Frankly, I'm confused. Robert H. Frank, the excellent Cornell economist, writes about taxes and income distribution, recently published a new book, The Darwin Economy, and has a regular blog in the New York Times (http://www.robert-h-frank.com/timescolumn.html). Frank Rich, who until his recent retirement was a fine columnist for the Times, may have started as a theater critic, but ended his stint on the Op-Ed page with essays on finance and the public interest like “The Tea Party Wags the Dog” and “At Last, Bernie Madoff Gives Back” (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/frankrich/index.html). To top it off, Robert Frank, who writes about wealth for the Wall Street Journal (http://blogs.wsj.com/wealth/), has authored two recent books, Richistan (2007) and The High-Beta Rich (2011), about the meteoric trajectories of the spectacularly well off in 21st century America. And, as if willfully to confound the issue, Robert goes so far as to cite an earlier book, “The Winner-Take-All Society, by Robert H., no relation” (p. 18), in High-Beta. Clear? No wonder I’m confused.
In an effort at least to distinguish Robert Frank from Robert H. Frank, I’ve just finished High-Beta and have ordered a copy of Darwin Economy.
OK. So what Frank is on about is that the increasing concentration of income at the top end of the income distribution (see my last couple of posts, “Trick or Treat” and “PS…”) and the increasing volatility of the incomes and spending patterns of the top few percentiles mean that our economy is itself more and more a volatile reflection of their experience. He draws heavily on the work of Parker and Vissing-Jorgensen to document the increasing magnitude since WW II of income swings in the top 1% as compared to the rest of us. In the days of my youth, the income streams of the wealthy were much less volatile than the average (beta < 1), but over time that has changed as income increases have become more concentrated and the income of the richest have come to depend less and less on manufacturing and more and more on financial instruments. In the 1%, beta is about 2; in the rarified top 0.01%, it’s over 3.
And that’s enough to scare anyone, particularly anyone whose job it is to forecast state tax revenues. Toward the end of High-Beta, Frank cites Hill and Williams, “By 2007, the top 1% of California’s taxpayers were … earning 25 percent of all income and paying 48 percent of the state’s income taxes.” (p. 180) Clearly a recipe for disaster when you have to balance the budget, whatever the revenue shortfall. Increasing concentrations of increasingly volatile incomes are bad enough. What makes it worse is that the spending patterns of the rich and famous have apparently become as wild and crazy as their incomes. High-beta consumption has been paired with high-beta incomes. The spending fraction for the high-beta wealthy is above that of average households! is Gone are the days of conservative buy-and-hold finance. It’s been replaced with innovate, develop, liquidate and spend. Diversification has been replaced with leverage, and Frank’s narrative is replete with stories of spectacular financial catastrophe (bankrupt former billionaires, repossessed Gulfstream 550’s, the collapse of Yellowstone Club World) that serve as a titillating counterpoise to Richistan, his catalogue of wretched excess. But without a hint of schadenfreude. In fact, he ends with the tale of yet another Frank (Kavanaugh), a low-beta millionaire and a model of rectitude and self-restraint, whose goal is to create value and jobs. “Look at the banking industry,” he is quoted as saying (p. 204) “… they don’t have real expertise in a real business, and I’m not sure they’re creating lasting value.” Frankly, words to live by.
Hill, Elizabeth and Bradley Williams. “California’s Changing Income Distribution” Legislative Analyst’s Office (8/2000)
Kapur, Ajay. “The Global Investigator; Michael Moore, Misrepresentation and Migrating Plutonomies” (2009)
Parker, Jonathan and Annette Vissing-Jorgensen. “An Increase in Income Cyclicality of High-Income Households and Its Relation in the Rise in Top Income Shares,” Brookings Papers and Proceedings (2010)
_______________. “Who Bears Aggregate Fluctuations and How?” AER (2009)
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