the economic arms race INTERVIEW | BY RON NETSKY
It’s a mixed metaphor of major proportions: the country’s headed for the fiscal cliff, with the debt ceiling closing in. And Robert H. Frank, professor of economics at Cornell University’s Johnson Graduate School of Management, says we might have to go off that cliff before Republicans realize they’re holding a losing hand. Frank writes the monthly Economic View column in the New York Times and is a distinguished senior fellow at Demos, a progressive think tank. If you think of economists as buttoned-down, conservative types, Frank will turn that image upside down. While most economists consider Adam Smith to be the father of modern economics, Frank’s latest book, “The Darwin Economy: Liberty, Competition, and the Common Good,” says that the ideas of naturalist Charles Darwin are more important to economic theory than Smith’s. When Frank analyzes an economic problem, such as why the middle class is falling behind, he doesn’t just study the financial aspects; the psychology of status becomes a major part of the equation. And when it comes to self-made millionaires, Frank agrees that hard work counts, but says there’s another often-overlooked factor: dumb luck. Frank cuts through nonsense quickly. The Republican talking point on why taxes shouldn’t be raised on the rich — they’re the job creators — is, in Frank’s view, ridiculous. And he says there should be more taxes on harmful behaviors like drinking alcohol and smoking. As for another Republican scourge, “Obamacare,” Frank says the Affordable Care Act is the logical and inevitable way out of the current private-insurance oriented health-care system. The following is an edited version of a recent conversation with Frank. City
DECEMBER 19-25, 2012
CITY: When we last spoke, in 1999, the economy was so rosy that our headline was “We’re rich.” What happened?
Frank: We’re still rich, but there was the big financial crisis which threw everything into a tailspin. We’re more or less on the way back from that. But even in the time you’re talking about, what was true then and is still true is that a handful of people near the top have gotten very rich and for most other people there has not been much gain. What can happen if this imbalance becomes too large?
There have been violent revolutions in many countries over issues of just this sort. We seem to be way slower to kindle to anger on this issue than other countries so I’m not thinking it’s imminent, but I like the great Herb Stein remark: “If something can’t go on forever, it will stop.” At some point, if you stretch things too tight, they do break. One reason middle-class families are struggling is what you call an “expenditure cascade.” Can you explain?
People in the middle have a little more money than they did 30 years ago, so why are they hurting so much more? The answer is what they have to spend to achieve their basic goals has escalated much more than their income. How much do you have to spend to get the average-size house for your area? I calculated a toil index. Thirty years ago, if you were the median earner, you had to work 40 hours a month to get enough to cover the cost of the medium-priced house, which is what you need to do if you’re going to send your kid to the average-quality school. By 2007, you had to work more than 100 hours a month to get the average-size house. The medium income went up maybe 15 percent over the last 30 years. That’s a huge bite, so what are families going to do: send their kid to schools [in the bottom 20
percent]? Most families won’t do that. If other families are spending more and they’ve got to spend more to keep pace, they’re going to do that. They’re going bankrupt more often, they’re saving less for retirement, they’re driving longer distances in commutes. So it has become much harder for people in the middle to make ends meet, and it’s because standards have cascaded down from the top. The people at the top built bigger mansions. Then there’s a group near them who built bigger, too. It cascades down one step at a time so the median new house is 50 percent bigger than it was in 1970.
Robert H. Frank. PHOTO PROVIDED
In “The Darwin Economy” you say that Darwin is a more important figure in economics than Adam Smith. Why is Smith important?
Smith is most often mentioned for his invisible-hand theory: the idea that under some conditions, if you just turn people loose and charge them with pursuing their own narrow interest in the marketplace, you’ll get results that are attractive from the perspective of society as a whole. Sometimes that does happen, but I think Smith himself was aware of things that could go wrong. The kinds of things he thought could go wrong are more like the things
you’d hear from a modern liberal: not enough competition, firms with market power that will exploit consumers and workers. He wasn’t anywhere near as uncritically enthusiastic about his theory as many of his modern disciples are. One of the key premises of your book is Darwin’s idea that the interests of individuals are often in conflict with those of broader groups. How does this apply to the economy?
This would apply to any economy under any circumstances. Darwin’s central insight was that big portions of life are graded on the curve. It’s