Waxing economic

I was listening to Professor Robert Frank of the Johnson School at Cornell University talk about economics, the economy and what we can do about it the other day on the Commonwealth Club. He claims that in another 100 years, Charles Darwin will have replaced Adam Smith as the father of modern economics, the key difference between their philosophies being that Smith's theory assumes that individuals acting in their own best interest will result in everyone getting what's best, whereas Darwin's theory leaves more room for improvement.

He gave the example of elephant seals: as a male elephant seal, it behooves you to be as massive as possible so that you can fight your competitors for a harem and send your genes into the next generation, which over time results in enormous elephant seals. Male elephant seals today can weigh up to 6,000 pounds. 6,000 pounds! All in all, Frank says, elephant seals as a population would likely prefer to be a third that size. They could escape predators faster and wouldn't have to find as much to eat, but such is evolution.

And this is where Frank says we as humans can step outside this cycle. We don't have to be victims of a vicious cycle. We can change the rules. In considering the current economic crisis, he emphasized the Keynesian government spending, saying that now is not the time to balance the federal budget by cutting spending, imbalanced as it may be. Even without fully knowing the implications of that sort of policy, it's heartening to hear an economist recommend that the government put more people to work, and not just digging holes and filling them back up à la FDR, but getting some real work done, like hiring people to inspect all those bridges and dikes and then actually fixing them to help prevent disasters.

The idea that really intrigued me though - and I'm not one to be intrigued by economics in general - was called something like the graduated consumption tax. It goes something like this - rather than taxing you on your gross income, the government would tax you based on how much you spent in a given year, and tax rates themselves could be (on the surface at least) much higher. For example, Frank proposed 100% tax for upper spending brackets, which I suppose in the end may be similar to the current tax structure in terms of how much money we bring in, except that it would encourage saving, a good behavior. Milton Friedman won a Nobel Prize in 1976 for this kind of thinking. All in all, it sounds to me like a pretty neat idea.

Fortunately, someone in the audience asked the question I was thinking of, which was - do we really want everyone stuffing all their money into savings right now? Don't we need that economic stimulus? And his answer was that, yes, consumption tax wouldn't be a good idea right now, but it would be a good idea to put it on the table for later. If we said we'd be converting to a consumption tax structure in some number of years, people would be incentivized to spend now, which would give us that extra kick we need, and then spend more moderately in the future.

For example, say you're a millionaire and you're just itching to build an addition onto your mansion (so as not to be outdone by your neighbors) and you're aiming to spend $2M on your project. If you know a consumption tax is on the horizon, you have two options: build a $2M addition now, or build a $1M addition later and pay another $1M (assuming you're in the 100% tax bracket) in taxes. Having the consumption tax on the horizon encourages you to build now, and anyone looking to build later will be incentivized to scale back, which, if everything goes according to plan, will help address the tendency for excess.

Future moderate spending is ok, he says, because money stored in banks and mutual funds isn't actually tied up. It's moving around as capital on the market.

Then, as I'm finishing dinner, feeling optimistic, the World Affairs Council wraps up and BBC World News starts up, main story: California lawmakers finally balance budget by cutting spending on education and social services. Sigh.