Advantage Luck

EconTalk Extra
by Amy Willis
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Robert Frank on Success and Lu... Gary Belsky on the Origins of ...

This week, EconTalk host Russ Roberts sat down with Cornell's Robert Frank to discuss his new book, Success and Luck: Good Fortune and the Myth of Meritocracy. As in past episodes with Frank as a guest, it was a spirited conversation, with several good-natured points of disagreement.

So where do you stand? Is luck responsible for a larger share of our success than we're willing to admit? Or is luck, as Branch Rickey said, merely "the residue of design" of the result of good old-fashioned effort?

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1. After listening to this week's episode, how much of a role has luck played in your life? To what extent have you underestimated the role of luck?

2. How does the analogy of headwinds and tailwinds explain people's ability to perceive the role of luck or chance? Why does this asymmetry suggest people aren't willing enough to contribute greater tax payments for social services? Explain.

3. What does Frank mean when he says, "it's just a cognitive error to think that taxes are going to hurt as much as you think they will?" How convinced are you by this argument?

4. Frank suggests that Roberts's "government bashing" serves only to contribute to the problem of ineffective or non-responsive government. To what extent do you agree, and why? How might Roberts's effort be better spent?

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COMMENTS (18 to date)
Dr. Robert J Pefferly Jr writes:

OK fellow Econ-Talkers, I know the deadline has passed, but at least want to sow the seeds of an application...

At what point should Russ Roberts be nominated for a Nobel in Economics? His academic work is not outrageously groundbreaking, but his communication of economic thought to the masses as well as his social discussion of topics and education of the general public is worthy of at least consideration.

http://www.nobelprize.org/nomination/economic-sciences/

The totality of the weight of production is tipping in favor of at least an application being sent.

Definitely Team-Russ!

Pete S writes:

Regarding 3 and 4.

3. Taxes are more than 50% used for redistribution. Not only that but the redistribution that goes on is more than taxes cover as almost no developed countries are balancing their budget.

4. Governments lack really good feedback on their services. Market feedback is better than the feedback you get from the government doing research or redistributing money. This is not to say that these things shouldn't be done, but they surely should be done in a way that includes balanced budgets which is currently not the case.

A company that isn't returning an operating profit will go under. A government department of spending program can go on for a long, long time because of the financial heft of the government.

Greece, Britain in the 1970s and other examples are what can happen when governments spend too much, mostly on wealth transfer, and fail to set up the conditions for sufficient growth.

Discussing bridges and the police is one thing, but it's health care & transfer payments that are now the bulk of government spending and their size and efficacy is what should be discussed.

Also, as a final point Roberts says that US roads are much worse than the roads in New Zealand and other places. I've lived in the US, two European countries and Australia and disagree. US roads are actually quite good. How many 4 lane highways are there in New Zealand that are like US interstates?

Ajax4Hire writes:

Luck is Robert Frank's God.
Like the casino visitor, he prays at the alter of good luck.

Apparently he thinks that...
luck is unequally distributed.
Those who have good luck eventually attain advantages that lead to good outcomes as well as wealth.
Since luck is not evenly distributed amongst the population, a redistribution of the fruits of good luck is required.

Go listen to PragerU.com talk on
"Why Bad Luck is good"
https://www.prageru.com/courses/life-studies/why-bad-luck-good

And no, you are wrong.
Some college students DO graduate with no student debt, of that you are wrong as well.

As as final note;
One of the few times I had to stop listening because the path was so wrong.

Amy Willis writes:

@Pete S, Great point about feedback...From a public choice perspective at least, a balanced budget would indeed be one sort of feedback mechanism...But what else could be done to promote feedback loops similar to those found in markets? Unanimity rules? What about with elected officials? What do you all think?

Jeff W writes:

Towards #4:

Frank is right in many ways. Throughout this episode Russ was telling us the way things are. For instance, he used the example of revenue generated from speeding cameras to elicit the emotional "yuck!" response to current government spending.

But Frank was telling us the way things ought to be, and that's much more compelling. "Government needn't be this way--check out Scandinavia" was largely his rebuttal to Russ's points. Surprisingly, Russ didn't use some of the rebuttals he's used before to this point ("Well, we aren't Norway..."). He kept returning to, "But that's not how things are!" That's not really refuting Frank's points.

I'm sympathetic to Russ's points, and it's debate I have very often with friends and family. But if we are going to advance a vision for limited government, we need to win the "...and it ought to be this way" argument instead of attacking the way things are. I've heard Russ make this argument before, and I'm surprised he didn't counter Frank with it.

SW writes:

I have to admit I found this podcast somewhat frustrating to listen to. Clearly Roberts and Frank are both highly intelligent individuals who approach this issue from two fundamentally different theoretical standpoints. However, the amount of straw-man arguments and special pleading that Roberts was doing clearly made it appear as though he was on the defensive the entire time.

Dan Hanson writes:

As soon as I heard the topic was about 'luck', I knew the author was going to wind up making an argument for wealth distribution and for a more communitarian and less individualistic view of society. This has become a meme of the redistributionists, so he's just advancing the narrative.

Of course luck plays a part in our lives. We live in a statistical universe. And of course there will always be lottery winners or other outliers. But for the vast majority of people, they will experience many events of good luck and bad luck.

'Lucky' people tend to be those who know how to maximize their gains from good luck and minimize their losses from bad luck. For example, if you know you are going to play in a poker game, you can either just wade in and bet your 'feelings' and hope to get lucky, or you can work hard and study the game and be disciplined.

Over the short term, either player can win or lose, depending on how lucky they are. But in the long run, the good player is getting all the money,

I work in a large engineering firm. If I look at the people who have advanced, and the ones who haven't, I ca't think of a single one near the top who is there because he or she was 'lucky'. Generally, the people who advance to the top (and therefore make the most money) are exactly the people you would have expected to advance, given their contributions and work ethic.

Counting on luck ( or blaming other people's success on it) is not a helpful way to look at life or society. I much prefer Robert Heinlein's take on it:

"There is no such thing as luck; there is only adequate or inadequate preparation to cope with a statistical universe."

Not universally true, but a much better philosophy to live by than, 'Hey, I just got lucky. Nothing to learn from here.'

Mark Crankshaw writes:
1. After listening to this week's episode, how much of a role has luck played in your life? To what extent have you underestimated the role of luck?

See Dan Hanson's comment. It's a good one.

2. How does the analogy of headwinds and tailwinds explain people's ability to perceive the role of luck or chance? Why does this asymmetry suggest people aren't willing enough to contribute greater tax payments for social services? Explain.

This asymmetry, even if true, doesn't account at all for my unwillingness to contribute greater tax payments for social services. I have had good luck and some rotten luck. I have made some good decisions and some bad ones. What separates me from those who benefit from social service spending, however, in my view, is not luck. Those who get the benefits of social services typically make a series of catastrophically bad decisions.

It is compounded by the fact that there are millions of males (they don't merit the term men) in our society that are criminally irresponsible when it comes to sexual reproduction and living up to the responsibilities of providing for the children they unthinkingly "father". This isn't a result of "bad" luck, this is called "gaming the system" and the system is being gamed big time.

These men know full well what they are doing and what the effect will be on their children. They have also been made fully aware that the taxpayer will foot the bill for their irresponsible and incontinent sexual behavior. They simply do not care. That's all I need to know to resent my money from being taken to support their kids.

3. What does Frank mean when he says, "it's just a cognitive error to think that taxes are going to hurt as much as you think they will?" How convinced are you by this argument?

Not surprisingly, I am not convinced in any way. I can easily envision higher taxes leading to a diminution of my standard of living without any corresponding benefit from what those tax dollars are (mis)-spent on. Swollen budgets for DOD or HHS isn't going to do one thing for me. The US government has squandered trillions to end poverty--they've only entrenched it. The US government has squandered trillions to "protect" its citizens from foreign aggression--all the while pursuing policies that engender foreign aggression. The US government has squandered trillions in an effort to "improve" primary education-- all to no measurable effect. The US government has squandered trillions to over-subside health care consumption, then claims it needs trillions more to stop health care prices from rising. The US government siphoned hundreds of billions of dollars out of the national economy, starting in the 1960's and continuing till today, into Detroit in the form of transfer payments and financial aid to Detroit public schools. What does it have to show for that particular "investment" other than the election of corrupt Democrat politicians intent on only "rinse-and-repeat"?

The only thing the US government seems competent to do is to take money out of "Peter's" pocket to pay "Paul" so that "Paul" will vote to keep the political scam running. While a "Paul" like Robert Frank may think this is great, this "Peter" is rather sick of that particular arrangement...

4. Frank suggests that Roberts's "government bashing" serves only to contribute to the problem of ineffective or non-responsive government. To what extent do you agree, and why? How might Roberts's effort be better spent?

Again, I don't agree with that premise at all. The reason "government bashing" comes naturally to millions of Americans is because the US government is, in fact, cynical, nasty and exploitative as well as ineffective and non-responsive.

But the causality doesn't flow the other way-- pretending that the government isn't cynical, nasty, ineffective, exploitative, and non-responsive isn't going to make government effective and responsive. Wishing that the government were effective and responsive will work about as well as a morbidly obese person wishing they were thinner without making any other changes in lifestyle and eating habits. Unless our government were to change the way it does "business", which it has shown absolutely no inclination in doing, then no amount of hope or pretending is going to change how it performs or how people then rightfully see it...

I say "steady as she goes", Russ...

Paul O'Sullivan writes:

Listening to Frank talk about luck reminded me of the CAPM. The error term in the CAPM is assumed zero because negative errors will balance against the positive ones in the model. What else could it be? Even if it's not true, couldn't you say the same thing about luck in life? I've had awesome luck and I've had huge rounds of bad luck too. I don't know if it's a push but I do know there's no way I could quantify either one.

His comment about how high taxes wouldn't preclude super nice goods from ending up in the same hands as his big idea got me thinking. I really don't think this idea is true. He has to assume that the supply curve for said products is stable at the higher tax regime. There's no way it could be.

Example: Fewer people would buy Ferraris if there simply was fewer dollars in their pockets. Ferrari could perhaps attempt to offer their cars for less money but they'd eventually not make any profit. Ergo, they'd stop making them or come out with less expensive models.

Dave writes:

This talk of luck is just silly. Everyone knows that when bad things happen it isn't the result of bad luck, but the the obvious consequence of an imbalance of bodily humors, perhaps caused by a toad or a small dwarf living in ones stomach.

Craig writes:

The excuses people invent for rationalizing and conning others into favoring a totalitarian society are without end! The divine right of kings, the supposed economic benefits of central planning, racism (both upholding it and opposing it!), saving the planet, the worship of democracy, etc. and now the redistribution of luck. The only constant is the invariable end sought: an unfree society.

Craig writes:

I think it is probably a mistake to go to the trouble to refute the arguments trotted out by these advocates of totalitarianism because that entails granting their basic premises. Furthermore, it is futile since the validity or details of the arguments they present are not what is really important to them; they will only make up new excuses for the same end. It would be better to identify that end and deal with their underlying premises directly.

Carl Jones writes:

Great interview. Just for the record, I declined a job opportunity in California because of the increased income tax rate. My wife and I are both from California, but once the income tax rates were raised, we decided to take a position in Florida instead.

VA writes:

Limited government fans, I'm surprised you're not more enthusiastic. I'm fascinated with the thought experiment this tax scheme presents.

Russ and many commenters seem to assume that Frank's consumption tax scheme implies a greater tax burden on wealthy individuals. I don't think that's necessarily so.

I understood Dr. Frank to be discussing a scheme in which tax burden is based on what you spend, not what you earn. (taxable income = income - change in savings - $30K)

This sounds like a Roth IRA on steroids. Saving reduces your tax liability. Pay no taxes now; when you spend the money in your retirement, you'll get a nice $30K deduction each year. The gov't stays out of your way much more than under the current system, unless you're spending millions each year.

I'd expect charitable contributions to be exempted, which would have to be a major coup for people like Russ who would prefer to fund privately administered charities as opposed to gov't programs.

As one commenter noted, Ferarri will eventually stop making their highest-end cars. I'm curious whether that's a bad thing or a good thing. I support wealthy individuals' right to own whatever they desire and can afford. At the same time, might'nt there be a lot of benefit if the *market* saw fit to divert the economic activity related to developing that highest-end Ferarri into other activities (i.e. developing better goods and services aimed at a wider range of customers)?

In general terms, I'm curious how a decline in the luxury sector would affect all of us. Initially, there would be pain as providers of luxuries suffer. Eventually, we'd hope luxury providers would find other niches, which might be good news for almost everyone.

Even if you're currently a big-time consumer of luxuries, it's possible even YOU would benefit from a contraction in the luxury sector. You'd probably be willing to trade better healthcare for a little reduction in the performance of your supercar, for instance. There are probably also consumer electronics breakthroughs or safety technologies that would make it worthwhile for you to downgrade from an ultracar to a supercar.

It's interesting to think of the cultural impact, too. I suspect "conspicuous consumption" would start to look tacky and unappealing. If the rich reject being showy, there's less of a moral hazard for others to engage a lifestyle they can't afford.

One detail to be ironed out is how "saving" would be defined. If people began to feel that banks and/or the stock market seemed shaky, it would be terrible for the taxation system to continue pushing people into those investments against their better judgement. Could this scheme be broad enough to allow people to store value in other ways?

On a related note, there are probably very good reasons why we don't currently show the IRS (directly) what's in our savings accounts and stock portfolios.

jw writes:

VA,

I think that you missed a few of my earlier points. Ferrari CAN'T shift to lower end cars, not within a five year window as that's how long it would take to adjust. By then they will be out of business.

When Sen Kennedy forced through an earlier "luxury tax" in 1990, yacht and private plane builders started laying off workers by the thousands. Since these were mostly union workers, the law was quickly repealed. This consequence was never "unintended", it was predicted by many economists, but the left's drive to demonize Republicans (by inventing an "all Republicans are wealthy" meme - never mind Clinton's and Kerry's hundreds of millions) overshadowed simple logic (see the 2016 minimum wage laws).

Speaking of yachts and private planes, recall that MA put a luxury tax on docking yachts and that their favorite son Kerry docked his yacht in RI to avoid paying the tax. And the Clintons' use a pseudo-charity to pay for their better-than-first-class travel to help dodge their high income taxes. Do what liberals do, not what they say.

You also fall for Frank's mirage that a consumption tax will replace the income tax. It will never happen and has never happened. It will only and ever be an additional tax.

Lastly, although you claim not want to restrict what people do with their money, you then hypothesize that what you want them to do with their money would be better for them. Sorry, it is the same level of hubris.

Terence Dehart writes:

1. After listening to this week's episode, how much of a role has luck played in your life? To what extent have you underestimated the role of luck?

- I look at the major turning points in my life, and I would attribute most or all of them to God's grace. I worked hard to make the most of them, but I think they mostly fell in my lap.

3. What does Frank mean when he says, "it's just a cognitive error to think that taxes are going to hurt as much as you think they will?" How convinced are you by this argument?

I have arrived at a spot where taxes really don't hurt economically, but that is because I have structured my life so they costs are baked in. What hurts is that they are used in ways that harm people.

4. Frank suggests that Roberts's "government bashing" serves only to contribute to the problem of ineffective or non-responsive government. To what extent do you agree, and why? How might Roberts's effort be better spent?

This was the part of the discussion that drove me crazy. We are handing money to individuals, not some theoretical disinterested deity. Government is a net negative because the individuals there take care of themselves first, their enablers second, and the theoretical beneficiaries follow a distant third. Furthermore, the intended beneficiaries may actually be promoting or inflicting moral evils with my money.

I apologize for shouting at the podcast during those sections.

dbh writes:

I have a very different take on the relationship between the perceived role of luck and willingness to support larger government. I look upon myself as very fortunate to be where I am. Sure, I work hard and I am good at my job. But many other people would have done the same or more, given the breaks that have gone my way.

Since I don't think of myself as largely self made, and I do think of myself as the beneficiary of a lot of good luck, I don't assume I can just make more money if the government takes it away. Rather, I think that the money the government takes is gone, and it is not realistic to assume that someone will drop another pot of gold on me.

This makes me less interested in giving away my money to anyone for anything. The gravy train could stop at any minute, and I will need those assets.

Maybe I would feel differently if I believed that supporting large government spending would increase my likelihood of getting help when my lucks runs out. But I see a huge share of the money that goes to government as wasted or stolen, and I don't see any link between what I pay and what I get now or in the future. Yes, if I end up poor because my luck runs out, then I would like someone to help me. But I don't think that is likely to happen, whether I pay high or low taxes now.

Recognizing the role of luck makes me more reluctant to spend money on government, or anything else.

JimST writes:

While luck plays a large role in the short term, how you respond to good and bad luck will have a lot to do with how your life plays out. Persistence can overcome luck in the long term. We all get both good and bad breaks. How you deal with these has a big role in your life.

I agree that gratitude for the things you have, both big and small, material and not material, plays a big role in having a good life This is a spiritual value far more than an economic value. Saying that paying more taxes is what we should do to express our gratitude is a very narrow view. There are lots of ways we can express our gratitude every day, both material and non- material, that are far more impactful than taxes.

I was surprised by he discussion of a consumption tax and the unrealistic assumptions about the behavior of the wealthy. Most wealthy people I know consume only a very small part of their assets. Most of their income is reinvested- that is how they build wealth. The people described in the book "The Millionaire Next Door" are more like the people I know than people with mansions and big boats. There are some who do not fit this pattern (young athletes and entertainers come to mind) but there are a minority.

The simple formula Imcome- Change in Savings- $30K= Taxable Consumption would likely result in less taxes on the wealthy than the current system given the true behavior of the wealthy since they will reinvest (ie place in savings) most of their earnings. For those who religiously believe that higher taxes on the wealthy are the solution to our problems, this would not be good so the system would not last long. We'd need a lot of rules and sub-rules to make sure this didn't happen.

I also do not see that the government (which in is broadest sense means the opinion of other people) are going to make better decisions than I am on what is acceptable to spend money on. A couple of examples;

1 I spend a few weeks working in a remote part of Africa. Annual average income is supposed to be $200/yr but this doesn't really reflect reality since every lives on subsistence farms so that housing, food, and even some clothing does not end up in the GDP. Anyway, this area was 4 miles off the grid but almost everyone had cell phones. They would walk to town on a weekly basis to pay someone a small fee (perhaps 25 cents) to recharge thier phone. To many outsiders, it seem a unwise choice but communication is a very basic need.

A second example was a discussion I have a few year ago comparing vacation plans with an acquaintance. He was taking his family of 4 on a Costa Rico Eco tour. I was going snowmobiling in Northern MN. He was rather disdainful of my choice, saying it was not good for the environment. I ran the numbers- his trip to Costa Rico would burn 4-5 times as much fuel as my trip. Yet one may be considered acceptable to a certain group of people while the other is not. Nothing against Eco tours- I have been to Costa Rico and highly recommend it. Its just not necessarily a better or more moral choice than going snowmobiling. As an aside- the snowmobile trip was much cheaper. (And as a crude first approximation, the cheaper you are the greener you are)

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