keeping your head above water: anti-mankiw links

If someone is being "overpaid" here, it surely isn't workers

There are multiple things wrong with Professor Mankiw's recent post about comparing public and private sector employees by compensation.

First of all, the title of the post, "Are federal government workers overpaid?" is misleading. We usually say that someone is overpaid when they are contributing less than they are being compensated. But the CBO report is examining compensation differentials, which is a different issue. The problem is complicated by the fact that public sector workers are engaged in activities (such as education or security) which have clear positive externalities on society, so it's even more difficult to talk about being over or underpaid. (Are the participants in the securitization of bad loans over or underpaid?) It's clear what Mankiw is actually trying to accomplish in his post, and we at Anti-Mankiw can assure you that it has nothing to do with accurately conveying economic research.

Second of all, the report is only for workers in the federal government. In this excellent report by John Schmitt at the Center for Economic Policy Research it was found that state and local government employees are actually paid less than their private sector counterparts, after controlling for observable characteristics (similar to the methodology in the CBO report).

Finally, if a dynamic analysis were performed (i.e., examining the trend of wages in each sector over the last 30 to 40 years), readers would quickly realize that there are more pressing issues at play here. The most important of which may be the fact that wages for both public and private employees have been stagnating since the 1970s. Sure, public employees may have been paid more (according to the study from which the above graph is pulled, however, even that is a contested issue), but the story is more like: private sector wages are falling behind as public sector wages struggle to keep above water. Comparing with the elite 1% over the same 30, 40 year period, you see the drastic explosion of inequality that is the main subject of public debate today. In short, Mankiw is really doing a disservice to the more pressing macroeconomic issues by choosing to focus on whether one sector is more compensated than the other.

Here is another, similar report on this issue ("Public and Private Sector Workers Are in This Together") which focuses on college graduates: http://vox-nova.com/2011/03/17/public-and-private-sector-workers-are-in-this-together/.

Hardly a rosy picture -- for either public or private sector workers. Someone definitely seems to be overpaid here, but it's not workers!

an A for ideology, an F for technique

In this article Greg Mankiw describes the argument behind a New York Times opinion piece written by Yoram Bauman, of "10 Principles of Economics, Translated" fame. The thrust of Bauman's thesis is that economics majors, by drilling ideas about incentives, private property, and self-interest into their heads for their classes, are thereby trained to be more selfish. It is supported, supposedly, by evidence showing how the economics majors were less likely to contribute to two charities presented to them when registering for classes.

Greg Mankiw doubts this implication of Bauman's findings. Mankiw basically takes issue with the following quote from Bauman's article:

You may question whether these groups actually serve the common good, but that’s mostly beside the point. Regardless of the groups’ actual social value, a purely self-interested individual would choose to free-ride rather than contribute; after all, a single $3 donation is not going to make a noticeable difference in tuition rates.

Mankiw, in criticizing this passage, makes a fair point: the supposedly positive externalities of any public good do need to be carefully examined and analyzed, even for small values of contribution, and someone with a social science background, particularly economics, may be well-equipped to do so. They might be less willing to dole out cash to a random charity, but their education is put to use in other ways that are beneficial to society.

While Mankiw may have a point, we at Anti-Mankiw strongly disagree that Bauman's essential claim that economics is ideological evaporates in the face of Mankiw's criticism. In fact, published studies have been done on surveys of students who have successfully completed an introductory course to economics in which the mainstream view is presented without any critical perspective, and these studies offer an interesting take on how ideology matters in the classroom.

The findings? The majority of students 6-12 months after taking such a course recall most quickly the normative aspects of the course but are relatively less able to solve simple problems related to these ideas (to see how they might work or not work in practice). Ideas like "taxes are bad for efficiency, though not for equity", and "prices not set by the free market lead to welfare losses and are therefore undesirable" are common, but give them a question to solve on calculating consumer surplus, for example, and they cannot deliver. These are consistent with our own experiences in teaching introductory courses offering a mainstream view, and indeed, on a certain level makes sense: most cases, you may just get the main point of an argument and not necessarily the details behind the argument. But nevertheless, it's presented as an argument, and therefore not of course the only perspective!

[See Bartlett, Ferber, and Green's "Political Orientation and the Decision to Major in Economics" in International Review of Economic Education; and Faravelli's "How Context Matters" in Journal of Public Economics for two resources. These ideas were also reflected on based on a correspondent's current dissertation research which we are not allowed to cite openly.]

The lesson learned?  That market-centric views and market-centric efficiency criteria are at the center of any policy evaluation of a student, leaving no room to discuss how efficiency is not a scientific concept. (See this article by Rick Wolff, entitled, "Whose Efficiency?" which does a great job of breaking down the different models. Duncan Kennedy and Frank Michelman also have a nice piece as well entitled "Are Property and Contract Efficient?".) Second, it is highly questionable whether an intro course "enlightens" the student in the way Mankiw believes it does. Admittedly, part of the problem here is with education itself -- how we train our students and so on -- but Mankiw, writer of the currently most successful textbook, is therefore part of the problem, not the solution.

It's a short step from this final point to the idea that a better economics textbook -- which either clears away the ideological content and works more like the seminar room or offers a critical approach that draws on many different worldviews (or both) -- is just on the horizon...

anti-mankiw links; or, education and income inequality -- in which direction does the causal relationship go?

In this article from a few days ago, Mankiw links to a post which suggests that increased education, particularly graduate school training, is a way of lessening income inequality in the U.S.

How does Greg see the relationship between education and income distribution? For him, increased opportunity, fostered through more education, leads to gains in an individual's productive potential. This does not necessarily imply, for him, that education will automatically lead to gains in income -- just that the potential for gains will be increased. This view is reflected in this article from his blog.

But what if the causal mechanism actually goes the other way -- i.e., from economic backgrounds and economic inequality to human capital growth? That is the story behind this Crooked Timber article and the associated New York Times article it quotes. A collection of other works questioning the role of education as an engine for social mobility can be found here, at the Legal History Blog.

When "class matters" to human capital accumulation, we are, all of a sudden, in very different territory -- not just because financial resources become important -- but because of the disproportionate impact the rich have on democratic institutions (an argument which, we believe if push came to shove, Mankiw would not disagree with).

But, thankfully, it is not unfamiliar territory. As education theorists have known for decades, economic elites have a disproportionate impact on the educational system in terms of funding and also in terms of influence. A classic in this line of literature is Bowles and Gintis' Schooling in Capitalist America, which argued that classrooms operate as training grounds for an obedient and productive workforce. The Bowles-Gintis theory of human capital seems to be supported by more recent discussions on the importance, or lack thereof, of creativity in the classroom (via MarginalRevolution). Though Tabarrok is a libertarian, we are certain he would agree with a corollary of the argument advanced in his article that educational policy (influenced by elites with political power) promotes a docile student body.

In summary, there seems to be two main ways in which one can view education and the "human capital" question. One may view education as a source of increased opportunity for a productive workforce. On the other hand, one may think that the problem lies in economic inequality and its egregious influence on educational institutions -- which means that more education will not address the problems of inequality in society and that it may in fact promote such problems. Let us not forget that there is, historically or cross-sectionally, no unidirectional relationship between the average education of a society and economic inequality!

We at Anti-Mankiw believe that more attention should be placed on this latter issue, given that there is more convincing evidence of that thesis.

Want to join the 1%? Enroll now!

In a recent blog post, Greg Mankiw posits that education is the key to closing the income gap, allowing upward mobility for any regular 99%er to join the elite 1%. According to Mankiw, working hard in school improves the odds that an individual is able to join the 1% or at least significantly increase their earnings potential. Education then closes the income gap and smoothes out inequality.

But the question arises: if college enrollment has been steadily increasing over the years, why do we still have the highest income inequality in decades?

Let’s give a closer look at Mankiw’s claim about the great equalizer that is college. In this claim, he fails to acknowledge that access to education is often determined by the income of a potential college freshman’s family. Simply put, Mankiw fails to acknowledge that barriers to access exist.

A 2007 report by UCLA on entering freshman found that the median income of the families of was 60% higher than the national average in 2005. Further, at institutions that may appear to increase the probability of joining the upper-crust 1%, namely Ivy League institutions such as Princeton, Harvard, and Yale, evidence shows the acceptance of people with incomes in the bottom 50^th percentile is exceptionally low around 10-12%. A recent Georgetown study reported on by the New York Times that within the 2010 freshman class, drawing from “193 of the country’s most selective colleges”, only 15% of the freshman class came from the bottom 50% of the income distribution and 67% came from the top 25% of the income distribution.

With those reports in mind, it becomes quite clear that for Mankiw’s claim is unsubstantiated. The idea that higher education is a means towards great income equality is solely dependent on having no barriers to access for all levels of income and socio-economic groups. Unfortunately, that is simply not the case. Unless the American educational system is drastically restructured to provide adequate college preparation across all income levels and proportionally accept students from the bottom percentiles it is likely that the distribution of higher education and wealth with remain significantly skewed in favor of the 1% and the already wealthy.

A Response to Mankiw and His Defenders

Mankiw seems genuinely concerned that his protesting students ironically had to miss his lecture on income inequality.   It is important to give Mankiw and his EC 10 text-of-choice (presumably his own “Principles of Economics 6e”) the credit deserved: he mentions income inequality and says it may be a problem depending on one’s political or philosophical persuasion.   Unfortunately, that is about the extent of the credit one can extend.

We take two broad issues with Mankiw’s NPR interview response to his students’ walkout:

1.  Mankiw’s coverage of income inequality is inadequate for an economics course(s)
2. Mankiw misses the broader point that he and his textbooks do not promote plurality of discussion on a wide range of topics beyond income inequality and its relation to economic activity

It’s clear what Mankiw’s lecture on income inequality is all about by looking at his official lecture notes.  He spends some time comparing the poor and the rich in the United States and across countries, and then quickly moves to discussing problems with measurement of income inequality.  And here’s where the bias kicks into overdrive.  According to Mankiw, measures of income inequality are drastically biased upward due to 4 things:

1. The values of in-kind transfers are often ignored when measuring inequality.  The problem is that that is not necessarily true.  For example, the US Census, in its measures of inequality began valuing in-kind government transfer programs back in 1982. 
2. People can borrow and save, therefore ‘smoothing out’ their incomes over time.  The problem with that is that poor persons, almost by definition, have little means of borrowing on credit as they often lack collateral. Second, they have little ability to save since living closer to the poverty line means dedicating just about all of income to subsistence.
3.  If what we really care about measuring is inequality of living standards, then one should compare wealth or permanent income, not transitory income levels.  Again, that is all fine and good except for the statistic is unlikely to improve for poor persons who have limited resources.  
4. Income measures fail to account for the fact that the poor have opportunities to lift themselves up.  Unfortunately, Mankiw fails to mention any barriers to doing so that exist in our society, political power, institutional limitations, or otherwise.  

The rest of Mankiw’s discussion of the income distribution can basically be summed up in 1 sentence:

The problem of income inequality is important, but something more for politicians and philosophers to further a discussion on after comparing the cost of improving income equality, at the expense of economic efficiency.

There is no discussion as to how economics (and students of the discipline) can contribute to the discussion other than as a distant, silent observer.  That is likely why it is nearly the last chapter in this microeconomics textbook – for Mankiw the discussion is an afterthought in economics, as opposed to an integral part of it – so it’s ok if instructors that use his textbook skip the chapter entirely.  Perhaps more importantly, Mankiw’s chapter on income inequality is, to the degree it is discussed, entirely from a microeconomic perspective.  He completely ignores the macroeconomic links between the income distribution and wages, profits, and economic growth.  In his GDP chapter (the macroeconomic measure of living standards) he fails to discuss other measures of income inequality that many nations use because of GDP’s inadequacies (like the Human Development Index, or the Genuine Progress Indicator) which largely stem from the lumping profit (rich) and wages (middle class / poor) into one aggregated measure of supposed well-being. 

All this said, it is disappointing that the protesting Harvard students focus so much of their attention on income inequality and fail to really focus in on the broader problem- that Mankiw and his textbooks perpetuate an ahistorical, assumption laden, non-complex market based dialog, often times ignoring other schools of thought that may have something interesting or useful to say on a topic.

Behavioral economics often points out how unrealistic some of the assumptions of textbook economics truly are, and in fact perfectly rational economic actors are more or less sociopathic.  Some heterodox schools of economics discuss how income inequality is directly related to boom/bust cycles of capitalism and therefore are not just explained by a human capital premium.  Environmental economics also discusses the relationship between economic growth, business cycles and environmental degradation beyond simply discussing market-based tax solutions.   Finally, Mankiw largely ignores the relationship that politics and economics have – and specifically the relationship between political power and economic power of which political scientists are all too familiar with understanding.  Were he to truly recognize the issue, he might have an answer for one of the biggest concerns of the Occupy Wall Street movement: why, essentially, rich people  were given preferential financial/political treatment over poor people when it was the rich people who were in large part responsible for the recent economic calamity that directly hurt the poor.

At the end of the day according to EC 10, economics is about being able to explain only a small part of individual and national choice behavior – the unrealistic perfectly ‘rational’ part - and applying only one kind of solution – a kind of economic bandage (taxes etc.), in the rare instance choice behavior isn’t so perfect or in equilibrium.  For Mankiw, economics can be boiled down to brief, vague principles.  Students around the globe are brainwashed with this limited kind of homo-economicus thinking that would make Adam Smith roll over in his grave.   Luckily, some students are waking up from the haze.  

-anti-mankiw