Robert Frank is an economist at Cornell University and author, most recently, of “The Darwin Economy: Liberty, Competition and the Common Good,” which argues that in a time of austerity, the best way to cut budget deficits is to focus our cuts on the spending we do to compete with one another rather than the spending that actually makes our lives better. You can read a short version of the argument here. We spoke about the book Friday, and an edited transcript of our conversation follows.
Ezra Klein: As a longtime Robert Frank fan, this book, it seems to me, is a new way of making a point you’ve been making since at least “Winner-Take-All Society” and “Luxury Fever”about how decisions that are economically rational for individuals can make all of us collectively worse off. In this case, the metaphor is evolution.
Robert Frank: It’s exactly that. Sometimes collective and individual interests coincide, as when keen eyesight develops in one hawk and then moves to the rest of the species. That’s analogous to product-design innovation in the free market. It originally benefits the individual that introduces it but as it spreads it benefits everybody. The story doesn’t end there, though.
There are extreme examples of traits that were selected primarily to help individuals compete effectively against members of their own species and in those cases the traits ended up being costly weights around the ankles of the species that had them. The cover illustration of the book is two male elks squaring off. Their antlers in the modern world are around four feet across. They got there because if you had bigger antlers you were more likely to win the battle for mates, and so antlers kept growing. They don’t grow without stopping, of course. They’re not 40 feet across. So there’s an equilibrium. But it’s not a good equilibrium for the species. Chase them into the forest and they get stuck. They’re easier for wolves or hunters to catch.
EK: And your argument is that this happens among humans, too.
RF: If you look at the auto racing associations, most of them have long since imposed a limit on engine displacement. If you don’t have a limit like that, you just keep building engines with more displacement and you eventually have all these cars that are going so fast they put drivers at risk and cost enormous sums of money. But what the industry realized collectively was that they you could get great races without engines that big. So they put down limits. Steroid bans in sports are something of the same theory. So in sports and other direct competitions, these problems are well known.
EK: And then in the economy?
RF: Take traffic congestion. Conservatives say it’s social engineering if you propose a congestion tax. They say the same for vehicle weight. But buying a bigger car puts others at a greater risk of dying. A vehicle weight tax gives people an incentive to ask themselves whether a station wagon would be as good as an SUV.
The biggest of all in this case is my proposal to scrap the income tax altogether and replace it with a progressive consumption tax that’s based on how much you spent during the year. You’d pay tax on your taxable consumption--defined as your income, as you now report it to the IRS, minus your annual savings, as you would document that for tax-exempt retirement accounts, minus a standard deduction, say, $30,000 for a family of four. And this way, you could raise taxes without worrying that you were hurting the incentive to save or invest.
EK: And the progressive consumption tax, as I understand it, is based on the idea that a lot of luxury spending is driven by status competitions with one another, and if everyone had an incentive to buy smaller houses, then no one would be worse off. But the question that raises, I think, is who we should trust to decide what does and doesn’t have value? Robert Frank might not be a believer in big houses or in the exquisite satisfaction of knowing you’re richer than your neighbor, but perhaps other people disagree, and so who is Robert Frank to say otherwise?
RF: That’s the linchpin of the argument obviously. I wouldn’t want anybody to trust me to produce estimates of how much harm there is in these activities. I wouldn’t have the patience to do that work. But we know how to make rough estimates of these harms. The standard way to do this is to see how much you would be willing to pay to avoid the harm you would suffer from, say, getting on a crowded roadway.