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!

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!

give thanks to capitalism

An "In the News" excerpt in chapter 7 of Mankiw's Principles of Economics (4e) is titled "The Miracle of the Market" and begins with the following proposition:

An opinion columnist suggests that the next time you sit down for Thanksgiving dinner, you should give thanks not only for the turkey on your plate but also for the economic system in which you live.

The topic is Thanksgiving dinner and the argument is that we owe our Thanksgiving turkey to the division of labor, supply chains, and the pursuit of private gains. Of course, the article -- an opinion piece from the Boston Globe (does that count as "In the News" to you?) -- is meant to support the "argument" laid out over the previous 13 pages that "the price of turkey at the supermarket is fair", from a social efficiency standpoint, as long as free markets are the means by which scarce resources are allocated. Central planning would require vast amounts of information and time to do what a free market economy does completely on its own.

Fair point about central planning -- but why bring it up in the first place? Why does the author's argument about the coordinating miracle of the free market have to be compared to the extreme opposite of a completely centrally planned economy?

While we can never be certain of the author's intentions, let us offer a response: perhaps elements of a planned economy trickle into the author's story in ways overlooked or simply ignored by him. In other words, it appears to us as though the tactical use of attacking the "central planning" argument is to divert attention from more important and empirically relevant matters, such as the following:

Who determines the price of gasoline used by the trucks delivering the turkeys to the store? Oil cartels play an important role in determining prices at the pump. 

Who coordinated work at the factories which produce the feed and raise the turkeys? Most likely, these tasks were performed by a manager and other centralized authority figures. 

Who regulated the quality of the Turkeys or facilitated their transportation? Government laws and statutes were necessary for these things. 

Upon reflection, it seems that there does exist an essential economic planning element to your Thanksgiving dinner. Imperfectly competitive markets and the organization of economic activity which takes place in the firm are important examples of cases in which economic agents act collectively to plan and alter economic outcomes.

So this year, give thanks to capitalist social relations for the meal on your plate. While Mankiw has tried time and again to assert the universality of the "free market" model and its relationship to Thanksgiving, a simple look around at how economies actually function suggests otherwise.

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