refer to a process that I have elsewhere called “expenditure cascades.”"

Is this a valid analogy?

In a running race where everyone only cares about their position relative to those slightly faster or slower than them, the naturally fastest person running faster doesn't directly hurt the slowest person. However, it motivates the second-fastest person to run faster, which in turn motivates the the third-fastest, and so on until it motivates the second-slowest to run faster, hurting the slowest.

 
At 2:27 AM, May 13, 2010, Anonymous Anonymous said...

Quite apart from the merit of the arguments, I find Frank's expression of his logic loose. Does anyone else feel like reading his prose is like working in a messy room?

 
At 4:09 AM, May 13, 2010, Anonymous Anonymous said...

Frank's argument about health care seems seriousy confused to me. It's true that the quantity of health care is largely fixed in the short run, but health care is mostly rationed by income, not social rank, and the income pays directly for provision of said health care: it is not dissipated in relative-rank contests.

The same argument applies to quality of education, with the proviso that some of the private value of education may arise from socialy inefficient signaling games.

Responding to an argument by Nick Weininger, it might be true that "in a state of freedom no one would ever have to compensate the envious for their envy", but this does not mean that envy isnt an externality. In a Coasean world where vain people have a property right to cause envy to others, the envious could still compensate those who refrained from causing envy. Vanity woud still carry a positive implied price, although the distributional impact would be different.

 
At 9:16 AM, May 13, 2010, Anonymous Sean Mulholland said...

Let me assume that workers freely enter into contracts with each other where the most productive worker receives less than his/her marginal product while the less productive worker receives slightly more compensation than his/her MPL. Thus "rich" to "poor" transfers are already naturally occurring.
This would support smaller government mandated transfers, would it not? These natural transfers might also suggest that policies such as the minimum wage eliminate large voluntary transfers from high income to low income.

 
At 10:40 AM, May 13, 2010, Blogger Michael F. Martin said...

There is a suppressed premise underlying Friedman's replies, which is that we shouldn't worry too much about distributional inequalities so long as the aggregate wealth/welfare are higher. He is talking past Frank, who does not disagree that larger aggregate wealth/welfare should be preferred, ceteris paribus.

If wealth and welfare are not coupled beyond some threshold, then it seems to me that relative status probably has something to do with the decoupling. Status contests are socially wasteful if they are zero sum. What's so horrible about these arguments for libertarians? I don't get it.

Also the "expectations cascades" are no more of a stretch than the usual substitution effects one expects with shifts in supply or demand.

 
At 12:19 PM, May 13, 2010, Blogger Albert said...

So, Robert's argument would imply for "forced" redistribution via taxes on some local sphere with no redistribution on a national sphere in order to maximize societies utility function. Can we then assume that a caste-based society inadvertently has some support from a behavioral/psychological standpoint?

 
At 12:44 PM, May 13, 2010, Anonymous Bill said...

It would be nice to see Dr Frank dance less and engage more with the local vs global point (this has, after all, been the key weakness of this whole line of research for, like, ever).

If local status preferences can be bootstrapped up to global ones via cascades, then doesn't Dr Friedman's previous objection to the (alleged) popularity of anti-poverty programs come back? Cascades can work up from the bottom, too, right?

Dr Frank's status competition stuff strikes me about the same way that behavioral economics, externalities, information asymmetry strike me. The arguments seem to be taken seriously where they produce lefty conclusions and pretty much waved away where they do not.

Weirdly, the large local effects do not call for transfers from warehouse workers to 7-11 workers or from doctors to professors but those thready, indirect bootstrapped global effects fairly cry out for income transfers from Bill Gates to welfare moms.

Academics are, of course, absolutely obsessed with rank and status---more so than any other group I know of. The resulting status competition leads to massive waste in the form of wildly excessive production of journal articles, books, and the like. These should be very heavily taxed, right?

Also Friedman should poke Frank some more on the education point. Why did he dodge discussing the implication that university education should be very heavily taxed instead of very heavily subsidized. I mean, that *is* a straightforward implication of his arguments, right? No non-lunatic actually believes that Harvard attendees are motivated by anything other than pure status concerns, right? Certainly, no non-lunatic who has actually met a Harvard grad can seriously entertain a contrary possibility.

 
At 12:50 PM, May 13, 2010, Blogger Tracy W said...

When a serious health problem strikes, a person wants the highest absolute quality of care possible, but because the quality and quantity of care are limited at any given moment, not everyone seriously ill patient can have the best. My claim, which is surely completely uncontroversial, is that someone with high social rank is more likely than others to get the best care.

Actually, this is controversial. I've seen a few reports that someone with very high social rank is more likely than others to get subtly worse medical care. See for example http://well.blogs.nytimes.com/2009/08/27/when-the-patient-is-a-vip/

But here, too, the important point for my argument is that persons of high social rank are more likely than others to be able to send their children to the best schools. That point is completely uncontroversial.

Actually, again, this is controversial. It depends on how you define "best schools". If you mean schools with a high percentage of students passing exams, then yes, typically people of high social rank are more likely to send their children to the best schools. But if you mean schools that are the best at passing on knowledge to students controlling for student quality, I've never seen any study that has shown that. And some other studies have shown that there's no difference. See http://www.livescience.com/health/080527-public-schools.html

I suspect this isn't widely known because private schools don't want to undercut their market and public schools want to lobby for more money for themselves and that's easier if they imply that rich kids are getting a better education because their parents spend more.

So, according to Robert Frank's knowledge, perhaps we should be charging people with high social rank lower taxes, to make up for the worse healthcare they are likely to be getting, and about the same quality education.

 
At 2:33 PM, May 13, 2010, OpenID hudebnik said...

Nathan writes:
The average personal computer is way, way more than 50% faster than one made in 1980. But people are buying more computers not because they're trying to keep up with the Joneses, but because they are also much cheaper than they were 30 years ago.

Computers are another good that looks at first as though it should be absolute, but actually has a lot of relative value. In particular, if your computer is towards the bottom of the distribution curve, you'll be unable to get support, parts, or software for it, even though it's absolutely more powerful than most of the computers available ten years ago.

 
At 2:42 PM, May 13, 2010, OpenID hudebnik said...

Tracy W writes:
It depends on how you define "best schools". If you mean schools with a high percentage of students passing exams, then yes, typically people of high social rank are more likely to send their children to the best schools. But if you mean schools that are the best at passing on knowledge to students controlling for student quality, I've never seen any study that has shown that.

How about "schools that everybody knows are the best schools"? Yes, it's circular reasoning, but that's the way reputation often works in the real world.

(Relatively) wealthy people are more likely to either (a) live in neighborhoods with "the best" public schools, or (b) send their kids to "the best" private schools. In either case, those kids are more likely to get into "the best" colleges, and therefore more likely to get (absolutely or relatively) desirable jobs.

 
At 4:32 PM, May 13, 2010, Anonymous Anonymous said...

"In particular, if your computer is towards the bottom of the distribution curve, you'll be unable to get support, parts, or software for it, even though it's absolutely more powerful than most of the computers available ten years ago."

Actually it's the high-end buyer who is at a disadvantage, since developers want to target a large installed base. This problem is particularly acute for software which isn't highly scalable in performance, such as games.

 
At 1:23 AM, May 14, 2010, Blogger Tracy W said...

hudebnik - it is entirely possible that those kids whose wealthy parents are more likely to send them to the "best" schools would be more likely to get (absolutely or relatively) desirable jobs, even if their parents had sent them to a average school, or one that did badly as measured by exam results. (I am prepared to believe that there are schools out there that are far better at educating their students than the average school, and other schools that are far worse, I just don't see any empirical evidence supporting the idea that the distribution of said schools are correlated with parental income or annual tuition fees).

Most of the kids of wealthy parents are biologically related to said wealthy parents, which means that there is always the possibility that genetics is driving any correlation between outcomes. A while ago Alex at Marginal Revolution published an amazing graph from a study on the relationship between parental income and their children's income as adults, broken down by whether the kids were biological or adopted (the adoptees were from a programme for adopting Korean kids that, if parents were accepted into the programme, randomly assigned the parents to a kid). See http://www.marginalrevolution.com/marginalrevolution/2009/08/the-inheritance-of-education.html

 

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