Sensible Observations

One of the nice things about transitioning out of academic life and into professional life (if only temporarily) is that I suddenly have a surfeit of leisure time, and among other things, I’m using that time to catch up on a pretty substantial backlog of reading.  This is all by way of saying that I just finished economist Robert Frank’s 2007 book Falling Behind: How Income Equality Hurts the Middle Class.  Frank’s main point is that relative deprivation leads to “positional arms races, where Person A attempts to improve their positional status through greater consumption, which in turn, leads Person B to do the same, resulting in an equilibrium where relative status remains stable, although absolute status might be higher.

What’s more, this is all exacerbated by the tremendous income inequality of the last twenty years; the consumption of the richest Americans sets the standard for the next level of income earners, and so on and so forth.  But, because incomes have stagnated for the middle-class, this pattern leaves many middle-income families struggling to acquire positional goods (larger homes, for instance) at the cost of more valuable non-positional goods (in terms of psychological well-being), like leisure time or time spent with family.

Anyway, in the course of making this point, Frank makes a really insightful point about the bizarre way in which we talk about taxation:

Why doesn’t the average voter realize that if we elect a Congress that raises taxes to fund basic public services, the extra tax burden won’t be very painful?  After all, a direct consequence of the tax increase will be an across-the-board reduction in consumption, one result of which should be, according to my argument, that the consumption context will shift, so families won’t feel that they need to spend as much as before.

This makes intuitive sense to me.  If your taxes are raised to pay for better schools across-the-board, then there’s a good chance that you’ll feel less inclined to purchase an expensive house in a good neighborhood with good schools.  After all, you’ll have access to a comparable school in a cheaper neighborhood.  You can even extend this observation to things that don’t directly relate to positional goods: on average, poorly maintained roads add an additional $335 to the annual cost of owning a car.  In all likelihood, that is far more expensive than a small tax increase to pay for regular road maintenance.

Sure, Americans enjoy relatively lower “official” taxes, but those is more than offset by the exorbitant “hidden taxes” that are the result of underinvestment in public goods.  The income that doesn’t go to Uncle Sam goes toward repairing a blown tire or, since we’re on the topic, paying absurdly high health insurance premiums.  Yes, you could say that paying an auto mechanic or a health insurance company benefits the economy, and you’d be right.  But my hunch is that the positive economic impact of lower health care costs facilitated by health care reform, or fewer lost wages resulting from regular road maintenance (among other things) is far greater than the alternative.

This is all to say that Democrats would have a hell of a lot more success in selling policies that require tax increases if they took the time to emphasize that most Americans are already paying more than they would pay under a new system.  If voters understood that basic fact, then we might be able to lower – if even slightly – the huge barriers to raising adequate revenue.

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18 thoughts on “Sensible Observations

  1. I’m not opposed to the latter half of your post which I am inclined to agree with. Particularly the part about trying to explain to voters the concept of the hidden costs of excessively low taxes, good stuff, I like it.

    The first half of your post, though, really leaves me cold. It feels to me like it treats people in the middle class as not being responsible for their actions. Of course the poor dear is in foreclosure and bankrupt, have you seen the size of the yacht that Trump built? Surely the gap between the haves and the have-nots has been much greater in the past. Why did this problem only seem to crop up more recently? Couldn’t this point be flipped around and made into an argument against extending generous credit to the middle class instead of an argument for heavy taxation against the wealthy? I consider myself liberal whenever people start talking about the positive benefits of taxing for the sake of the positive effect of taxation itself (which is in my opinion what this premise posits). It reeks of the same toxic kool-aid that the right downed through the 90’s and 2000’s where the answer to every problem was to cut taxes. As we watch their side writhing and foaming while they try and work it out of their intellectual systems why would we on the left even consider mixing our own equivalent version and drinking it?

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  2. My reaction was the opposite of the first commenter. I thought the positional/non-positional paradox is a very interesting one. It plucks the Rousseauian heartstring of mine. But I am very pessimistic at throwing government money at things. In particular, I’m of the mind that throwing more money at schools is one of the biggest non-ideas for improving education that we can possibly talk about these days.

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  3. Maybe you’ll change your mind when you get job.

    Seriously, I don’t know what to say about this. It’s just too much for a short response. So, if we pay higher taxes it will kill the urge to spend and government will use the money more wisely so that we save the money we would have spent on stuff, which is like breaking even? Wouldn’t we still have the same amount of disposable income, and therefore continue our robotic pursuit of the Joneses? Actually, we would have to be taxed for more than the government could save us money — that way all the dirty excess wouldn’t tempt us. Perhaps government could keep that excess in a savings account until we really need it for something important. Somebody shoot me — just shoot me and get it over with.

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  4. If the middle class is not irresponsible for lack of saving and spending an unreasonable share of their income, then it is big business/finance/government that is responsible for manipulating them. For generous credit to be extended to a fiscally responsible middle class, big business/finance/government ought to be reformed first so our helpless citizens aren’t continually manipulated. And we still have regular people fighting against sensible government intervention – probably due to general and understandable mistrust (habitual lying and deception ‘justified’ by controlling public opinion) and nonsensical members of the ruling elite (Palin?).

    Given that the prevailing economic system naturally induces growing wealth disparity (without significant wealth redistribution), described by the Pareto principle, it comes as no surprise that ~25,000 people die daily of starvation and the likes of Trump and the ‘b-club’ hoard their obscene wealth. While it could potentially be argued that absolute wealth has increased across-the-board within the US, it would be incomplete not to consider the rest of the world where American economic interests take their toll (caused by either/or US denizens, institutions).

    Wealth disparity was probably not greater in the early days of the US when slaves and servants weren’t bestowed the rights enjoyed by property-owning citizens. To account for these historical slaves, we have to account for modern debt/wage slaves abroad, and I’m sure you’ll find that income ratios have only increased. Unless it is shown that a certain amount of resources has been shared among a greater number of people, any claim of a reduced disparity should be questioned. But, it could likely be shown that disparity was greater in the past by selectively choosing who is included in the calculation.

    In the case where greater taxation curtails the main driver of the (on hindsight, unbridled) consumerism that fuels much human suffering, honestly, what is so unreasonable about this? It only becomes toxic kool-aid if the additional tax dollars are not put toward enhancing public infrastructure or containment of abusive institutions, and instead upon effectively commercial (and similarly socialist) subsidies.

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    • Thanks for your response Russel, judging from the order and nature of your points I believe it was directed at my post so I’d like to respond. Of course I disagree with you on your characterization of the citizenry as hapless innocent ducklings swept along by the merciless tides of big business/finance/government. Happily I do not reject it entirely so we can meet half way in that I agree that big business/finance/government is indeed manipulating them but also that our citizenry are far from hapless and are vigorously manipulating those entities right back. I’ll add that the idea that you would consider Palin of all people, a washed up and comical failed vice presidential nominee, as part of our ruling elite is laughable but at least we can agree with each other that she is laughable.

      Certainly our current economic system allows wealth disparity. Capitalism surely is the worst economic system known to man, well except of course for all of the others that have been tried. Certainly it is pretty obvious that the people of the world have come a long way from our times of hunting bugs on the plains and I’d even go so far as to inquire as to whether there has been a time in our past when humanity’s lot has been better than it is now? Certainly in terms of starvation, employment or number of people living under representative governments I’d be interested to know if you can suggest a time that was better? Considering the rise of the Far East out of flat out mass starvation and tyranny into comparatively honest and caring governments (Singapore, South Korea, Taiwan, heck even cruel communist China is at least merely cruel and communist rather than being cruel communist and universally dying under madman Mao’s none too gentle hand.) Now of course we have a long way to go but if you are going to indict our economic systems surely some credit may be due them for the things they’ve done to improve the human condition.

      My objection, and the source of my kool-aid term, is viewing taxation as a good in itself. Taxation is at best an unpleasant but necessary tool to allow/compel citizens to contribute to the general social order on which all our prosperity depends. I’m of the opinion that when raised significantly taxation can become a plague, which curtails the willingness of our fellow humans to be productive to the full extent of their abilities and decreases the general welfare of us all (this is without going into the horribly ineffective things government loves to do with it). We’ve also seen how the republicans hollowed out their own thinking and philosophies by making a fetish out of reduction of taxation as a cure to all ills and dependence on borrowed money. I feel that Frank’s suggestion that taxation is a good in of itself is a dangerous line of thinking for our side (the left) that would threaten to lead us into a predicament similar to the one the right suffers now. Frank seems to be suggesting that we can make people care less about money by taking it away from them and that seems to me to be an economic equivalent of making a desert and calling it peace.

      Now I am left wing, I’m willing to believe that Americans may well be under taxed. But I would very much prefer that we view taxation as an unpleasant evil that is necessary to fuel the much greater goods that tax revenues can be used for. I fear that if we start viewing taxation as beneficial in of itself then we’ll be started on the road back into the wilderness.

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      • North, I question the idea of progress altogether. I’d say it was progress only in the most literal sense, and that we certainly shouldn’t be taken with pride. In fact, in some aspects we might ‘regress.’

        So in all seriousness, considering how American Indians co-existed rather well with the plains and its bugs we could borrow some of their values. I’m sure that social pressure was effective to ensure that everyone ate, and that wealth disparity was low and agreeable. So-called primitive people probably didn’t suffer mass starvation at the hands of others, didn’t have productivity issues, and had reasonable and compassionate leaders (at least simply because of proximity and solidity). I imagine these people in their relative ignorance were quite happy. At now, we’ve let technological determinism bring us into a precarious time (e.g. nukes, Islam, and Christianity don’t make a good cocktail) where a surprising proportion of people in the developed world are flat-out miserable. Contrast this with Amazonian natives, who probably care little for our modern acoutrements and get along fine otherwise.

        But perhaps you may find this comparison unfair, so in the spirit of the Democrats I’ll give up the primitive option. As for which *empire* is best, you could be right in that out of imperial US self-interest Pacific nations have benefitted, but you can’t say the same for South America. Yet for my lack of historical knowledge, I’ve currently no better example to provide. If credit is due, then disappointingly it is so, because I believe we can do much better. And thanks for the check, as I’ve now more to think on.

        In the practical sense, your taxation point is definitely valid. While positive effects of taxation are real, it is a dangerous way to sell a tax hike, and an insufficient way to bring about savings or a shift in values.

        (Just to clarify my last reply: 1) please forgive the indicative conditional if-then logic I put forth – I fully acknowledge gray spaces. 2) I used Palin sarcastically to express discontent as ‘nonsensical,’ although if they thought she was VP material then it could be the public that’s nonsensical and the elite are simply cruel )

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        • I think we can agree to disagree on your first two paragraphs, Russell. While I can understand a Luddite or antimodern point of view to a degree I feel that it imbues early cultures with a level of romanticism that I have difficulty sharing. Still, in as much as those views cast a jaundiced eye on development and provide anchors for sensible environmentalism (and also a yard stick against which to measure human progress) I value and respect them even though I do not share them.

          As to your latter two paragraphs I agree completely. Please don’t apologize for any of your writing styles. I’m often plenty long winded and obscure in my own contributions and when reading others I probably go too fast, the eyes outrunning the brain probably.

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  5. Frank’s main point is that relative deprivation leads to “positional arms races, where Person A attempts to improve their positional status through greater consumption, which in turn, leads Person B to do the same, resulting in an equilibrium where relative status remains stable, although absolute status might be higher.

    Folks will jockey for position. Some of them will have television wars. Some of them will brag about how they don’t own a television. Some of them will show off their jewelry. Some of them will point out how they are storing up their treasures in heaven.

    I do not see, for a second, how anything short of indoctrination will put a stop to this. Even indoctrination will result in people pointing out how much more indoctrinated they are than those other, less enlightened, folks… and, between you and me, aren’t you glad that we’re not like them?

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  6. Be sure to save some of the new leisure reading time for theology or you’ll never qualify to debate Chris Dierkes on God and materialism (if you’re so inclined).

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  7. Yes, you could say that paying an auto mechanic or a health insurance company benefits the economy, and you’d be right. But my hunch is that the positive economic impact of lower health care costs facilitated by health care reform, or fewer lost wages resulting from regular road maintenance (among other things) is far greater than the alternative.

    Jamelle – read Bastiat’s broken window. I think you’ll find a pretty good refutation to the idea that paying the auto mechanic because your car suffered damage due to poor maintenance of roads is good for the economy.

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