Sunday, September 26, 2010

Bob Frank and the Libertarian Welfare State

In a forthcoming book, economist Bob Frank advances a bold proposal for a "Libertarian Welfare State."  Following John Stuart Mill, Frank holds that behaviors can be legitimately regulated when they cause harm to others.  This is a position that, on its face, most libertarians would agree with (in ways that might make Mill uncomfortable, but that's another story). 

Frank is able to square this view with the apparent contradiction of a "welfare state" by (rightly) taking an expansive view of what constitutes "harm to others."  This is a brilliant jujitsu move, taking the libertarian stance seriously-individual freedom is paramount until it causes harm to others, and then it should be legitimately restricted in the least coercive way possible-and showing how it leads to counterintuitive solutions.

Frank deals with some classic "externalities," such as pollution and second-hand smoke, but he also takes into account coordination problems and competition driven by positional goods.

"The social environment profoundly affects individual decisions," Frank writes.  Wow!  There it is, out in the open, and straight from the mouth of an economist.

Recognizing this, then, radically shifts our conception of causing harm to others.  Frank writes of high school hockey players, whose ruggedly individualistic identities and competitive team culture would, absent enforced rules, lead most to forego wearing a helmet; individual players (and certainly their parents) might want to wear a helmet but would feel constrained by group norms.  Thus, hockey players and teenage cyclists need a mandate, a clear rule, to wear a helmet or perverse coordination problems will lead them (some unwillingly) not to wear one; both for a utilitarian greater good and to ensure freedom of choice, rules to wear a helmet are necessary.

Frank also takes on the issue of "positional goods," that is, goods whose value derives in (large) part from how much they are desired and consumed by others.  Status symbols are the iconic example of positional goods.  Elsewhere and in his new book, Frank has written of super-sized houses as examples of counter-productive positional goods.  A 30,000 square foot house may actually reduce a household's utility but it may also feel necessary in a keeping-up-with-the-Jones atmosphere of competitive positioning. 

Frank presents a revealing thought experiment: Which world would you choose?

World A: You live in a neighborhood with 6,000-square-foot houses, others in neighborhoods with 8,000-square-foot houses;


World B:  You live in a neighborhood with 4,000-square-foot houses, others in neighborhoods with 3,000-square-foot houses.

The materially maximizing rational choice is, of course, World A.  But most Americans would choose World B.  This little exercise reveals that the value of house construction is not in its pragmatic utility as a home but in its relative size compared to others.

This leads Frank to the surprising conclusion that a highly progressive consumption tax would not only divert resources toward more productive ends but actually might increase the utility and wellbeing of those same high-income households.

It also makes me think of all the grumbling I hear these days from unhappy airline passengers.  With airline flights, most bought online, a particular framing of choice leads us to privilege low price over all else.  Comparing prices online, we reduce the value of the seat from here to there to price only.  We shouldn't complain about food and service as we are all part of the system that is pushing it in that direction.  Another coordination problem, although this might be the sort of thing that just needs a nudge, an emblem with more information easily understood for example.

In this book, Frank moves beyond the "choice architecture" and gentle nudges of Thaler and Sunstein, who are resistant to advocating clear mandates.  Frank advances a more radical proposal that takes into account the social and relational (positional context) as well, willing indeed to invoke legislation, regulation and higher taxes to most efficiently determine cost/benefit analyses (and under a Libertarian banner, no less!).

Indeed, I read his proposal even a bit more radically than he intends, I think.  If the economy is meant to make us better off, and if we understand "better off" to mean a more holistic, multidimensional, fulfilled life (in the Aristotelian sense, or the Amartya Sen-ian sense of freedom and capabilities), then we could go far beyond not doing harm to others in our mandates.

Frank's work, and that of Lynn Stout discussed below, is part of an exciting new wave of social science that brings high-level theory into conversation with real world problems and policies.  This is a book that should be read by policy makers and pundits as well as academics and students.

Thursday, September 23, 2010

Laffer, Godard; Taxes and Property

The newspapers today were filled with incredible stories--incredible as in they strain our credibility, bordering on the absurd or surreal.  To paraphrase Chilean author and filmmaker Alberto Fuguet, why read magical realism when what is really happening in the world is so much crazier.

The French are manning the barricades again, resisting raising the retirement age from 60 to 62 and talk of tinkering with the 35 hour work week.  At moments, the French seem almost hopelessly out of touch with economic realities, a contrast made all the starker by comparisons to the other big E.U. economy, austere Germany.  But it is not all dreary economics and gritty protests.  Today's New York Times also reports that Paris has installed its first public fountain that spurts sparkling water.  What a wonderful idea, perfectly capturing bourgeois eco-consciousness.  Maybe the Germans, who mostly drink their (sparkling) water from glass bottles, do have something to learn from the French after all. 

That same issue of the Times reports on Jean-Luc Godard's rejection of intellectual property rights.  Godard proclaims that "there is no such thing as intellectual property."  He goes on to state that:
"Copyright really isn't feasible. An author has no rights. I have no rights. I have only duties."
Godard's statement exemplifies the best of professional virtue, vocations driven by intrinsic rewards.  Rejecting what has become a sort of neo-feudalism for the knowledge economy, Godard argues that IP is not a private property right from which he is entitled to collect rents. He writes movies because that is his calling, he has "only duties" to himself and his audience.  The extrinsic rewards are nice, but secondary.  We would all do well to follow Godard's example: living a good life based around the pursuit of meaningful (and not just lucrative) projects.  To realize this, of course, we need more jobs with dignity, but that's another issue. 

Turning to The Tennessean, the editorial page today ran an opinion piece by Arthur Laffer (the trickle-down theorists of the Reagan years) and his associate Ford Scudder titled "Raise taxes on all-except the wealthy."  I assumed the title was a touch tongue-in-cheek, if not fully ironic, and read the piece eagerly.  Alas, there was not satire or irony, but a case that high-income workers (having more control over their destiny and less daily need to work) will defer income or work less if taxes rise, which the authors claim would more than negatively offset the gains proposed by higher taxes.  But taxing the wealthy will not only reduce tax revenue, they argue, it will also lead the wealthy to "close down factories, hire fewer workers, invest less and move jobs offshore."  In short, raising taxes on the wealthy will produce more poor people.  It would be cruel to the poor, really, to tax the rich.

Where to start?  I would refer the author first to Lynn Stout's new book discussed below in which she looks at the many ways folks (even the wealthy) are motivated by factors beyond short-term financial incentives.  Maybe high-income earners wouldn't shutter up all the factories and reduce their productivity if they took home a few percent less--perhaps in fact these privileged folks also have the privilege of doing some they like, something they are committed to, something from through and on the society in which we all live and to which we must all contribute. 

In fact, we need to raise the number of high income tax brackets.  The top rate is currently above about $370,000.  We should have brackets of over $500,000 and over $1m.  And those should have a progressively higher rate.

Speaking of intrinsic rewards rather than material incentives: The Tennessean today also reports on a Vanderbilt study that found  that offering teachers financial incentives for student performance had no impact on student test scores.  Again, as Lynn Stout argues in Cultivating Conscience, many professions, such as teaching, are perversely corrupting by financial incentive schemes.  We want to pay teachers well but we also want to accord the profession the dignity it deserves (and pay is a symbol of that) and attract teachers who are driven by a calling, by the intrinsic rewards of teaching and not just by instrumental financial incentives.

Friday, September 17, 2010

Lynn Stout's on How Good Laws Make Good People

Laws can oppress--for proof, we need look no further than North Korea, Turkmenistan, or, for many, Arizona.  Laws and regulations can also liberate.  They can liberate in the freedoms protected, we may all agree.  But they may also liberate in a more expansive, and counter-intuitive, way.  I have been writing lately about how, in some domains, regulations that reduce choice may improve overall wellbeing.

An even more powerful case is made in Lynn Stout's provocative new book, Cultivating Conscience: How Good Laws Make Good People (to be published by Princeton University Press in November).  Stout presents a powerful and compelling case for the role of law in promoting "prosocial" (conscientious) behavior.  (What she terms "conscience" is closely related to my use of the term "moral" in postings below.)

She convincingly shows the flaws in the current fetish for "incentivizing" certain behavior within organizations, demonstrating how the good-intentioned road paved with incentives and marked with accountability metrics can lead to the corruption of virtues and conscience.  (She also acknowledges that there are cases where these incentive structures seem to work well.)

She writes that
"Contemporary experts often assume the best way to get people to follow rules is to use material incentives and disincentives, much like a circus trainer who relies on sugar cubes and a whip to make an animal perform a trick.  Yet by assuming only incentives matter, they may be missing an essential ingredient in the recipe for changing human behavior.  This essential ingredient is conscience."

Since law "is mostly about promoting unselfish prosocial behavior," it follows that laws may act in ways that help us not only cooperate and compete better, but that help us be the sort of people we want to be.  Indeed, as Stout points out, there is a growing body of evidence that suggests prosocial behavior is positively associated with a holistic sense of wellbeing that includes economic prosperity and personal happiness.

This is an important message, and Stout makes a power and eloquent case.  Cultivating Conscience should be required reading for policy makers as well as academics.  

Love's Problems Lost

MedellĂ­n's El Combiano newspaper quotes my definition of romantic love to argue that love arose to solve problems we had before we became who we now are, a beneficial solution that has caused other problems.  My wife finds it funny that I am often quoted as an expert on romantic love.  Regardless (of the problems love may cause or of my personal failings), the benefits of love surely outweigh the costs.

But, as Deirdre McCloskey enjoins us, we should not reduce love to material cost/benefit analyzes--such an approach does violence to the very concept.  Rather, she argues, we should embrace love and incorporate it into economic models, for if we ignore the powerful motivation of love and regard for others we cannot begin to account for real human behavior.  

Thursday, September 16, 2010

¿Que Pasa Nashville? Latin American Studies

On this episode of Que Pasa Nashville, Cristina is joined by Edward Fischer from the Vanderbilt Center for Latin American Studies who will tell us about a grant given to them to improve education and expand community outreach.

Would We Be Happier As Germans?

Tom Geoghegan argues that most Americans would actually be happier under German style social democracy.  I tend to agree, as the post below suggests.  He makes this case in his new book, Were You Born on the Wrong Continent? and on his blog. 

Although, I am not sure if "happier" is the right work--perhaps "fulfilled" would be better.  I went hiking with Andreas Weigend not long ago, and we agreed that if it had been raining, it would have been much more fulfilling in a uniquely German sense.

Tuesday, September 14, 2010

Other Explanations for Germany's Economic Performance

Below I have argued that Germany's "short work" (Kurtzarbeit) program, business culture, and frugal investment has led to its spectacular performance in the current downturn (lower unemployment than the U.S., healthy GNP growth, reasonable debt levels, etc.).

Perhaps there are other explanations, or at least other factors, at work.  Jon Shayne passed along this post from Naked Capitalism (which calls on a FT article), "Is the Eurozone Germany's Stalking Horse?"  In it Yves Smith suggests that the Euro zone's (led by the PIGS) debt troubles has kept the currency valued low, which in turn has led to increased demands for the now cheap German export products.

This certainly plays a role, although it is not a complete explanation.  Germany's labor, welfare, and monetary policies have also surely played an important role.

Wednesday, September 8, 2010

Our Future is Tied to That of Latin America

We are intimately tied to Latin America, economically, politically, and culturally.  We import more oil from Latin America than from the Middle East.  Salsa now outsells ketchup in the U.S.  Our discussion of immigration need to move beyond polarizing sound bites and stereotypes to look at our complicated relationship and work toward futures of mutual benefit.

See FOX 17's edited version of what I and others had to say about immigration today at a CLAS symposium.