Read Robert Frank’s three-part essay about inequality. This is the Robert Frank who is an economist at Cornell University, and not the Robert Frank who’s a wealth reporter for the Wall Street Journal.
Part one
Part two
Part three
Here’s a sample from part one:
All parents, for example, want to send their children to the best possible schools. But a good school is a relative concept. It’s one that’s better than most other schools in your area. In every country, the better schools are those that serve students whose families live in more expensive neighborhoods. So if a family is to achieve its goal, it must outbid similar families for a house in a neighborhood served by such a school. Failure to do so often means having to send your kids to a school with metal detectors at the front entrance and students who score in the 20th percentile in reading and math. Most families will do everything possible to avoid having to send their children to a school like that.
But because of the logic of musical chairs, many are inevitably frustrated. No matter how aggressively everyone bids for a house in a better school district, half of all students must attend schools in the bottom half of the school quality distribution. As in the familiar stadium metaphor, all stand, hoping for a better view, only to discover that no one sees any better than if all had remained comfortably seated.
I disagree with part three where he recommends a “progressive consumption tax.” Just because Frank is one of the few economists smart enough to identify the problem doesn’t mean he has the right solution. A consumption tax isn’t any different than an income tax with a deduction for savings, and if we tried to implement that within the context of our income tax system, people would rightly criticize the deduction as regressive because rich people save more of their income than poor people. Nope, our income tax system with loopholes removed and perhaps some higher rates for the wealthiest Americans is the best way to take money away from those who have too much. And Robert Frank has done a good job of explaining why it’s a problem for the middle class when the rich have too much.
Robert Frank also doesn’t write about value transference, although the example he gives of a top-paid performer is interesting:
The trustees who recruited David J. Skorton as Cornell University’s 12th president in 2006 knew that his most important responsibility would be to head the university’s $4 billion capital campaign, which was then just getting under way. The hiring committee identified several candidates they felt would succeed in reaching that goal. They eventually decided, however, that none could have handled the task nearly as well as Skorton.
Having seen him in that role for the past several years, I find it easy to see why. Skorton, a man of great humor, warmth, and charm, is a distinguished research cardiologist and an accomplished jazz musician. Alumni adore him. If his compellingly articulated vision of the university’s future persuades them to donate only 3 percent more than the next-best candidate would have, he will have boosted the university’s endowment by more than $100 million.
I don’t know how much Dr. Skorton is paid. But many social critics expressed shock and outrage when it was reported that annual salaries of presidents of some private universities had passed the $1 million threshold several years ago. Leaders of David Skorton’s stature are in short supply, however—and because they’re so valuable, the real surprise is that they’re not paid even more.
Regardless of how well Dr. Skorton does his job, thereby increasing the income of his employer, he’s not creating value; he’s just increasing the transfer of value from donors to Cornell, and transferring some of that to himself in the form of a high salary. Dr. Skorton is a salesman. He might even be destroying value if the money donated to Cornell would otherwise have been invested in a value-creating industry.
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I am a mostly a libertarian; I don't think that taxing the rich is anti-libertarian. I just understand that inequality is an inefficiency of a completely unregulated market that needs to be reined in.
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