Sunday, October 28, 2012

Robert Frank's fantasy world

Cornell University's Robert Frank has authored a typically ridiculous piece in today's New York Times, this time arguing that the low taxes sought by rich donors may actually hurt them via a decline in the quality of public goods. Here's how the column begins:
At first glance, money’s growing influence in politics appears impossible to challenge because of a powerful positive-feedback loop. Yet hope remains. 
Although big-money donors are a diverse group, many of them want lower tax rates for themselves and less stringent regulations for their businesses — and they’ve been brilliantly effective in getting them. 
What is he talking about? Is he really arguing that recent years have seen lowered taxes and reduced regulations? Federal marginal tax rates haven't been lowered in a decade and are higher today than after the 1986 tax reform act. The corporate tax rate, meanwhile, is the highest in the developed world. And deregulation? Did Frank miss the passage of Sarbanes-Oxley? Dodd-Frank? Obamacare? What alternative reality does he inhabit?

Later on he says this:
Lower tax rates have affected these donors in two opposing ways. On the positive side, they have supported higher consumption in the private sector. But on the downside, the resulting budget deficits have reduced the quantity and quality of public services. Compelling evidence suggests that the negatives have been much larger, and the positives considerably smaller, than many donors have expected. 
Through private schools, gated communities, personal aircraft and other adaptations, the wealthy have been insulated from many costs of a decaying public sphere. But ill effects remain. Declining quality of public schools, for example, makes it harder for businesses to recruit productive workers, and a shrinking middle class makes it harder to sell their products in volume.
First off, what does he mean by decaying public sphere? It certainly can't be less money. According to, total government in FY2013 is slated to be $17,152 in constant 2005 dollars. Five years ago, in FY2008, that figure was $16,122 and ten years ago in FY2003 it was $14,396. The trend is hard to miss.

The fact that the quality of public schools are in decline, meanwhile, has nothing to do with decreased resources as fresh data reconfirms. Indeed, the fact that increased expenditures on public schools has failed to raise quality suggests that this realm should be shifted away from the public sector and towards the private sphere. 

As for a shrinking middle class, what Frank neglects to mention is that the biggest factor contributing to middle class decline is that so many members of the middle class are becoming rich:
The Pew study found that some of the shrinkage in the middle class came from people moving into the upper-income tier, which represented 20% of the nation's adults in 2011, up from 14% in 1971. The lower-income group rose to 29% of all adults, up from 25%.
While it is worrying that 4 percentage points of the middle class's decline is the result of people moving to the lowest income group, it is unclear what this has to do with lower tax rates. Would they be better off with more of their incomes confiscated via taxation? Further, perhaps Frank should reflect on the fact that this dynamic correlates with increased government expenditures in recent years. 

Frank goes on to offer up a thought experiment:
Let’s say that two societies differ only in their mixes of public and private spending. In one society, lower taxes on the wealthy allow them to drive very fine cars — say, $180,000 Bentleys. The streets and highways in this society, however, are riddled with foot-deep potholes. 
In the other society, the wealthy pay higher taxes that support well-maintained roads, but drive $120,000 BMWs. Some car buffs will grumble, but for argument’s sake, let’s assume that all view the Bentley as the better car.
In which society would the wealthy be happier? Because product-quality improvements cost much more to achieve beyond some point, the absolute quality of a $180,000 car may be only slightly higher than one costing $120,000. And because not even the most sophisticated automotive suspensions can neutralize deep potholes, it’s little wonder that most people think the BMW drivers would be happier, not to mention safer.
Well yes, it is difficult to enjoy expensive things while basic infrastructure crumbles. This, however, in no way represents the margin at which the discussion over government funding is taking place. Local, state and federal government is projected to spend $6.4 trillion in FY2013, which is more than adequate for paving the nation's roads. The implied notion that current taxation levels pose a threat to the provision of basic government services is simply preposterous. 

Better questions Frank would be advised to ask himself are why Americans should have money confiscated from them via taxation that is then used to fund ineffective federal meddling in education, subsidies for clean energy and agriculture, nonsensical infrastructure projects such as bridges to nowhere and the like.

Perhaps the most absurd passage, however, is found near the end:
Compliance with regulations, of course, can be costly. And if only one company has to comply, its profits may indeed decline sharply. But regulation applies to all companies in an industry, which typically allows them to cover their costs by raising prices.
And what if consumers decide to stop purchasing the product due to the higher cost? Does Frank believe in zero price elasticity of demand

All in all, shocking stuff from an Ivy League economics professor. 

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