anti-mankiw links - or, the defense of manufactures

The other day Professor Mankiw linked to a piece by Christina Romer in the New York Times on why manufacturing should not be subsidized by government policy.

On one hand we can see why this might be a smart policy: manufacturing is past us, isn't it? The U.S. has increasingly moved into smarter, faster sectors of growth like technology, finance, and higher education. The last thing we would need, argue economists such as Romer and Mankiw, is a return to 60s-era economics.

On the other hand, as Jeff Madrick observes in the NewDeal 2.0 blog, manufacturing is only seen as dead because we don't necessarily know what a smarter, leaner, and more efficient manufacturing sector might look like. What is the contradiction between smart technology and good manufacturing jobs? Once upon a time, there wasn't any such clash. But as competition for cheap labor and a variety of factors overwhelmed businesses in the 1970s, "low road" policies were inevitably taken which compromised quality for productivity and low wages. Finance, Madrick notes, took manufacturing's place as the key driver of growth -- and what has that gotten us in the last 40 years? High inequality and relatively stagnant growth and living standards.

Manufacturing -- potentially with a focus on green technologies at the frontier of certain frontiers of economics growth -- can itself become a hotbed of innovation. As Madrick notes, "Isn’t [manufacturing] where the scientists and engineers are? Don’t we learn and innovate by doing? One commentator recently said that those innovations are exploited by others, so it doesn’t matter. Really? Then maybe we should stop promoting R&D altogether." Research and development is key to a vibrant economy. There is no reason to halt our attempts at strengthening them.

A similar point regarding the potential dynamism and value added of the manufacturing sector can be found in the debate which took place in the Economist last summer between Ha-Joon Chang and Jagdish Bhagwati over this same issue. (Chang won the debate). Chang makes an interesting point in his rebuttal to Bhagwati's scepticism about "manufacturing fetishism" which we will end on, here:

Take the case of the Netherlands. Unbeknown to most people, it is world's third largest agricultural exporter, despite having little land (it has the world's fifth highest population density). This has been possible because the Dutch have "industrialised" agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world's most advanced chemical and electronics industries. In contrast, despite being the world's second most high-tech exporter (measured by the share of high-tech products in manufactured exports), the Philippines has only $2,000 per person income because it makes those products with other people's technologies.

Overall, we at Anti-Mankiw definitely think that the promotion of manufacturing could be an excellent way to revitalize the economy. How the government (or other branches of the state) does so is a different point -- but let's not relegate such an important source of a country's material wealth to the trashbin too quickly!

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