Rational economic man, that construct beloved of many economics textbook authors, is hardly a superhero. Indeed, a nontrivial fraction of the population behaving as him can seriously weaken a number of our social institutions.
For instance, imagine that rational economic man is getting up in years and wants to leave his estate to his heirs, but to avoid all estate taxes and the like. Normally, we don't allow this, imposing a rather stern estate tax on large estates. But rational economic man is clever, and gives not a damn for any transcendent properties of our institutions. So he strategically divorces his wife, strategically marries his granddaughter in law with a clever prenuptial agreement, and then divorces her to remarry his former wife while his grandaughter in law remarries his grandson. Trampling of course all over the spirit of marriage, but transferring an arbitrary portion of his estate to his grandkids and dodging all the clever barriers society has deemed fit to place in his way. Rational economic man can also make use of the institution of marriage to transfer citizenship (in India, for instance, such is generally valued at around 100k in their marriage markets), to enjoy privilege against having to testify against one's spouse, and as a general way of transferring assets beyond the limits of the gift tax without creating a taxable event. He can also use it to confer his health plan to a spouse and their children for primarily financial reasons (generally health plans do not expect that spouses and children will be adversely selected...but rational economic man will certainly do that). To top it off, he can also arrange to game the Social Security system after his death by transferring his benefits to a vastly younger woman.
But rational economic man is just getting started. During the real estate boom, he purchased a house valued at 400,000 dollars, taking out a standard 30 year mortgage in a non-recourse state (California of course). Owing to the housing market collapse, his house is now valued at 200,000. Rational economic man therefore stops bothering to send his mortgage checks (which he can still easily afford, as he is RATIONAL economic man, and did not take a mortgage that he couldn't afford). He knows that it'll be upwards of a year before he is foreclosed upon, and might even accept a principal reduction (to 200,000) if such was offered by the lender. He's quite the ruthless borrower. He knows that inside 7 years any damage to his credit rating will be effaced, and rationally values the 200k (and the 12-18 months of rent-free living) more than it. In essence, he treats the non-recourse option on mortgages in his state like a put option on the property that he purchased. Want to know what happens when lots of people take this position? Just wait, you'll see. Non-recourse mortgages, bankruptcy forgiveness after 7 years, and a number of other laws were put in place to avoid putting the genuinely needy into debt slavery as a result of bad luck or mishap. They won't survive a lot of people gaming the system and the rest of us feeling like suckers for playing by the spirit of the rules. Previously, social sanction, shared values, and mild social ostracism limited the gaming of such systems, but one can presently seriously question whether there actually IS an overall society now, and certainly whether it shares values. With corporations and banks freely defaulting whenever it is profitable to do so, and frequently being bailed out by the government, it is very hard to argue that the little guy should still be required to play according to the spirit of the rules...to stay cricket, so to speak.
So where am I going with all this? The common thread is the desacralization of our social institutions---marriage, lending, and the like. We have put in place a number of refinements to our rules regarding these institutions that have the effect of shielding most people from a number of onerous hardships. For instance, we wouldn't feel right about holding Joe in debt bondage indefinitely when his life takes a turn out of the book of Job. Our bankruptcy laws, for instance, go back to the tradition of Jubilees described in the Old Testament. Our rules surrounding marriage are based on a presumption of a transcendent quality in said relationship. We would all be poorer if we had to drop all of the privileges of marriage and of borrowers in general that could not be sustained in the presence of the Rational Economic Men. So clearly we need to avoid taking actions and setting policies that encourage this desacralization. This is, IMO, one of the strongest arguments against extending marriage to gay couples. It is also a pretty strong argument against no-fault divorce.
Alternatively, we can dump the notion of the income tax and the estate tax in general, opting to raise money in some fashion that doesn't care about the particular economic unions that exist in the society as a whole, probably a consumption tax. We would also have to make significant revisions to our immigration law and make pretty much all loans full-recourse (in addition to returning to the days of at least 10% down so the borrower has 'skin in the game'). We would also have to seriously evaluate the bankruptcy laws and most likely make them far more punitive in general. To invert the words of Bush the First, we would have to establish a meaner, harsher society.
2 days ago