Posts Tagged ‘Mankiw’

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Mark Tansey, “The Occupation” (1984)

It’s not the best of times. In fact, it feels increasingly like the worst of times. I’m thinking, at the moment, of the savage attacks in Pittsburgh (at the Tree of Life synagogue) and Louisville, Kentucky (where 2 black people were recently gunned down by a white shooter at a Kroger store) as well as the election of Jair Bolsonaro (who represents, in equal parts, Rodrigo Duterte and Donald Trump) in Brazil. So, it seems appropriate to change gears and, instead of continuing my series on utopia, to turn my attention to its opposite: dystopia. 

Mainstream economics has long been guided by a utopianism—at both the micro and macro levels. In microeconomics, the utopian promise is that, if the prices of goods and services are allowed to reach their market equilibrium, everyone gets what they pay for, everyone is equal, and everyone benefits. Similarly, the shared goal of mainstream macroeconomics is that, with the appropriate institutions and policies, capitalism can be characterized by and should be celebrated for achieving full employment and price stability.

But that utopianism has been disrupted in recent years, by a series of warnings that reflect the emergence of a much more dystopian view among some (but certainly not all) mainstream economists. For example, the crash of 2007-08 and the Second Great Depression have raised the specter of “secular stagnation,” the idea that, for the foreseeable future, economic growth—and therefore the prospect of full employment—is probably going to be much lower than it was in the decades leading up to the global economic crisis. Moreover, what little growth is expected will most likely be accompanied by financial stability. Then, there’s Robert J. Gordon, who has expressed his concern that economic growth is slowing down, it has been for decades, and there’s no prospect for a resumption of fast economic growth in the foreseeable future because of a dearth of technical innovations. And, of course, Thomas Piketty has demonstrated the obscene and still-growing inequalities in the distribution of income and wealth and expressed his worry that current trends will, if they continue, culminate in a return to the réntier incomes and inherited wealth characteristic of “patrimonial capitalism.”

Such negative views are not confined to economics, of course. We all remember how readers sought out famous dystopian stories—for example, by Sinclair Lewis and George Orwell—that connected the anxieties that arose during the early days of the Trump administration to apprehensions the world has experienced before.

However, Sophie Gilbert [ht: ja] suggests that, over the last couple of years, fictional dystopias have fundamentally changed.

They’re largely written by, and concerned with, women. They imagine worlds ravaged by climate change, worlds in which humanity’s progress unravels. Most significantly, they consider reproduction, and what happens when societies try to legislate it.

She’s referring to speculative-fiction books that parallel the themes in and draw inspiration from The Handmaid’s Tale by Margaret Atwood—novels such as Louise Erdrich’s Future Home of the Living God, Leni Zumas’s Red Clocks, and Bina Shah’s Before She Sleeps. 

With the help of Jo Lindsay Walton, coeditor of the British Science Fiction Association’s journal Vector and editor of the Economic Science Fiction and Fantasy database, I have discovered another burgeoning literature in recent years, representing and critically engaging the dystopian economics in fantasy and science fiction.

A good example of a dystopian scenario is “Dream Job,” by Seamus Sullivan. As the editor explains, it is a “cutting parable for a generation that undersleeps and overworks to get underpaid—where paying your student loans is quite actually a waking nightmare.” The protagonist, Aishwarya, lives in Bengaluru and works for low wages in a call center. In order to supplement her income, to pay back her loans, she attaches wireless electrodes that arrive by courier from SleepTyte and sleeps for an extra hour or two a day on behalf of someone else (such as as banker in Chicago), who gets more waking hours in the day without feeling tired. An eight-hour shift pays more than the call center and her customers tip her well. But even though Aishwarya manages to save enough rent for her own apartment, the increasing number of hours she’s spending sleeping for someone else leads to her own ruin, as her body deteriorates and she can no longer control the break between her customers’ dreams and her own living nightmare.

As Robert Kiely and Sean O’Brien explain, while much twentieth-century science fiction tends to traffic in a certain techno-optimism, a growing body of recent work looks to counter that narrative and emphasize the negative effects of the existing (or, in the near future, imaginable) technologies of capitalism, especially increased automation and the rise of digital platforms.* The themes include, in addition to the capitalist takeover of sleep time, the automation and digitization of both the labor process and the distribution of commodities, the proliferation of new border zones and heightened constraints on the circulation of laboring bodies, the reappropriation by capital of ameliorative measures such as the universal basic income, the development of performance-enhancing drugs for the workplace, the development of surveillance technologies and a concomitant increase in hacking tools designed to evade detection, and the intensification of climate change. The result is a dystopian landscape of impoverishment and impasse,

not a transitional space on its way to postcapitalism, but an immiserated space going nowhere at all, a wasted landscape of inequality and insecurity built on the backs of precarious workers and hardwired to keep them in their place at the bottom of the slagheap.

The fact is, utopian literature has always been accompanied by its dystopian opposite—each, in their own way, showing how the existing world falls short of its promise. Both genres also serve to cast familiar things in a strange light, so that we begin to notice them as if for the first time. What distinguishes dystopian “science friction” is the warning that if things continue on this course, if elements of the economy’s current logic remain unchecked and alternatives are not imagined and implemented, the outcomes may be catastrophic both individually and for society as a whole.

As is turns out, mainstream economic theory, when viewed through the lens of speculative fiction, is replete with its own dystopian narratives. As Walton points out, the story of the origin of money offered by mainstream economists—that money was invented in order to surmount the problems associated with barter—is not only a fiction, which runs counter to what anthropologists and others have documented to be the real, messy origins of money as a way of keeping track of debts and as a result of the actions of sovereigns and the state; it rests on a dystopian vision of a money-less economy.** The usual argument is that barter requires the double coincidence of wants, the unlikely situation of two people, each having a good that the other wants at the right time and place to make an exchange. Without money, producers (who are always-already presumed to be self-interested and separate, in a social division of labor) are forced to either curtail both their production and consumption, because they can’t count on exchanging the extra goods and services they produce for the other goods they want to consume. People would have to spend time searching for others to trade with, a huge waste of resources. Barter is therefore inconvenient and inefficient—a presumed dystopia that can only be superseded by finding something that can serve as a means of exchange, unit of account, and store of value. Hence, money.

The barter myth is eager to argue that money arises from the uncoordinated, self-interested behavior of individuals, without any role for communal deliberation or governmental authority. Simultaneously, it tries to insinuate that money is a completely natural part of who and what we are. It tells us that learning to use money isn’t too different from an infant learning to move around, or to make their thoughts and feelings known. In other words, money has to be the way it is, because we are the way we are.

The theory and policies of mainstream economics are based on a variety of other dystopian stories. Consider, for example, the minimum wage. According to mainstream economists (like Gregory Mankiw), while the aim of the minimum wage may be to help poor workers, it actually hurts them, because it creates a situation where the quantity demanded of labor is less than the quantity supplied of labor. In other words, a minimum wage may raise the incomes of those workers who have jobs but it lowers the incomes of workers who can’t find jobs. Those workers, who mainstream economists presume would be employed at lower wages (because they have little experience, few skills, and thus low productivity), would be better off by being allowed to escape the dystopia of a regulated labor market as a result of eliminating the minimum wage. Similar dystopian stories undergird mainstream theory and policy in many other areas, from rent control (which, it is argued, creates a shortage of housing and long waiting lists) to international trade (which, if regulated, e.g., by tariffs, would lead to higher prices for imported goods and less trade for the world as a whole).

Dystopian stories thus serve as the foundation for much of mainstream economics—from the origins of monetary exchange to the effects of regulating otherwise-free markets. Their aim is to make an economy without money, or a monetary economy that is subject to government regulations, literally unthinkable.

But, Walton reminds us, “the relationship between dystopia and utopia is intensely slippery.” First, because it’s possible to go across the grain and actually want to inhabit what mainstream economists consider to be a dystopian landscape—for example, by embracing the forms of gift exchange that can prosper in a world without money. Second, once everything is torn down, it is possible to imagine other ways things can be put back together. Thus, for example, while Laura Horn argues that the ubiquitous theme of corporate dystopia in popular science fiction generally only allows for heroic individual acts of resistance, it is also possible to provide a sense of what comes “after the corporation,” such as “alternative visions of organising collectively owned, or at least worker-directed, production.”***

Dystopian thinking can therefore serve as a springboard both for criticizing the speculative fictions of mainstream economics and for imagining an “archaeology of the future” (to borrow Fredric Jameson’s characterization) that entices us to look beyond capitalism and to imagine alternative ways of organizing economic and social life.****

 

*Robert Kiely and Sean O’Brien, “Science Friction,” Vector, no. 288 (Fall 2018): 34-41.

**Jo Lindsay Walton, “Afterword: Cockayne Blues,” in Strange Economics: Economic Speculative Fiction, ed. David F. Shultz (TdotSpec, 2018), 301-326.

***Laura Horn (“Future Incorporated,” in Economic Science Fictions, ed. William Davies [London: Goldsmiths Press, 2018], pp.  41-58).

****Fredric Jameson, Archaeologies of the Future: The Desire Called Utopia and Other Science Fictions (London: Verso, 2005).

 

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You’d think a Harvard economics professor would be able to do better than invoke horizontal equity as the sole argument for reducing the U.S. inheritance tax.

But not Gregory Mankiw, who uses the silly parable of the Frugals and the Profligates to make his case for a low tax rate on the estates of the wealthiest 0.2 percent of Americans who actually owe any estate tax.*

I’ll leave it to readers to judge whether or not it’s worth spending the time to compose a column on a tax that affects such a tiny percentage of rich—very rich—American households. And then to argue not for raising the tax, but for lowering it.

Me, I want to raise a few, more general issues about how mainstream economists like Mankiw think about inheritance taxes.

First, Mankiw presents one principle—horizontal equity, the “equal treatment of equals”—and never even mentions the other major tax principle—vertical equity, the “unequal treatment of unequals,” the idea that people with higher incomes should pay more taxes. Certainly, on the vertical criterion, those who receive large inheritances (for doing nothing more than being born into and raised within the right family) should pay taxes at a much higher rate than those who do not.

Second, even the notion of horizontal equity—that equals must be treated fairly—depends on an assumption that we each have come fairly to where we now stand. If that principle is violated (as it often is, e.g., because an estate represents the accumulated wealth based on other people’s labor, their surplus labor), then we need to ask if there is even an a priori principle of horizontal equity. The alternative is to judge everyone’s entitlements and burdens, including those occasioned by large inheritances, according to a single theory of equity or justice.

Finally, and perhaps even more important, both the horizontal and vertical equity standards presume that tax justice can be achieved by minimizing the coercive relation between the citizen and the state, which is then counterposed to the freedom guaranteed by a system of voluntary exchange. As Paolo Silvestri explains,

if the problem of the legitimacy of taxation as coercion is posed in terms of ‘voluntary vs coercion’, or freedom vs coercion, the maximum that one can ask it is to minimize coercion and maximize possibilities for voluntary exchanges, and / or minimize the role and size of government and leave as much room as possible to the private sector.

The alternative, of course, is to imagine a very different economic and political relationship, one in which both exchange and taxation—and thus notions of freedom and obligation—are understood in terms of an alternative logic. Consider, for example, the gift. If there is indeed something that the literature on gift economies has revealed it is the fact that social reciprocity—literally, creating and reproducing social relationships through gift exchange—configures the relationship between freedom and obligation in a manner quite different from that presumed by Mankiw and other mainstream economists.

What Silvestri makes clear is the circulation of the gift involves the free recognition (or non-recognition) of the obligation or debt occasioned by the gift, “in the sense that human freedom is asserted as such at the very moment in which it recognizes (or not) his debt.” Taxation, in particular, can be represented as an act of “giving back” to society, the recognition of a relationship of living together beyond the family—which, while never finally solving the tension between obligation and freedom, creates and recreates relations of mutual trust and living in common. It thus redefines the issue of equal or unequal return—the accounting framework of giving and taking embedded in notions of horizontal and vertical equity—in favor of asymmetry and an unending cycle of producing and resolving instances of justice and injustice across society.**

To which the only possible answer is further giving—and thus the freedom of those who have managed to amass great fortunes to comply with the obligation, after they have died, to pay taxes at a high rate based on large accumulations of the social surplus.

 

*There are many other facts about the estate tax Mankiw conveniently leaves out (according to the Center on Budget and Policy Priorities): the effective tax rate is much lower than the statutory rate, only a handful of family-owned farms and businesses owe any estate tax, the largest estates consist mostly of “unrealized” capital gains that have never been taxed, most other rich countries levy some form of estate tax, and the estate tax is the most progressive part of the U.S. tax code.

**My concern here is with the inheritance tax. Silvestri takes his argument in a related but different direction: “the European economic crisis, the restrictive fiscal policies and their social consequences [that] have done nothing but to sharpen the citizen’s distrust in such legal-political institutions, increased their resentments, and even undermined the very possibility of a democratic discussion on taxes.”

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I’ve often said that the Occupy Wall Street movement’s greatest contribution, to date, has been to focus on the opposition between the 1 percent and everyone else.

And, to judge from Greg Mankiw’s latest, the OWS argument continues to have considerable bite. That’s because Mankiw, in an attempt to defend the 1 percent, throws everything against the wall in the hope that at least something will stick.

What does Mankiw come up with? Here’s some of what he tries: assertions without any empirical confirmation (“high earners have made significant economic contributions”), personal anecdotes (“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.”), one empirical study (about the high pay to CEOs in closely-held firms, a result that can be explained in a diametrically opposed manner), the supposedly high percentage of income paid in federal taxes by the top 1 percent (as if 28.9 percent is really that large a number), and a long slew of possible explanations of income inequality other than class or power (including IQ, “self-control, ability to focus, and interpersonal skills,” and preferences for income over “personal and intellectual freedom”).

What a mess! But, of course, the underlying framework Mankiw presumes is the usual neoclassical story of productivity and “just deserts”—the idea that, in a competitive equilibrium (and assuming no externalities or public goods), everyone gets what they deserve.

But it’s precisely that neoclassical story that the OWS movement has successfully challenged. Hence Mankiw’s everything-but-the-kitchen-sink argument, which simply reveals mainstream economists’ desperate attempt to defend their own economic theory and, with that, the interests of the 1 percent.

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Greg Mankiw wants to know why Obama announced a new minimum wage of $9 an hour.

How did they decide that $9 per hour is the right level?  Why not $10 or $12 or $15 or $20?

But, of course, he never asks why the hourly wage (for production and nonsupervisory employees on private nonfarm payrolls) is $19.97.

Why? Because neoclassical economists like Mankiw just presume that $19.97 is the correct, market-determined wage rate—a level of pay that corresponds to given preferences, technology, and resources.

Nor does Mankiw inquire about the income of the average member of the top 0.01 percent, which was $23,679,531 in 2011. That, too, in a neoclassical world is the correct, market-determined amount.

But let’s take Mankiw at his word. Why, indeed, not $10 or $12 or $15 or $20? Because the opposition to ever raising the minimum wage would go even crazier than it has already. And so, even at $9 an hour, minimum-wage workers will still fall below the poverty line.

 

I have no idea why Greg Mankiw posted this video (he provides no commentary).

Perhaps it’s because of Frans de Waal’s analogy between the angry monkey and the Occupy Wall Street movement. Maybe it’s to buttress Mankiw’s use of neoclassical economics to justify inequality (here, here, and here) in the face of our animal instincts of “inequity aversion” (as discussed in Sarah Brosnan and de Waal’s original 2003 research).

Leaving aside evolution, it’s bourgeois society that promises fairness in the realm of commodity exchange, which is violated as soon as we leave the realm of exchange and see that one class is able to appropriate—for doing nothing—the surplus created by another class.

Clearly, Greg Mankiw is discomfited by the claim that his approach to economics smacks of social Darwinism.

Jonathan Chait is the one who first made the claim, which he later defended. According to Chait, the “the main guiding principle” of social Darwinism is

a defense of the free market as a moral arbiter, rather than merely a tool for creating wealth. Just as natural selection allows better-adapted species to thrive and poorly adapted ones to die out, the free market rewards talent and hard work and punishes laziness or lack of talent, in a perfect or near-perfect way.

And that’s exactly what Mankiw argues in the paper [pdf] Chait cites, and which Mankiw suggests Chait and others read in full.

So, I did. First, Mankiw argues that “people should get what they deserve,” that is, “A person who contributes more to society deserves a higher income that reflects those greater contributions.” And, Mankiw argues, capitalism does exactly that.

Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources. But we economists often say that there is nothing particularly equitable about that equilibrium. Perhaps we are too hasty in reaching that judgment. After all, it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.

Mankiw, however, also recognizes that the “real world differs from a classical competitive economy free of market imperfections.” Therefore, there is room for progressive taxation within his Just Deserts world. But, and here’s the kicker, progressive taxation (and, long with it, the financing of government programs) only make sense if the value of government services increases along with income. In other words, the rich should only be forced to pay higher taxes to the extent they benefit from the “public good.”

What about transfer payments to the poor? These can be justified along similar lines. As long as people care about others to some degree, antipoverty programs are a type of public good. . .That is, under this view, the government provides for the poor not simply because their marginal utility is high but because we have interdependent utility functions. Put differently, we would all like to alleviate poverty. But because we would prefer to have someone else pick up the tab, private charity can’t do the job. Government-run antipoverty programs solve the free-rider problem among the altruistic well-to-do.

What this means is that, if the rich believe that alleviating poverty is a public good from which they benefit, they should be willing to pay higher taxes to support transfer payments to the poor.

Either way, it’s survival of the fittest.

Time and again, we’re faced with the canard that U.S. corporations are victimized by high tax rates.

This time it’s from Greg Mankiw, who fails to distinguish between the statutory and effective tax rates. It’s not like it’s difficult to find the actual numbers, as I’ve shown many times before (here, here, and here).

Fortunately, there’s someone out there who actually cares about and is careful with the numbers. Filip Spagnoli has shown that*

On the basis of the data presented thus far we can tentatively conclude that there is neither a positive effect on GDP growth of decreasing tax rates nor a negative effect of increasing tax rates. It seems that those who can respond to changes in the tax system in a way that influences economic growth rates – namely the wealthy, the productive and the innovative classes – don’t actually respond with increased or decreased labor, productivity or investment.

What we do know is that large corporations and wealthy individuals can pay higher taxes. And the fact that they don’t is an important reason why the United States faces rising fiscal deficits and debt.

* Spagnoli also challenges another of Mankiw’s lies, about the disincentive effects of higher individual marginal tax rates.

If the view I criticize here were correct, then we should have seen increasing growth rates resulting from the successive reductions in the top marginal tax rate in the U.S.. However, we don’t. International comparisons also fail to show that downward changes in top marginal tax rates lead to higher growth rates.