Author: Robert Frank

Robert H. Frank is the Henrietta Johnson Louis Professor of Management and Professor of Economics at Cornell's Johnson Graduate School of Management and the co-director of the Paduano Seminar in business ethics at NYU’s Stern School of Business. His “Economic View” column appears monthly in The New York Times. He is a Distinguished Senior Fellow at Demos. He received his B.S. in mathematics from Georgia Tech, then taught math and science for two years as a Peace Corps Volunteer in rural Nepal. He holds an M.A. in statistics and a Ph.D. in economics, both from the University of California at Berkeley. His papers have appeared in the American Economic Review, Econometrica, Journal of Political Economy, and other leading professional journals. His books, which include Choosing the Right Pond, Passions Within Reason, Microeconomics and Behavior, Principles of Economics (with Ben Bernanke), Luxury Fever, What Price the Moral High Ground?, Falling Behind, The Economic Naturalist, and The Darwin Economy, have been translated into 22 languages. The Winner-Take-All Society, co-authored with Philip Cook, received a Critic's Choice Award, was named a Notable Book of the Year by The New York Times, and was included in Business Week's list of the ten best books of 1995. He is a co-recipient of the 2004 Leontief Prize for Advancing the Frontiers of Economic Thought. He was awarded the Johnson School’s Stephen Russell Distinguished teaching award in 2004, 2010, and 2012, and its Apple Distinguished Teaching Award in 2005.

Time for Democrats to Go on the Offensive in Minnesota

If the Republicans want to keep depriving the Democrats of Al Franken’s vote, they should pay a price for it.

President Obama needs Al Franken’s vote in the Senate. With the Norm-Coleman-as-sore loser meme gaining traction, Democrats should go on the offensive. Ads reminding voters that Coleman is why the state has only a single senator during this time of national crisis would be a good investment.

Governor Tim Pawlenty has suggested that he may refuse to certify Franken’s election until Coleman has exhausted all possible appeals. Given Pawlenty’s presidential ambitions, even a well-executed ad campaign probably wouldn’t change his mind. But it would raise the price that Minnesota Republicans would pay for his decision. As Jonathan Zasloff noted yesterday, Coleman’s tactics have already darkened future Republican electoral prospects in the state.

File under: “Coleman, own petard, hoisted with”

Al Franken should tell Norm Coleman that the alternative to counting all the improperly counted absentees is counting none of them.

The latest from the Coleman-Franken recount (from the Minnesota Star-Tribune):

The campaigns of Sen. Norm Coleman and Al Franken disagree over the number of absentee ballots that were improperly rejected and should now be counted. While Franken wants to count 1,346 ballots that county officials say were mistakenly rejected, Coleman for now is agreeing to count only 136 of them.

Since the Minnesota Supreme Court ruling held that both campaigns had to agree on which absentee ballots are to be counted, isn’t Franken’s obvious response that he won’t agree to count any absentee ballots unless Coleman agrees to count all the improperly rejected ones? If Coleman refuses, Franken retains his lead. Game over.

Franken could of course achieve the same result by not agreeing to count any absentee ballots no matter what Coleman says. But having argued so strenuously for counting all improperly rejected ballots, he won’t want to do that. Thanks to Coleman, he doesn’t have to.

McCain’s “Redistributionist” Complaint

All government policies redistribute income. So McCain’s complaint is nonsense.

There’s already been lots of sensible pushback against John McCain’s charge that Barack Obama is a redistributionist. At the risk of piling on, here’s another story that illustrates just how bizarre the charge is.

Some months ago, I was asked to join a panel to review The National Council on Economic Education’s curriculum standards for the teaching of essential principles of economics, a task not normally entrusted to Marxists. On a conference call last Friday, the panel debated the Council’s content standards, including Content Standard 16, which reads in part,

There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

Discussion focused on a proposal by one of the panel members to change “Most” to “Many” in the last sentence of this standard. I asked whether anyone could think of a government policy that didn’t entail at least some degree of direct or indirect redistribution of income. No one could, which is hardly surprising, since government policies are paid for by taxes and create benefits and costs that generally fall unevenly on different people.

In practice, not every government policy meets the cost-benefit test described in Content Standard 16. But no one could come up with even a single example of a government expenditure—not for a highway guard rail, not for a bridge repair, not for an influenza vaccine, not for any other specific purpose—whose net costs and benefits were exactly equal for each and every citizen.

In short, there is a more plausible case for changing “Most” to “All” than for changing “Most” to “Many” in the last sentence of Content Standard 16. Rather than push the envelope, though, we voted to let the current wording stand.

If all government policies have distributional consequences, it makes no sense to complain that a politician favors redistribution. When John McCain appears on a talk show this Sunday, his interviewer should ask him whether all the policies he’s supported during his years in office that have had no effect on the distribution of income among his constituents. Unless the answer is no, then McCain, too, is a redistributionist.

McCain’s Silly Argument for Tax Cuts for the Wealthy

Senator McCain’s claim that tax cuts to the owners of small businesses will stimulate them to hire more workers flies in the face of bedrock principles outlined in every introductory economics textbook. If tax cuts won’t work because businesses can’t get bank loans to hire, it would make far more sense for government to offer hiring loans rather than income tax cuts — which is precisely what Senator Obama has just proposed to do.

Barack Obama says he would allow George Bush’s tax cuts for high-income Americans to expire as scheduled. John McCain objects, saying that this would stifle job creation by small businesses. This objection flies in the face of everything we know about the economic logic of hiring decisions.

It rests implicitly on the premise that if business owners could afford to hire additional workers, they would. But whether owners can afford to hire is not the issue. What matters is whether hiring will increase their profits.

The basic hiring criterion, found in every introductory textbook, is straightforward: If the output of additional workers can be sold for at least enough to cover their salaries, they should be hired; otherwise not. If this criterion is met, hiring extra workers makes economic sense, no matter how poor a business owner might be. Conversely, if the criterion is not satisfied, hiring makes no economic sense, even for billionaire owners. The after-tax personal incomes of business owners are simply irrelevant for hiring decisions.

Defenders of tax cuts for the wealthy sometimes respond that business owners need money up front to cover the hiring and training costs incurred before new workers can effectively contribute to extra production. Tax cuts put that money in their pockets. That is true but does nothing to alter the basic hiring rule.

Owners who used their tax cuts to finance the initial costs of new hiring would be acting, in effect, as their own bankers, lending money to themselves in the hope of future returns. The test for whether such internal loans make economic sense is exactly the same as the test for external loans.

A loan from a bank makes sense if the firm’s ultimate gain from hiring extra workers is enough to cover not only their salaries but also repayment of the loan plus interest. Internal loans must meet the same standard. They are justified only if the firm’s gain from hiring extra workers is enough to cover their salaries and repayment of the loan, including the interest that owners could have earned had they left their tax cuts in the bank. In hiring decisions, the implicit costs of internal loans have exactly the same economic standing as the explicit costs of external loans.

In brief, Senator McCain’s claim that tax cuts to the owners of small businesses will stimulate them to hire more workers flies in the face of bedrock principles outlined in every introductory economics textbook.

Senator McCain might counter that during the current financial crisis, tax cuts for small business owners will stimulate hiring because bank loans may not be available. Maybe so, but in that case, it would make far more sense for government to offer hiring loans rather than income tax cuts&#8212which is precisely what Senator Obama has just proposed to do.

Obama and the gas tax holiday

The gas tax holiday is a classic political pander: an idea that seems good only to those who don’t understand it. Barack Obama should give a high-profile public speech to explain exactly why the McClain-Clinton proposal is sucha bad idea. The arguments are simple and persuasive. If Obama cannot make them seem compelling, he is not the brilliant orator we all believe him to be.

Many of his supporters have been recommending that Barack Obama focus most of his attention on John McCain, arguing that further exchanges with Hillary Clinton lend credence to her dubious claim of still having a path to the nomination. The fact that both McCain and Clinton have now backed the same demonstrably insane summer gasoline tax holiday provides a perfect opportunity for Obama to take aim at McCain in a way that will also limit Clinton’s ability to profit from her proposal.

For reasons that Mark and Michael have clearly laid out in earlier posts, the McCain-Clinton proposal is a classic political pander &#8212 a proposal that sounds good to low-information voters, but whose effect would be to exacerbate the very problem it purports to solve. Obama, to his credit, has denounced the proposal. But in the furor over Jeremiah Wright, his response received little attention. In the meantime, Clinton’s ads touting her support for the tax holiday are probably winning votes. After all, that’s why politicians pander in the first place.

But this combination of events provides Obama with a golden opportunity to turn the issue to his advantage. He can do this by scheduling a high-profile public speech whose announced purpose is to explain why McCain’s gas tax holiday is a such bad idea. The arguments are simple and persuasive. If Obama cannot make them seem compelling, he is not the brilliant orator we all believe him to be. This speech would challenge McCain’s perceived strength as a straight-talker, because the proposal is the polar opposite of straight talk. After explaining why, Obama should challenge members of the press to find a single reputable energy expert or economist who believes otherwise. There aren’t any.

Damning McCain with Faint Praise

Obama says that McCain would make a better President that George W. Bush.
Well, yes. But then you could make a better President than George W. Bush out of papier mache.

At a town hall rally in Reading, Pennsylvania, yesterday, Barack Obama said that any of the remaining presidential candidates, including John McCain, would be a better president than George W. Bush. Hillary Clinton pounced. “We need a nominee who will take on John McCain, not cheer on John McCain,” she said at a rally in Johnstown.

But even setting aside Clinton’s earlier praise for McCain’s readiness to serve as Commander-In-Chief, it’s a stretch to accuse Obama of cheering McCain on. After all, 61 percent of 109 historians recently surveyed by the History News Network said they considered George W. Bush the worst president ever.

John McCain almost certainly would be a better president, but that’s hardly high praise.

A winner-takes-all market in infamy

Gibson and Stephanopoulos are the unlucky winners.

In the marketplace, products often emerge as big winners even though they were only a little better (or in some cases actually worse) than their closest rivals. Sony’s Blu-ray high-definition DVD technology, for example, recently won a bitter format war with Toshiba’s competing technology, even though experts found no compelling reason to favor one over the other.

Similar winner-take-all outcomes also permeate the world of ideas. Consider, for example, the phenomenon of “gotcha” journalism. The Washington Post’s respected television commentator Tom Shales described the questions posed by the moderators of Wednesday night’s debate as “specious and gossipy trivia that already has been hashed and rehashed, in the hope of getting the candidates to claw at one another over disputes that are no longer news.”

As Shales is surely aware, Charles Gibson and George Stephanopoulos were hardly breaking new ground in this respect. Yet a few simple principles of cognitive psychology all but guarantee that the journalistic reputations of the two will be forever sullied by their conduct Wednesday evening.

One of these principles is that mental shelf space is limited. Few ideas and issues ever rise to sufficient prominence to become the subject of widespread attention. Although negative reactions to gotcha journalism had been building for some time, they had been too diffuse to land on most people’s radar screen at the same moment. Wednesday’s debate, however, drew more than 10 million viewers, and millions of others watched excerpts and read news coverage of it. And by the standards of past televised debates, their reactions were both intense overwhelmingly negative. Some of these have been dismissed as partisan whining, but many others were voiced by neutral media experts.

Another important principle is that people’s receptiveness to an idea depends on the context in which they encounter it. Since he launched his campaign more than a year ago, Barack Obama has been speaking out forcefully against the pernicious effects of gotcha journalism. So when examples of it appeared in staccato succession in Wednesday’s debate, many viewers were already receptive to the possibility that it might be a bad thing.

In short, the sheer size of the event, the fact that people had been primed to consider the negative consequences of gotcha journalism, and the resulting intensity of the public’s reaction, pushed the issue over the threshold necessary for starting a national conversation about it. Gibson and Stephanopoulos will be the subjects of that conversation for as long as it continues.

Their best hope is that the conversation will die out quickly. But another principle of cognitive psychology makes that hope seem an empty one. For any subject to be discussed more than briefly, events must continue to call it to people’s attention. From the perspective of Gibson and Stephanopoulos, the current context is inauspicious. No one imagines that Senator Obama, the overwhelmingly likely Democratic nominee, has confronted his last gotcha question. No, he will hear many more such questions as the campaign unfolds. And each time he is asked, for example, why he doesn’t wear a flag lapel pin, he will seize the opportunity to remind voters that such questions divert attention from the substantive issues that concern them. Each of these exchanges will remind us of the questions posed by Gibson and Stephanopoulos on April 17.

In a just world, the pictures of Sean Hannity and Bill O’Reilly would appear in the margins next to future dictionary entries for gotcha journalism. But winner-take-all markets are not fair, and that distinction will almost surely go to Charles Gibson and George Stephanopoulos.

Why Has Relative Deprivation Always Been a Fringe Concept?

Relative deprivation isn’t about envy. It’s the natural result of the effect of context on evaluation.

I launch my recently published book Falling Behind by observing that variants of the relative deprivation concept have been talked about for hundreds, even thousands, of years. The concept has been introduced repeatedly, and each time, after generating a flurry of discussion, it disappears. Why has it failed to become a serious player in our intellectual debate?

The answer, I believe, is that many understand the concept far too narrowly. Many, for example, understand it to entail envy provoked by comparisons with others in more favorable circumstances. Although that may be true in specific cases, the core phenomenon actually has little to do with envy. Rather, it is fundamentally about the link between context and evaluation.

No one denies that a car experienced in 1950 as having brisk acceleration would seem sluggish to most drivers today. Similarly, a house of given size is more likely to be viewed as spacious the larger it is relative to other houses in the same local environment. And an effective interview suit is one that compares favorably with those worn by other applicants for the same job. In short, evaluation depends always and everywhere on context.

This observation is completely uncontroversial among behavioral scientists. If the link between context and evaluation is in fact what relative deprivation is mostly about, then explanations that ignore relative deprivation must also ignore this important link. This is true, for example, of the reigning economic models of consumer behavior, which ignore context completely. These models assume, preposterously, that each person’s consumption spending is completely independent of the spending of others.

Future intellectual historians will find this more puzzling than the fact that physicians once prescribed leeches to treat fever. Eighteenth-century doctors, after all, had no way of knowing about the germ theory of disease. But ignorance cannot explain the absence of context from economic models. Even those economists who have not studied the relevant social science literature surely know from their own experience how much context matters.

Evaluation guides choice. So if context shapes evaluation, it must also guide choice. Many important economic choices—ranging from the kinds of houses, cars, and clothing we buy to the amounts we save—simply cannot be understood without reference to context. But that claim raises an obvious question: If context is so important, why have economists largely ignored it? Below the fold, I summarize my attempt to answer this question.

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Are our moral intuitions irrelevant?

Mark argued this morning (follow-up here) that it is neither irrational nor morally wrong for Americans to place greater weight on the well-being of their fellow citizens than on that of unknown persons abroad when thinking about the desirability of expanded global trade. This observation will draw fire from consequentialist moral philosophers, who insist that the right course of action is the one that leads to the best consequences overall. Thus, argue the consequentialists, if trade benefits foreigners more than it harms Americans, it is morally desirable, full stop.

Although, like most economists, I’m attracted by the logic of the consequentialist position, on this issue I believe Mark has the stronger hand. As I argue here, consequentialists have been too quick to dismiss moral sentiments that conflict with their prescriptions, which sentiments they view as largely irrelevant vestiges of our evolutionary past. Consequentialists are probably right that moral sentiments sometimes inhibit us from making the best choices. But as Mark suggests, any system that did not actively encourage these sentiments would be unlikely to deliver good consequences.

More below the fold, including some relevant neuroscience

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Greg Mankiw on Trickle-Down Theory

Robert Frank claims that trickle down economics receives little support from economic theory and even less from empirical evidence. Greg Mankiw disagrees. The two textbook authors duke it out.

During his tenure as Chairman of the Council of Economic Advisers in George Bush’s first term, Greg Mankiw invoked trickle-down theory to help sell the massive Bush tax cuts for top earners. In my “Economic Scene” column in the New York Times last Thursday, I argued that trickle-down theory’s central claim that higher taxes curb economic growth is supported neither by economic theory nor by empirical evidence.

Mankiw quickly challenged my argument. But his challenge misinterprets the empirical evidence I cite and completely ignores the relationship between perceived well-being and relative consumption. The Bush tax cuts led top earners to build larger houses, the main effect of which was to redefine what counts as an adequate dwelling. But the resulting revenue shortfalls led to cuts in the Energy Department’s program for helping to lock down loosely guarded nuclear materials in the former Soviet Union. This was a bad trade.

Mankiw titled his critique of my column “Frank Needs To Read More Widely.” On that point, he is surely right. I don’t know Mankiw well enough to presume to know what he needs. But as I explain in the essay below the fold, he would be in a much better position to offer sound policy advice if he employed economic models that incorporate current scientific knowledge about human behavior.

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