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Misguided Attacks on the Rich

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Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank (Princeton University Press, 2016; 208 pages)

In 2002, I reviewed an atrocious book for this publication — The Myth of Ownership, by Liam Murphy and Thomas Nagel. It argued that we don’t really deserve to own anything because society makes everything possible. Therefore, whatever amount of income or wealth the state deigns to let us keep is morally fine. It’s wrong to view taxation as theft under their view; rather, the lack of taxation is generosity.

That kind of argument appeals to statists who will advance almost any excuse for a bigger and more powerful government. The Murphy/Nagle claim has been taken out of mothballs in the last few years by Barack Obama and Elizabeth Warren, both of whom got cheers for telling supporters that any success Americans have is not really their own. As Obama said about entrepreneurs, “You didn’t build that.”

Now there is a new book advancing a similar argument — Success and Luck, by Robert Frank. He approvingly cites Murphy and Nagel, but bases his case on the claim that rich people were almost always lucky to have succeeded as they did, and therefore shouldn’t object to more taxation.

Frank is an economist who has spent decades thinking about the role of luck in our society. More than twenty years ago, he co-authored the book The Winner-Take-All Society, arguing that we have moved into an economy characterized by “winner-take-all” markets in which one person or company rakes in almost all the rewards of success, with little left for the rest of the field. In his latest book, Success and Luck, he returns to that theme and explains why he finds it problematic.

“In recent years,” Frank writes, “social scientists have discovered that chance events play a much larger role in important life outcomes than most people once imagined.” Despite the American belief in meritocracy, Frank says that success and failure “often hinge decisively on events completely beyond any individual’s control.” The actor Bryan Cranston, for example, is now enjoying a booming career, his high demand a result of his starring role as Walter White in the TV series Breaking Bad. Frank points out that Cranston was offered that role only after John Cusack and Matthew Broderick had turned it down. Yes, Cranston was good, but without a lucky break, he would have remained in relative obscurity.

The business world, Frank contends, is full of such good-luck stories. In the market for tax-preparation software, for instance, numerous programs that were perfectly capable once competed. But owing to some favorable reviews, Intuit’s Turbo Tax eventually came to dominate the field. “Its developers profited enormously, even as those whose programs were almost as good were being forced out of business,” Frank laments.

It has always been true that a few lucky ones manage to reap great rewards even though they were little if any better than their rivals, but Frank maintains that the march of technology is magnifying the gap between the winners and the losers in law, medicine, sports, journalism, retailing, and even academia. In a revealingly egalitarian passage, he says, “It’s one thing to say that someone who works 1 percent harder than others or is 1 percent more talented deserves 1 percent more income. But the importance of chance looms much larger when such small performance differences translate into thousand-fold differences in earnings.”

Channeling Galbraith

But is the “winner-takes-all” trend really becoming more pronounced? For all of his anecdotes, Frank’s claim that it is, rests on nothing more than his ipse dixit. The same technological change that allows some to get exceptionally wealthy is also making markets open to far more people than ever before — publishing, for example. It also allows competitors to erode the positions of the lucky winners more rapidly than ever. This part of Frank’s case, I would say, is very doubtful. Let’s assume for the sake of argument that he’s right, however.

The key questions remaining are why this trend (assuming it exists) is harmful and what the author proposes to do about it.

One reason the trend is harmful, according to Frank, is that the quest for great success “may encourage people to compete where they have no realistic prospects.” True enough, but hasn’t that always been so? For the last century, vast numbers of young Americans have, for example, devoted a great deal of time and energy to perfecting their jump-shots, fastballs, and tackling even though the chance of making it into one of the major leagues (now with a multi-million dollar contract) is vanishingly small. Many others have tried to “make it big” in music or acting, even though the odds of success are similarly microscopic. And still more, lured by the possibility of gigantic profits, have tried to invent things and market them, but, like the rivals to Turbo Tax, failed. Frank focuses only on the wasted effort, but even when people don’t achieve their dreams, they usually gain from their efforts in ways that make future success more likely. As Thomas Edison said of his many unsuccessful experiments, “I didn’t fail, but learned what didn’t work.”

But there is a far bigger problem according to Frank, namely that the few plutocratic winners damage the nation with their prodigious spending on mansions, hyper-expensive cars, and over-the-top weddings. All of that conspicuous consumption doesn’t really make them happier: “Wealthy Americans have been building bigger mansions simply because they’ve received most of the country’s recent income gains. Yet there’s no evidence that, beyond a certain point, bigger houses make people any happier. Once houses reach a certain size, further increases in square-footage merely shift the frame of reference that defines adequate.”

While the rich are engaged in a sort of arms race to out-do each other, public investment suffers, Frank avers. Channeling John Kenneth Galbraith’s complaints in The Affluent Society (1958), Frank sees an America in which the wealthy are living it up at the expense of a starving public sector. He employs this analogy to make his point — we are like a driver who has a $300,000 Ferrari that bumps along on pothole-ridden roads when we could instead have a $150,000 Porsche that we drive on perfectly smooth roads.

We suffer from a huge infrastructure deficit of some $3.6 trillion but, Frank argues, the rich fail to understand that they were just lucky and therefore oppose paying the higher taxes that would lead to better roads for all, better education for everyone’s children, and so on. In short, we’d all be better off — even the rich — if they paid more in taxes and stopped their wasteful spending.

Wishful thinking

Several glaring problems beset Frank’s argument.

First, all of that needless (to Frank) spending by the rich provides the income for large numbers of people who are not rich. Consider the outlandish Manhattan weddings that now cost on average $76,000. Frank sees wasteful one-up-manship, but to the companies employed and their workers, that’s the money that pays the bills. The de-escalation of the arms race on weddings, houses, cars, boats, et cetera that Frank wants would inflict serious pain on many Americans whose livelihoods depend on rich people spending money on their lifestyles.

Second, it isn’t true that the super-rich have dug in their heels to oppose any and all tax increases on them. Frank points to one who has (Stephen Schwartzman), but a great many of America’s billionaires are supporters of leftist politicians who have pledged to make the rich pay much higher taxes. Something other than insatiable greed of the One Percenters is necessary to explain why the tax code lets them keep so much of the money they’ve been lucky enough to acquire.

Third, Frank’s proposed tax transfer of much of the wealth of the lucky few to the government would not produce the social benefits he envisions. That is because he assumes that if the federal treasury had trillions more, the politicians and bureaucrats would spend it wisely to give us smooth roads, strong bridges, efficient passenger rail, and above all, good schools for everyone. That is to say, Frank exhibits the standard liberal wishful thinking that we can solve our problems by just spending enough on them. Could this eminent economist be unfamiliar with the Public Choice critique of government spending? Is he unaware that many of the school districts that spend the most per student have consistently poor results? Apparently so.

Frank’s proposed solution to the alleged problem that the lucky are receiving too much of “society’s” income and squandering it is not to ramp up the highest income-tax brackets. Rather, he wants to replace the progressive income tax with a progressive consumption tax. That change would, he contends, reduce wasteful consumption spending while encouraging savings and investment.

Whatever might be said about the benefit of shifting away from the income tax and into a consumption tax, the case for doing so doesn’t have anything to do with luck or the “expenditure cascades” of the rich. Doctor Frank is prescribing a medicine on the basis of an erroneous diagnosis of the patient’s condition.

Success and Luck is not without its useful insights. Foremost among them is Frank’s statement that the “college earnings premium” that many educators cite as proof that we need to put more young people through college is a mirage. That “premium” exists, he notes, only because a small number of college graduates have enjoyed spectacular earnings. For most college grads, earnings are modest and haven’t grown much. Coming from a college professor, that’s quite a rebuke to the crowd calling for the United States to regain the world’s top spot with regard to the percentage of the populace with college degrees.

Nevertheless, the book’s big point is one that gives aid and comfort to redistributionists who will use almost any argument to justify expansion of the state. “You just got lucky” works just as well for them as another recent claim: “You didn’t build that.” At a time when the need to scale back the size, scope, and expense of government is the national imperative, Frank’s book diverts our attention and leads us astray.

This article was originally published in the June 2017 edition of Future of Freedom.

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    George C. Leef is the research director of the George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.