Sports Stars Versus Business "Stars"

Mankiw links to a Ken Rogoff piece that asks why people seem to have no problem with star athletes pay versus supposed star-CEOs and private business executives.   Mankiw, while not explicitly stating so, appears to agree with Mr. Rogoff. 

The argument is nonsensical for a few big reasons.  First, it assumes that people don’t think superstar athletes are overpaid.  Informal evidence suggests otherwise. Second, athletes are not generally paid millions for leading his or her own team’s failure. Third, athletes, while not always the pinnacle role models we wish them to be, have never contributed to the disintegration of an economy while simultaneously leading the perversion of our democracy -- controlling special interest lobby groups on one hand and begging for government bailouts on the other.

There are differences. Equating 'stars' in the sports industry to the top private sector businesses simply doesn't make sense.

we know what we're protesting

This Crimson article by Harvard undergraduates Rachel Sandalow-Ash and Gabriel H. Bayard from November 2011, addressing the fundamental issues underlying the Occupy Ec 10 movement, did not get nearly the amount of attention that it deserved. Published about a week after the walkout on Mankiw's class, very few sources on the walkout linked to it, instead choosing to focus on the open letter and Crimson editorial(s), which were good, but not very carefully articulated.

We think the exclusion of the Bayard-Sandalow-Ash piece is very unfortunate. The articles which Greg Mankiw chose to cite in this New York Times article "Know What You're Protesting" did not accurately portray the types of issues that most people who chose to walk out have with his course. It would have done more for discourse around the issue if Mankiw had actually spent time dealing with the substantive attacks, instead of largely arguing past the protesters.

For example, Mankiw chose to concentrate his Times article on the argument that economics is mostly a tool, not an ideology. In other words, Mankiw sees the standard introductory economics curriculum as introducing the student to a scientific framework in which students can approach any kind of problem related to public policy or current events. This is a very familiar argument to those of us who have taken an economics course or two -- the idea that we're equipping ourselves with tools to go out and change the world. Too bad those tools are stained with ideology. Let us explain

The issue which Sandalow-Ash and Bayard rightly point out is that the frameworks Mankiw presents are themselves value-laden and politically motivated. So while the efficiency-equity tradeoff seems to offer an analytical framework in which government intervention can be "objectively debated", underlying the framework is a market-centered approach that fails to point out how a more equal society, through promoting stability and long-run health, can help to promote efficiency. And though Mankiw goes to some length to present a consensus among mainstream economists about core issues such as the adverse effects of minimum wages and free trade in his book, both historical experience and a growing literature on these topics have already successfully taken on seemingly-unobjectionable tenets of neoclassical theory.

Overall, we strongly suggest you take a look at the piece by these two very intelligent and socially conscious Harvard students. This is where the Occupy movement's critique is truly located.

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!

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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 Obsession with Pigouvian Taxation ?

Mankiw is perhaps the most well-known supporter of Pigouvian taxation on retail gasoline (also known as a carbon tax).  As a review, recall that Pigouvian taxes are taxes enacted to solve for potential negative externalities in a market.  Gasoline consumption leads to more carbon emissions which leads to pollution, which is the negative externality.  This is a simple problem to solve if we just get a handful of smart economists to measure the societal cost/value of the externalities associated with gasoline, slap a tax on the 'bad' stuff to cover that cost, and voila: not only would the government increase it's tax revenue, but more importantly it would incentivize individuals to use less gasoline, thereby polluting less.  

Pigouvian taxes have been proposed for all sorts of things, and some have been enacted in states while others remain largely a theoretical possibility only: tax car crashes, tax irresponsible borrowing, tax fatty foods, tax alcohol and (Mankiw's most recent object of support), a tax on cigarettes. There is evidence that these taxes do indeed create some incentives to 'improve' behavior.  Nevertheless, many mainstream economists are so focused on Pigouvian taxation that it seems they have simply altered their message that "markets are generally good at what they do," to tack on: "... and where they aren't, we can easily make them work properly by either taxation or subsidies."

The focus on Pigouvian taxation, as particularly espoused by New Keynesian economists, may in fact divert attention away from market problems other than simple cases of measurable externalities.  After all, not everything can be solved with taxation policies.  Issues of broken institutions - particularly in the realm of education for example (see our previous post here) cannot be solved by simply slapping a tax on the behavior (in this case, institutions which do not grant the kind of "equality of opportunity" which they are supposed to in a democratic society).  Issues of institutional fairness, corporate cronyism, socio-economic mobility and opportunity, and other more structural issues, are not likely to be easily solved by imposing a tax to try to punish the behavior.  Finally, issues of unbalanced and asymmetric information in many markets (including credit markets) are not going to be easily solved with simple taxation.  

In cases where Pigouvian taxation may be appropriate, there are further concerns with implementation.  For example, there may be additional bureaucracy that comes with the new source of tax revenue.  As technologies change and societal costs change, so too would the taxation policies need to be updated.  Would we trust congress to be dynamic enough to change these rates accordingly.  And if not, what sorts of negative effects on private activity might that cause?  And even if our government were to support pigouvian taxation long-term, does this mean we could or should do away with certain regulations to maintain 'optimal' performance?

Additionally, it is not an easy thing to measure the societal costs of specific behavior that may contribute to pollution, or poor health, and so on. Assumptions are often made in coming up with a calculation of 'optimal' Pigouvian taxation - assumptions that may be wrong, or right only in present circumstances.  You simply can't take a message like this to a politician and expect them to enact legislation based on it:

Despite all the uncertainties in the quantification of externalities [from waste disposal], this study has pointed out that preliminary estimates of external costs and benefits can be established. Such estimates cannot be presented as exact values, but they can be used as decision support and as an instrument to explain the trade-offs that are implicitly made in political decisions. 

Coase (of Coase's theorem) pointed out that many externalities are reciprocal in nature:  i.e. a polluter causes harm to those in a given area through it's actions, but those in a given area cause harm by forcing (or making it costly for) the polluter to change their actions as opposed to, for example, leaving the area.  Some economists might argue that he was simplifying the issue, but even so the solution of what is 'optimal' then becomes even more complicated:

Nevertheless, there are grey areas and situations change.  Thus, it may be desirable to have a system of bilateral taxation

Finally, at the end of the day, there is a political component to deciding the merits of pigouvian taxation.  Economists often discount politics as something outside their purview (despite their own internal biases) but all the studies in the world cannot convince politicians who may have an ideological disagreement with the government picking and choosing what behaviors are 'good' and what behaviors are 'bad'.  

So, when taking consideration of measurement problems associated with externalities (and changes in a measured externality over time), political barriers, and ideological barriers to pigouvian policies, it becomes less clear how useful such policies can be the real world.  Pigouvian taxation, at the end of the day, certainly has its place.  But one hopes that that place is not a grand pedestal that outshines all other solutions to the problems of the day.  

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...