A Stitch in Haste

Perhaps the single leading advocate of economics as a tool of social control these days is my old graduate economics adviser from Cornell, Robert H. Frank.

Frank's research over the past 15 years or so can be summed up as follows: You're an ass. He repeatedly concocts theories of "consumer irrationality," meaning that people engage in behavior that he summarily designates as, um, "wrong" and in need of correction by economic or other government policies.

Now Economist's View alerts us to Frank's latest decree as a would-be central planner:

I argue here that low U.S. savings rates are in large part a result of pressures to keep pace with community spending standards, pressures that have been exacerbated by rising income and wealth inequality. Replacing the income tax with a progressive consumption tax would stimulate additional savings by reducing the price of future consumption relative to current consumption as compared to its price under the current income tax. Perhaps more important, a progressive consumption tax would stimulate savings by altering the social context that shapes spending decisions.

In other words, conspicuous consumption (i.e., "keeping up with the Joneses") is now a systemic economic crisis that needs to be combatted by replacing the income tax with a consumption tax (that such a consumption tax should presumptively be progressive is merely a gratuitous add-on to placate Frank's unrepentant socialism).

Some hasty stitches:

--There are people antediluvian enough to believe that the purpose of taxation is to fund the operations of government, and not to control people or correct behaviors that are deemed, um, "wrong" by self-appointed philosopher-kings (economist-kings?) who overlay their own subjective value judgments on to other people's decisions.

--Many of those same individuals are so old-fashioned as to think that people actually have a right to make decisions, even "irrational" decisions, for themselves, without interference from the government or would-be central planners and economist-kings.

--By the same token, there are individuals whose thinking is so obsolete that they believe people might buy things because they actually want them, and not merely because their next-door neighbor bought them yesterday.

--While it is broadly true that, all else equal, a consumption tax would tend to promote personal savings more than the income tax does, that can easily corrected by changing the income tax rather than replacing it. Simply exclude all returns to savings (i.e., interest, dividends and capital gains) from taxable income. Presto -- a tax-based incentive to save, exactly what Frank is calling for. If even more incentives are needed, then other options also present themselves: remove caps on deductibility of contributions to retirement vehicles such as IRAs and 401(k) accounts, eliminate the bizarre "use it or lose it" rule for flexible savings accounts, and scrap the deductibility of interest expense on second mortgages and home equity loans.

--Finally, I doubt that would-be central planners such as Frank really care too much about the savings rate of the rich. The real concern is always only with lower-income individuals. Well, if you want to stimulate savings by the working poor, then the best way to do so would of course be to enable them to participate in voluntary partial privatization of Social Security. It is hardly surprising that lower-income workers choose not to save when one-eighth of their paycheck is confiscated in Social Security taxes, while at the same time they are told that they will receive "guaranteed" retirement benefits through Social Security. Not saving when the government goes out of its way to get you not to save? Hardly sounds like "irrational consumer behavior" to me. Irrational government policy, perhaps, but not irrational consumer behavior.

Advocates of central planning always envision themselves as the central planners. Frank is no different. His "conspicuous consumption" canard is merely a convenient tripwire to advocate his pet policies and his need to see people "corrected" and "controlled."

He may be selling, but I'm not buying (which I suppose means that I'm "saving" after all).