Tag Archives: Mankiw

Krugman Versus Mankiw on Capital Income Taxation

This morning’s New York Times featured an op-ed from Paul Krugman titled “Wealth Over Work.” In the piece, Krugman warns that we are on a dangerous path towards an oligarchical society, where inequality is rampant and wealth accumulates in the hands of a small group of powerful elite. The government enacts policies that promote the accumulation of this wealth and living off of capital income over deriving income from working in the labor force.

While the inequality argument is certainly a relevant and important topic, Krugman’s finger pointing seems over the top to me. Krugman, in his typical fashion vilifies the GOP:

Despite the frantic efforts of some Republicans to pretend otherwise, most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about.

Some of his points are valid but there are two problems I have with Krugman’s argument:

  1. Krugman claims that one of the contributing factors to his claimed shift towards an oligarchical society is the favorable tax treatment capital income receives. Based on my experience studying taxes in Jim Hines’s government revenues class, this statement struck me as off. Taxes on investments such as capital gains and dividends are some of the most inefficient taxes a government can impose. I was happy to see that Greg Mankiw publicly called Krugman out on this on his personal blog. Mankiw points out that it is not class warfare that drives the rationale for lower capital taxes, but rather the fact that it is optimal economically. At its heart economics is about trade offs and governments are faced with a serious tradeoff when designing a tax system: the tradeoff between efficiency and progressivity. Capital taxes are extremely inefficient because capital owners can choose to not sell their assets very easily if they face the tax, distorting economic activity and producing dead weight loss, which is a net loss to society. Therefore having lower capital taxes if efficient. The tradeoff here is that the bulk of capital income goes to the wealthy and so a lower tax is also regressive. Our tax system corrects for this in other areas.
  2. My other problem with Krugman’s article is the borderline conspiracy theorist perspective he advances as to why this shift is occurring, “Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence — and not just through campaign contributions. Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.” To me this argument sounds a little too extreme. Yes money can buy power and influence, but politicians ultimately must answer to all of their constituents in our democratic society and ultimately those well off can be heard. The adoption of Obamacare (which the Koch brothers strongly oppose) is one example of a the less powerful majority winning a battle.

Overall, Krugman provides a thought provoking piece but his points seem drastic and overblown, especially from an economic perspective.

Mankiw: The Scientist is also the Philosopher

In his New York Times post today, Harvard economics professor Gregory Mankiw wrote that the “dirty little secret” of economics is that policy recommendations nearly always include political viewpoints as well as economic analysis. While this should come as no surprise to Michigan economics students, it does present a serious discussion of how economic data is presented.

Mankiw brings up the Democratic position as being for societal good. Decisions are made that may not be beneficial for all, but can help a majority. To demonstrate this, he gives two moving examples.

“Imagine that you are on a bridge and see a runaway trolley car below you, hurtling toward three children playing on the tracks. A fat man is standing next to you. You can push him off the bridge and into the path of the trolley, killing him but saving the children. What do you do?”
– Mankiw (2014)

In this scenario, with relatively clear protagonists (innocent children) and what Mankiw paints as an antagonist (a fat man – note that including the description of being fat does nothing but decrease the value Mankiw wants to portray on this man’s life), Mankiw argues that many wouldn’t hesitate to save the children. However, he gives a second example that makes the decision cloudier.

You are a doctor with four dying patients. One needs a new liver, one needs a new heart, and two need a new kidney. A perfectly healthy patient walks into your office for his annual checkup. Are you still willing to pursue the utilitarian course of action? – Mankiw (2014)

In this second example, Mankiw argues that it is harder to make the decision to sacrifice one person’s life for others due to his natural rights. So how can we translate these sensitive personal decisions into a person’s economic beliefs? Mankiw references the Affordable Care Act, which ended many people’s perfectly good health insurance plans in order to make insurance available for others. For some, especially in rural areas, insurance costs have increased by more than 100%. Small businesses have had to significantly add to their expenses by offering insurance to their full-time workers. Overall, the question for what to look at comes back to whether the ACA was a utilitarian decision – helping Americans get access to previously inaccessible coverage – or unfair to people perfectly happy with their coverage.

With so much data, it is more important than ever to understand the motives behind the numbers. Has the data been “cooked” to fit the argument? One example that I believe is a perfect example is the argument for increasing the minimum wage. Even in our class blog, articles have been posted which reference data supporting both sides. My own prior post references that a raise to $10.10 would reduce the quantity of low-wage jobs by 16%. This recent revised post, on the other hand, argues that the same increase wouldn’t reduce the amount of jobs available. In both cases, Mankiw is spot on when he stresses the importance of understanding the purpose of the data before interpreting the results.

“Fight” between Mankiw and Krugman

Greg Mankiw posted a blog defending the 1 percent richest people four days ago, and Paul Krugman obviously had a disagreement with that, he then wrote a post against Mankiw’s avocation.

Actually this is not the first time those two greatest economists disagree with each other on the equality problem. On June 8, 2013 Mankiw published his article Defending the One Percent, claimed that inequality problem is not that serious and the fixing the inequality is so hard and may result in the unfairness for those rich people. He argued that the reason why some people are richer is simply because they are better (in every possible way). And he also said the absolute equality is actually inequality, and actually rich people had contributed for the economy more than others in US. Basically, Mankiw’s idea is to control intervention toward equality in order to maximize efficiency.

In opposite, Krugman proposed that “We live in a society that allocates rights to intellectual property in a way that yields huge rewards to a select few, that taxes top incomes at a historically low rate”. Also on the other hand, Mankiw neglect the inequality of opportunity, which is vital to decide whether the resource will be allocated in a fair way, for this, Krugman said that children from rich families are more likely to remain their top position. Finally, he found it absurd for Mankiw to think that solving inequality would lead to absolute equality.

Now this “war” has been updated.

Mankiw’s new blog Yes, the Wealthy Can Be Deserving once again insisted on the rightness for rich people to own huge amount of money. Mankiw gave an example about Robert Downey’s income through the film The Avengers and argued that those incomes are totally legitimate and the player himself deserved the money, thus there should be no doubt toward the inequality. In addition, he believed that financial systems are “allocating the economy’s investment resources” fair enough to make the country work effectively.

One days later, Krugman agian wrote a blog to comment on Mankiw’s article. First he noted that film stars are not representative in terms of the “upper tiers of the income distribution”, executives from finance, corporate and real estate are actually what we are referring to as top 1 percent. And he strongly disagree with Mankiw’s statement about fair distribution, he pointed that our financial crisis was caused by the rich-dominated financial systems. So there is no such effectiveness addressed by Mankiw.

For me, I agree almost with Krugman, however, I also think it is great for Mankiw to think from the way of economic efficiency and dear to fight against main stream idea as long as he thought it is unreasonable.

I’d like to see this to continue and learn more from it.