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.