Apparently, when Greg Mankiw isn’t smugly referencing his own textbook on his blog, where
criticism comments are banned, he finds time to write papers on the most important political issues of our time. In his most recent offering, he is defending the poor old 1%, who are just so upset with the various criticisms directed at them by the plebs that they simply can’t take it anymore. If we are not careful they will stop creating wealth and we’ll all be doomed.
OK, enough snark for now. What Mankiw has done is written a paper literally titled ‘Defending the One Percent’, where he takes a pot shot at the Occupy Wall Street movement, and everyone else who – unjustifiably, it seems – directs their anger at the wealthiest people in society. Mankiw uses a Cold Hard Dose of Economic Logic to show us lefties how the real world works.
Typically, Mankiw starts with a quasi-perfectly competitive story about income distribution:
Imagine a society with perfect economic equality. Perhaps out of sheer coincidence, the supply and demand for different types of labor happen to produce an equilibrium in which everyone earns exactly the same income. As a result, no one worries about the gap between the rich and poor….
…[t]hen, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product…everyone in society wants to buy it…The new product makes the entrepreneur much richer than everyone else.
Let’s for now ignore that we’ve gone from the impossible world of perfect competition into a Schumpeterian/Randian vision of dynamic entrepreneurs, two worlds which are surely fundamentally incompatible. Let’s even ignore the fact that, far from originating in the minds of heroic entrepreneurs, an overwhelming number of innovations come from, or have their roots in, public funding, including the iPhone Mankiw references.
The main problem is that, contrary to Mankiw’s claim that:
…this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades.
This is nothing like what has happened, and is not at all what OWS and those like them are complaining about. The majority of the 1% are “managers, executives, and people who work in finance”, while the rest is composed of a mixture of people who are by no means Randian superheroes: for example, there are twice as many ‘not working or deceased’ (read: living off daddy’s wealth) as there are in “arts, media, sports” (celebrities) – the latter could, I suppose, be said to contribute something worthwhile, and have some talent.
Mankiw goes on to admit that it would indeed be a problem if the picture painted by the facts were true:
On the other hand, some of what occurs in financial firms does smack of rent seeking: when a high-frequency trader figures out a way to respond to news a fraction of a second faster than his competitor, his vast personal reward may well exceed the social value of what he is producing.
But here he completely ignores whether or not this is actually what’s happening, instead focusing on what really matters:
For example, if domestic firms are enriching themselves at the expense of consumers through quotas on imports (as is the case with some agribusinesses).
It’s the bloody farm subsidies! Evidently OWS should take their protests to Iowa, the morons. Alternatively, Mankiw would have done well to reference the fraud, publicly funded bailouts and general corruption that got the 1% where they are today.
The American Dream
Mankiw now repeats some standard blatherings about The Land Of Opportunity And All That. He notes that income persistence may be partly genetic: that is, the 1% are just a superior breed and we really shouldn’t worry too much. He references a paper that studies adopted children, and sums it up:
Indeed, Sacerdote estimates (in his Table 5) that while 33 percent of the variance of family income is explained by genetic heritability, only 11 percent is explained by the family environment. The remaining 56 percent includes environmental factors unrelated to family.
I’ll ignore the question of whether it is ‘unfair’ or ‘lucky’ to inherit good genes, various problems with IQ and so forth (for those interested, Ben Bernanke spoke about this eloquently in a recent speech). For the real issue here is that leaving the majority of the data unexplained and then throwing your hands up in the air is no conclusion at all.
Mankiw has deliberately narrowed his focus of social immobility to the effects of the family, but this is not necessarily the problem: it is that those who are poor will be born in bad neighbourhoods; will go to worse schools; will not move in the right circles; will not inherit money. It takes some real obfuscation to deny that social mobility is low in the US, where one’s income bracket is undoubtedly largely determined by that of one’s parents. Does Mankiw know, for example, that being born rich but not going to college is 2.5x more likely to make you rich later in life than if you are born poor but go to college?
He finishes the topic with this gem:
My view here is shaped by personal experience. I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age.
Well, that’s the matter settled then, folks. Mankiw doesn’t really feel like social immobility is a problem, based on some vague observations about his own life. This is after he previously castigated Joseph Stiglitz’ book for relying on anecdotes, by the way.
Mankiw then gives the verdict, based on his conclusions that neither rent-seeking nor social immobility are a major problem:
If the growing incomes of the rich are to be a focus of public policy, it must be because income inequality is a problem in and of itself.
Let’s forget how wrong Mankiw is about everything, and assume income inequality is a result of ‘natural’ forces of whatever he wants us to believe. If Mankiw is driven by the evidence, this sentence alone should make him want to reduce inequality: the authors of The Spirit Level showed that income inequality is associated with a wide range of social ills (if you tell me they confused correlation with causation then I’ll assume you have’t read the book). These observations hold true no matter how countries gain their equality: for example, in Scandinavian countries the equality is achieved through progressive taxation, whereas in Japan pre-tax income is already quite equal and progressive taxation is not as necessary. Equality is beneficial for people in every income bracket, across a wide range of societies.
As if that wasn’t enough…
Mankiw now takes us to neoclassical fairy-land, introducing us to a model whose assumptions essentially assume its conclusions. In this model:
redistribution is hard to accomplish, because the government is assumed to be unable to observe productivity W; instead, it observes only income WL, the product of productivity and effort. If it redistributes income too much, high productivity individuals will start to act as if they are low productivity individuals.
In other words: we assume the rich are productive and the poor aren’t, and that redistribution will make the rich less productive. We then conclude that redistribution could be risky because it would mean society produces less! It’s not really worth going into the specifics here, because the best bit of this section is that Mankiw then pokes a couple of holes in the model – with the goal of finding reasons to doubt the efficacy of redistribution – before concluding that:
I believe there are good reasons to doubt this model from the get-go.
Me too. Let’s forget about it.
Mankiw then chronicles the various problems with comparing the level of satisfaction different people with different tastes get from having more income, and implies that because of this we can’t really know whether or not to ‘redistribute’ money:
as of now, there is no scientific way to establish whether the marginal dollar consumed by one person produces more or less utility than the marginal dollar consumed by a neighbor.
Well, yes: utility is imaginary, we all know that. But really this isn’t the point. All people want is enough to have a decent standard of living, healthcare, education and so forth. Really, the idea that we need to do some sort of Benthamite calculation of society-wide pleasure is a construct of Mankiw’s; something only an economist could infer from looking at OWS.
Mankiw’s final word
Mankiw now sums up – yes, we’re almost there:
It is, I believe, hard to square the rhetoric of the left with the economist’s standard framework.
Yes, it is. But then, if you bothered listening to your political opponents beyond a few placards and caricatures, you’d learn that the left – and the general public – have many reasons to doubt this framework. Perfectly competitive models that don’t even have banks in them are hardly relevant when we are discussing animosity towards the finance industry and the clear impact it has had on real people.
Mankiw finishes with three points: number one is that the left argue the current tax system is regressive. This is something I have not heard before and it seems largely irrelevant – the real question is whether it is progressive enough. The second point is a restatement, with scant evidence, that the 1% aren’t the 1% because of rent-seeking, something I rebutted above. He offers some stylised facts about shareholders and CEOs which are really besides the point when we are talking about the entire finance industry.
The third and final point is based on the idea that the wealthy benefit from being in society, so should pay their fair share. Mankiw’s ‘rebuttal’ to this point is essentially to assert incredulously that the top already pay enough for some reason:
As I pointed out earlier, the average person in the top 1 percent pays more than a quarter of income in federal taxes, and about a third if state and local taxes are included. Why isn’t that enough to compensate for the value of government infrastructure?
Well, there are a few reasons we may want to tax the wealthy more: if their incomes are acquired unjustly; if inequality has pernicious effects; if the money is needed to reduce the deficit. All of these things are true based on the evidence I and others have presented. Ethically speaking, we might even make the stronger point that no income distribution is neutral in terms of policy, and taxation is really just one prong among a wealth of government-backed institutions that affect how incomes and wealth are distributed. Hence, the moral question of ‘redistribution‘ becomes something of a moot point, and Mankiw’s implicit notion of ‘just deserts’ is revealed to be spurious.
Mankiw and those who agree with him need to learn that the animosity toward the 1% does not rest on interpersonal utility comparisons, envy or whatever else. It is an expression of the dissatisfaction and outrage ordinary people feel when those at the top not only commit crimes but seem to flaunt their lawlessness; when they suck vast sums of public money out of the government, only to tell those in need that there’s not enough left for them; when they create massive, global economic problems through their incompetence/arrogance/selfishness; and when they have the political and economic power to make sure that nothing is done to remedy the situation they have created. It is a problem economists like Mankiw, with their largely irrelevant models, are ill equipped to solve and may even be blind to. Unfortunately for them, everyone else can see the problem clear as day, and will hopefully view out-of-touch articles like Mankiw’s as the snake oil that they are.
Update: the paper is chock full of gems, and naturally many other rebuttals have sprung up, covering areas I did not:
A write for The Economist takes issue with Mankiw’s Randian superhero story, and highlights his absurd ‘progressive taxation = compulsory organ donation’ analogy.
Tomas Hirst focuses on Mankiw’s ‘education education education’ argument, and finds it wanting.
Matt Bruenig gives Mankiw a lesson in political philosophy, exposing his implicit ‘just deserts’ hypothesis’
Commenter Magpie notes the reality of wealth and power, showing how selective Mankiw was with his list of ‘entrepreneurs’.
Commenter Luis Enrique says Mankiw is ’embarrassing the economics profession’, offering some examples of economists who are not shills.