On Sun, Jun 16, 2013 at 1:14 PM, Jim Devine <[email protected]> wrote:
> Defending the One Percent > > N. Gregory Mankiw June 7, 2013 > > Rebutting Mankiw, from The Economist of all places.. http://www.economist.com/blogs/democracyinamerica/2013/06/inequality -----------------------------snip The 1 percent needs better defenders [...] So why does Mr Mankiw pick three figures from the entertainment and computer industries, where everyone knows the "superstar" phenomenon is strongest? Because if he used examples from other industries, it would be even more difficult to convince the reader that the immense rewards being reaped by those at the top had anything to do with their unique contributions to the economy. Last year the highest-paid chief executive in the country<http://www.forbes.com/lists/2012/12/ceo-compensation-12_rank.html>, at $131m, was a guy named John Hammergren, who runs a medical and pharmaceuticals business called McKesson. If he hadn't been running McKesson, some other guy would have been. If Michael Vascitelli ($64m) hadn't been running Vornado Realty Trust, somebody else would have. Perhaps those other guys wouldn't have been as good at their jobs; in that case, these firms would have lost market share to competitors. So what? The social purpose of high executive pay is to create incentives for hard work to maximise profit. But these guys are being paid double what their predecessors were making in the 1980s, which was not exactly a period known for its stodgy egalitarianism. Are we seeing startlingly better corporate performance today than we were back then? Is there greater productive innovation in, say, medical technology or commercial real estate? Is our economy growing faster? Are general standards of living rising faster? No, no, no and no. What public interest is served by the fact that these CEOs, as a class, are earning a multiple of what their predecessors did a generation ago? Mr Mankiw's analogy stacks the deck by making it appear as though great creative entrepreneurs create the consumer demand which leads to inequality. This is not how things work. Inequality is rising for structural reasons that have nothing to do with the social value produced by the labour of the top one percent of earners. If the government were to, for example, return top marginal tax rates to the levels that prevailed in the 1990s or the 1970s in order to compensate for the superstar effect, there is no reason to believe that the top one percent would produce any less value for society than they do now. Mr Spielberg would likely have worked just as hard at 1970s tax rates as he does at 2013 tax rates; indeed, he did so when he made "Jaws". Similarly, Mr Jobs worked very hard on the Apple 2e in the 1970s and on the iMac in the 1990s, and Ms Rowling worked quite hard on the Harry Potter series even though tax rates in Britain are much higher than those in America. To avoid accusations that I'm just picking out an ill-thought-out analogy while ignoring Mr Mankiw's main thrust, I'll add a few more points. Mr Mankiw argues that the calculus of progressive taxation is based on a confused utilitarianism. Whether high tax rates discourage productivity among the top one percent is the wrong question, he writes. Redistribution as such is misguided, he thinks, because we don't have any good way to measure the increased utility which redistribution aims to create for low earners: "there is no scientific way to establish whether the marginal dollar consumed by one person produces more or less utility than the marginal dollar consumed by a neighbor." This is strictly true, but I can't see how it's relevant in any normal society, where such compromises are made every time a law entitles citizens to equal treatment without trying to determine each person's exact individual preferences. And it's a particularly strange point to make in a paper called "Defending the 1 Per Cent". We can be pretty sure that a dollar is worth more to someone who earns $30,000 per year than to someone who earns $3 million. Mr Mankiw's preferred alternative is a "just deserts" theory, in which people should retain the value of their labour beyond whatever is needed to provide public goods and compensate for externalities and market failures. "Confiscatory" tax rates, he says, should be avoided. This is one reasonable approach, but at the least, it suffers from the same calculation problem as the utilitarianism he derides: how much is a "confiscatory" tax rate, exactly, and according to whom? But I think the worst weakness in the paper comes in Mr Mankiw's brief treatment of the Rawlsian justification for redistribution. Rawls's argument is that if people were asked what kind of society they'd want to be part of, without knowing whether they'd be rich or poor (ie behind the "veil of ignorance"), they would choose one where the rich paid taxes to fund social insurance for the poor. Mr Mankiw objects that this approach would also probably lead people to choose a society with mandatory organ donation, since they wouldn't know whether or not they'd need an organ. He thinks this a serious flaw in Rawls's argument: If imagining a hypothetical social insurance contract signed in an original position does not supersede the right of a person to his own organs, why should it supersede the right of a person to the fruits of his own labor? Why indeed? And how come when I break your window it's just vandalism, whereas when I break your nose it's assault? Because your rights over your own body are more fundamental than other kinds of property rights, that's why. If Mr Mankiw is looking to dismiss the Rawlsian social-insurance argument, he's going to need a better argument than this.
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