I don't think anyone is surprised at the reaction to Mankiw's forthcoming JEP article. Discussions about the distribution of income get people excited. I read Mankiw's piece, and thought it was a decent summary of what economists have to say about the distribution of income and wealth. Mankiw's own views certainly enter into it, but he makes it clear when he's relying on serious research, and when his argument is based only on casual empiricism.
There are two main points. First, Mankiw argues that the increase in dispersion in the income distribution in the United States is due mainly to two factors: technological change driving an increase in the relative demand for highly-skilled labor, and a scarcity of high-skilled laborers. He could add international trade as a third factor - the idea that wages of low-skilled are lower than they would otherwise be because of lower barriers to trade and a plentiful supply of low-skilled labor abroad. But the point is that most of the change in dispersion is due to factors that have little to do with government activity (except perhaps trade policy), i.e. with tax policy and regulation. I think those conclusions are not particularly controversial among economists who have worked in this area.
Second, Mankiw argues that, to the extent that there is something "wrong" with the income distribution, there are better ways to do the fixing than by changing the way we tax income. If government regulations serve to protect inefficient monopolies, or allow financial institutions to practice what is essentially theft, then we should change those regulations. If patents promote inefficiency, we should change our patent laws. If opportunities are poor for people living in inner cities, we need to be thinking about how we can promote education in those neighborhoods.
Tax policy is something we have to be careful about. Micro evidence seems to tell us that the incentive effects of income taxation are small. But, for example, work by Manuelli, Seshadri, and Shin tells us that, if we look at the full array of tax and retirement policies, and take account of lifetime decisions about capital accumulation in general equilibrium, then the incentive effects are big-time.
So, for the most part, I agree with Mankiw. I think we also a agree about "enrichment" programs for kids. This actually goes much beyond summer camps. At Washington University in St. Louis, where I work, undergraduate tuition fees for the 2013-14 academic year will be $44,100. What do students (or their parents) get for their money? As Mankiw says, a lot of it looks like consumption rather than investment. Indeed, a walk through campus can remind you of a summer camp. Rich parents certainly want to send their kids here, but there's no guarantee that sending them here will perpetuate family wealth. Apparently, taking economics helps, though.
Tax policy is something we have to be careful about. Micro evidence seems to tell us that the incentive effects of income taxation are small. But, for example, work by Manuelli, Seshadri, and Shin tells us that, if we look at the full array of tax and retirement policies, and take account of lifetime decisions about capital accumulation in general equilibrium, then the incentive effects are big-time.ReplyDelete
It's always pretty easy to dig up a paper supporting any given proposition...
Mr. Cynic. There is indeed good work in economics that tells us something useful. Manuelli, Seshadri, and Shin are people I know well, and I can vouch for their work. It's excellent.Delete
I should add that citing a paper or writing a blog piece is easy. Writing that paper was not.Delete
I enjoy both your blogs very much but there is little value to be found in Mankiw's paper; that is, unless you substantially revise and redact it as I would say you (SW) have done! I found his political and moral engagement juvenile. His characterization of OWS was simple minded. His engagement with genetics was 30 years behind the literature (part from not a thorough read of the paper he cited, and part from a lackluster usage of the term HERITABILITY, which itself confounds environmental factors. As a corollary, I found his engagement with Stiglitz unsatisfying. Not his best work IMO!Delete
Manuelli, Seshadri and Shin, so you know them well . . . .
And that makes their work excellent ???
So, tell me what you think is wrong with their paper.Delete
I was a little confused; don't we want Mankiw to write fewer articles? I saw all his objections as things that are actually working as intended. Isn't it a design feature of progressive income taxation that the already-rich will then work marginally less? Thus allowing the less-rich more opportunity to work?ReplyDelete
I don't want to put words in Mankiw's mouth, but this is what I would say. I think we can agree that it is optimal to have some social insurance. There are many ways to provide that social insurance, one of which is a progressive income tax. As with all insurance, there is a tradeoff. More insurance is bad for incentives. So somehow we have to figure out what the optimal amount of social insurance is, including how progressive the income tax should be. I interpret Mankiw as saying that there is no compelling reason to think that the U.S. income tax system should be more progressive than it is now.Delete
I agree with Mankiw that this problem may not be best addressed in a utilitarian framework. However, he nixes the Rawlsian framework using his kidney example. While I agree that individuals have certain rights over their kidneys and the fruits of their labours, I think that the rights that libertarian or 'just desserts' thinkers want to protect are too narrow. Amartya Sen would ask, is not the freedom to live without fear of undernourishment, poor health or lack of opportunity just as important?ReplyDelete
My prior belief is that the army of financial industry lobbyists in Washington are evidence that there is quite a bit of rent seeking going on in the financial sector. However, if someone disagreed with me it would be hard to get the data to settle that.
Mankiw did a service by presenting an alternative viewpoint in an academic way. He could have been more controversial but he presented all the arguments.
Maybe, just maybe, we should focus on making higher education more affordable and less like a "summer camp". And if you teach at a university, why the hell aren't you a part of that solution?ReplyDelete
Second, the blog post neglects, as does Mankiw, to address published research by Peter Diamond that the optimal tax rate on the top end is at around 70 percent.
If you're going to be intellectually honest and not a hack, deal with opposing views. This is piece isn't worth of any academic.
"...Peter Diamond that the optimal tax rate on the top end is at around 70 percent."Delete
Read Manuelli/Seshadri/Shin and the references therein. Diamond is getting that result from a measured micro elasticity that he's misusing.
"I read Mankiw's piece, and thought it was a decent summary of what economists have to say about the distribution of income and wealth."ReplyDelete
Just to clarify here: Mankiw spent the first part of the paper going over some empirical claims about the degree of inequality of opportunity in the US and the causes of inequality. You agreed that his summary here followed the consensus?
But the second half of the paper was all moral and political philosophy. I'm not exactly sure what economists have to add here(although it's great to see Mankiw's normative judgements laid out clearly and explicitly). I thought his treatment of utilitarianism and Rawls was pretty shallow and unconvincing. Though he was trying to cover a lot in a short paper...
You're being rather pejorative, I think ("shallow" and "unconvincing"). There was nothing particularly wrong with the philosophical part of the paper, but I didn't find it very useful.Delete
"Shallow" is a bit pejorative (though IMO appropriate, as a description of the depth of insight Mankiw displayed), but "unconvincing" is hardly perjorative. If I'm not convinced by something, why can't I say it was "unconvincing?"Delete
"There was nothing particularly wrong with the philosophical part of the paper . . ."
If you were familiar with the philosophical literature, you'd find quite a bit wrong with it. Rawls’s argument is badly mischaracterized (kidneys aren’t Primary Goods, and Rawls’s two principles of justice are misconceived as a scheme of social insurance), the Steve Jobs example is nothing more than Robert Nozick’s Wilt Chamberlain example, which has the subject of withering critiques by T.M. Scanlon among others, Mankiw misses Ronald Dworkin’s distinction between option luck, e.g., choosing between careers without knowing their future payoffs, and brute luck, e.g., your place in both the social and natural lotteries of endowment, which bears heavily on the issue of “just desserts,” etc., etc.
I should have said that I didn't find anything wrong with the philosophy. I know little about philosophy, and never had the urge to explore it much. To the extent that I run into it, I don't find it helpful for thinking about economic problems. Indeed, if it were me writing the JEP article, I would have left it out. Obviously you know something about philosophy. Maybe you could tell me why I should learn more about it.
"Obviously you know something about philosophy. Maybe you could tell me why I should learn more about it."Delete
I'm not Greg. But there's a clear response to make here: Mankiw is making an argument that we should not excessively redistribute wealth (beyond what his just deserts principle would prescribe). This is a moral argument, that needs philosophical reasoning and backing. No amount of economics (which is a social science attempting to discover the way the world is) will tell us what we ought to do (although it can help inform our decisions of course).
So the question of how/whether we should redistribute wealth is not fundmanetally an economic question, because it is normative. Although no doubt a solid understanding of economics should inform the discussion.
Mankiw made it quite clear he wasn't engaging in his area of expertise in the paper.
If you don't find the questions interesting, that's fine. But I'm not sure why you're blogging about it.
Why study philosophy? Well, economics was once political economy, and many of the greatest economists were also first-rate philosophers: Smith, Hume, J.S. Mill, Marx, Hayek, Ramsey, and Keynes. Several Nobel prizes have been awarded to economists who were well versed in philosophy: Hayek, Samuelson, Arrow, Sen, Harsanyi, and Buchanan, all of whom, with the possible exception of Samuelson, wrote about John Rawls’s Theory of Justice!
Back to Mankiw for a moment. Even if we grant all of Mankiw’s economic propositions, I don’t think he’d have reached the same normative conclusions he did if he’d read Rawls more carefully, read Ronald Dworkin’s essay, “Equality of What?” Joel Feinberg’s “Doing and Deserving,” John Roemer’s “Equality of Opportunity,” and A. K. Sen’s “The Idea of Justice.”
Mostly, though, you’re very smart, I think you’d enjoy broadening your horizons.
"No amount of economics (which is a social science attempting to discover the way the world is) will tell us what we ought to do (although it can help inform our decisions of course)."Delete
I disagree. You could do the experiment and let philosophers run the world, but I don't think you would like the result.
Greg: I don't know. The contemporary economists I admire don't spend much time talking about philosophy, and these aren't all narrow nerds - there are well-rounded intellectuals in the bunch. I'll keep my eyes open though. Maybe there's something to it.
"I disagree. You could do the experiment and let philosophers run the world, but I don't think you would like the result."Delete
I would not like a world run by philosophers, true. There's a hugely important place for scientists and social scientists. Because their job is to figure out the way the world is. And given some moral goals we have (about the way the world ought to be) this empirical knowledge of how to best get there is very important (so we need to target a nominal anchor in monetary policy, because this leads to a better world)
But you've in no way, shape or form argued for how economics has the capacity to tell us what we should value. What, precisely, in the methodology tells us what is valuable in the first place? Have economists bridged Hume's is-ought gap without telling anyone?
"But you've in no way, shape or form argued for how economics has the capacity to tell us what we should value."Delete
I think economics actually does tell us what we should "value." The first thing I was taught in an economics course was the difference between positive and normative. There was this idea that economists could not make value judgements, and that our role was to tell people what the consequences of particular policies are, and then to hand over to politicians the job of deciding which policies to adopt. But I think that idea is about as useful as discussions of the "scientific method." Nobody actually does science in the way the "scientific method" is laid out in high school textbooks. In the same way, we don't do positive and normative in the way I was taught. You can't separate the two, nor should we want to.
Stephen, your response is very interesting. It goes against everything I've been taught in economics and philosophy (although you admit your beliefs are not by the book) and everything I've heard people say. And I'm not at all convinced. But I am interested.Delete
Do you have any links to posts, papers, or names of thinkers who can elaborate on how economics can involve itself in normative judgements?
My hope and assumption was that any economist giving policy prescription should say "Contingent on X being the right moral theory, my economic analysis shows that Y is the right path of action". But I feel you disagree with this.
Mankiw starts out by imagining some economic utopia, where all incomes are equal. Why? How silly! There's never been such a society - and I'll bet there's no sane person in America yearning for such a one. This is a problem with economics - the models and arguments are built on shoddy foundations.ReplyDelete
I think most agree that those who add significant value to the economy deserve lucrative paychecks.
However, the problem today is that many in the 1% are not adding value at the level reflected in their paycheck. The top exec pay scale has dramatically outstripped the pay of most Americans, whose salaries (if they are employed) have remained stagnant over the last 30 years.
Bebchuk and Fried noted in their book, Pay without Performance, that:
"The growth of executive compensation far outstripped that of compensation for other employees. In 1991, the average large-company CEO received approximately 140 times the pay of the average worker; in 2003, the ratio was about 500:1."
It is delusional to think that this increase in disparity is due to the value added by these CEOs - our economy should not be swirling in a toilet if that were truly the case.
Tell me the value added to the economy by Rick Wagoner, who spent 20 years in the C-suite of GM and was ousted when the US government bailed his company. He got a hefty retirement package while UAW employees took a pay cut.
The financial sector turned banking into a Vegas craps table. When bailed out, they got bonused. Thank you GW Bush and Hank Paulson! Mankiw briefly glosses over this by noting that: "devising a legal and regulatory framework to ensure that we get the right kind and amount of financial activity is a difficult task."
The man who advised Mitt Romney on economic policy should have a better response.
We live in a world where exceptionally paid individuals seek to limit the pay of employees and service providers to the barest minimum, while padding their own paychecks to levels that make no sense. In a consumer-driven economy, this is devastating.
Finally, that he feels his children - the children of the head of Harvard's econ department, the children of the man who advised Mitt Romney during his campaign - have the same opportunities he did as the child of people without college degrees - that's an astonishing claim. When middle-class children emerge from college saddled with astronomical debt, their opportunities are clearly very different than Mankiw's were when he was beginning his career.
I agree that other policy issues need to be developed to address the structural issues our economy faces. But also, the tax code needs to be reformed.
"Mankiw starts out by imagining some economic utopia, where all incomes are equal. Why?"Delete
Mankiw writes text books. That's a textbook story to get you thinking about the issues.
I think textbook stories (aka thought experiments) are great, and we can learn something by taking a closer look at Mankiw's story, which reads:Delete
"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."
Mankiw neglects to tell us whether everyone works the same number of hours and incurs the same disutility (for lack of a better term) in working. Suppose Alice works two hours a day doing pleasant things, while Bruce works ten hours a day doing unpleasant things, yet both receive the same money income. I'm hard-pressed to call this "perfect economic equality" since Alice has a lot more leisure time, as well as, more appealing working conditions, than Bruce.
Here's a different thought experiment. Suppose everyone is equally productive, measured in output per hour of labor, and has similar preferences over working conditions. In this scenario, wages for unpleasant work would have to be higher than wages for pleasant work. Isn't this a closer approximation to "perfect economic equality" than Mankiw's story?
A right-wing hack defends another right-wing hack (unlike the former the latter was at least a fine economist before he became a political hack). Yawn.ReplyDelete
Just responding to the blog host's repeated claims that he is a left-winger. If you defend a right-wing hack like Mankiw who has, as I pointed out, written some great papers in his prime ("Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly" was one of the papers which kicked off the nominal price rigidities literature which is nowadays part of mainstream DSGE models) but became a bullshit artists once he started to play for Team Republican, you are the same bullshit artist. Especially if the very paper you defend has a political title like "Defending the One Percent".Delete
What misses in Mankiw's bad paper as well as in Williamson's bad defense is simply political economy. Incomes do not emerge in a politically neutral space. If they would I could claim that somebody who was part of the ruling elite in Stalinism was simply the guy best suited of the job. Hey, he wouldn't make so much money and wield so much power if he wouldn't be.
"Just responding to the blog host's repeated claims that he is a left-winger."Delete
I think you're getting overly wrought-up with the political side of things. I vote for Democrats, and tend to think of the Republican party as pretty scary, but that doesn't stop me from thinking like a scientist. Mankiw was a least trying to think about the economics, and that was what I was responding to. I thought his piece was pretty innocuous, and didn't merit the vitriol.
On Mankiw's own work, I'll have to admit that I'm much less fond than you are of the menu cost stuff. And one of my least favorite papers is Ball and Mankiw's sticky price manifesto. I'm with Lucas on that one (read his comment in the Carnegie-Rochester series).
"Incomes do not emerge in a politically neutral space."
Yes indeed. Collective decisions do matter for the income distribution. As economists, though, I think we understand that all matters related to the compensation of individuals in society shouldn't be decided in Washington. There are strong market forces that route income and wealth to those with high ability and skills, and we play with those forces at our peril. We need to be careful about how we correct for where the market screws up.
Of course fundamentals matter and every good economist looks at fundamentals first. So when there is more intra-labour inequality skill-biased technological change makes sense and when the fraction of labour income to total income falls over time capital seems to get more productive relative to labour (even Krugman thinks like this).Delete
But political economy also matters. Volcker exaggerated when he claimed that the only significant financial innovation during the last decades has been the ATM but productivity in finance has surely not risen as quickly as income in finance has.
You can only explain the gap via political-economical stories, certain industries, wealthy individuals and large companies wield political power and bend the rules in their favour.
I might have to add that advocating a more holistic view which includes not merely fundamentals like productivity but includes rent-seeking behaviour and political-economical influences upon incomes does not make me a fan of distortionary (!!!) taxation and redistribution. Political changes towards social democracy, the kind of stuff we shortly had for a few decades after WWII, imply that pre-taxation income inequality decreases (in the range that is possible, of course fundamentals matter).
"...wealthy individuals and large companies wield political power and bend the rules in their favour."Delete
Yes, I agree. But...
1. In spite of all that wealth working to perpetuate itself, there is an African American Democrat in the White House. I would much rather be a woman or an African American in 2013 than in 1958. Progress was not made for women and minorities because they were wealthy.
2. The ability of wealth and power to perpetuate itself exists. But is this problem worse than it ever was? You have to measure it before you can draw conclusions.
First, progress for minorities (not so sure about progress for African-Americans in the US given that the incarceration rate massively rose since the seventies) can go hand in hand with, well, anything.ReplyDelete
Second, of course check-in-an-envelope kind of corruption has always exited. But Citizens United opened the floodgates for corporate money undermining the democratic procedures in the US. In other Western countries there are similar tendencies. Crouch's post democracy notion, i.e. the form of democracy persists but the content is no longer democratic, comes to mind here.
Third, as you asked for quantitative stuff, I don't think that you can explain this (http://www2.macleans.ca/wp-content/uploads/2012/09/fredgraph_labour_share.png) entirely via a standard story about productivity. Why do I think so? Because the downward trend of labour's share of income started precisely when the social democratic era ended, in the seventies.
I just want us economists to be a bit more holistic and not explain everything via fundamentals. There was a reason economics was called "political economy" back in the days.
"I just want us economists to be a bit more holistic and not explain everything via fundamentals."ReplyDelete
What you're discussing is "fundamentals" as well. We can, and do, build models of lobbying, power, and theft, and use them to think about what we see in the data. Here's a random sample:
Are these things important? That's hard to deny. Are they important for thinking about some of the key changes in the income distribution in the United States in the last 30 or 40 years? I'm inclined to think no, but who knows? I'm certainly happy to have people studying it.
As to whether you can explain the declining labor share with the factors I mentioned (technical change, decline in trade barriers), I'm afraid that's exactly what's been done in the literature.