In defence of Mankiw

By Matt Nolan 19/06/2013

When it comes to looking at policy, I started life fairly heavily left wing.  When I started university at the age of 18, my first textbook was by Greg Mankiw.  He was a Republican, while most of my economics reading at the time had been Marxist or a frustrated attempt at reading the General Theory by Keynes.  I was immediately certain that I would hate the textbook, and that it had no value – at that point I was even more immature than I am now ;)

I was utterly and totally wrong – a situation I have become accustomed to.  Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves.  He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist.  His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

So I see he wrote a paper called “defending the one percent“.  Undeniably it was titled that way to irritate people.  And undeniably it succeeded. (Update:  I’d note Cochrane states it is mistitled – and I believe to an economics auidence it is.  I touch on why I think he gave it that title for his target audience below)

I was sent the paper by a reader on twitter (as I was reading it), and he was unhappy with it.  We discussed it, we didn’t agree (that is not the purpose of discussion on normative issues), and that was good.

What isn’t good was when I saw Noah Smith decided to go to twitter insulting it.  Noah is an insightful guy, with clear and consistent views on what economics is.  And if he had read the paper more charitably I find it hard to believe he would have made a lame crack about it being any good at all.

Mankiw comes in, with standard economic welfare analysis, and applies well established principles of equity to try and articulate the impact of his assumed “cause” of changes in inequality – and the way that policy would respond given the fundamental equity-efficiency trade-off.  This is basic “normative economics”.  Note it wasn’t written to set the world of welfare analysis on fire – from what I can tell it is written to clearly articulate economic concepts around redistribution to the lay reader.

Now an economist might say “what is the point” – to which I’d note again, this paper is obviously not written for economists.  The title is likely the way it is because there are people out there yelling “arg 1%” and he is saying, hey let’s think about this 1% a bit more and the idea of taxation.

All the stuff in this paper should be standard knowledge to virtually anyone who has studied economics – and I don’t mean at a high level.  He is just trying to show the nature of the debate we can have around income inequality for non-economists – and illustrate that there are complicated issues, both in terms of getting the right “measurement” of things, and in terms of our normative assumptions around fairness. Any economist who has a modicum of modesty would be willing to accept just how danged hard this issue is – which is why it is something you don’t really see from bloggers (my fellow NZ blogging community excluded ;) )

And his conclusion:

In the final analysis, we should not be surprised when opinions about income redistribution vary. Economists can turn to empirical methods to estimate key parameters, but no amount of applied econometrics can bridge this philosophical divide. I hope my ruminations in this essay have convinced some readers to see the situation from a new angle. But at the very least, I trust that these thoughts offer a vivid reminder that fundamentally normative conclusions cannot rest on positive economics alone.

He is writing to intelligent non-economists about tax and redistributive policy, and illustrating that there are trade-offs, and fundamental normative questions, that have to be faced before we can make a conclusion.  Simply concluding “soak the rich” based on a single graph without context and analysis is moronic.

Seeing otherwise wildly intelligent economists say “MY POLICY IS THE GOOD POLICY, DO MY POLICY AS I AM ECONOMIST” is embarrassing – I accept all these guys are a lot smarter than me, but even with this intelligence they do not have any miraculous insight into the values of others.  As a result, when it comes to these types of policy conclusions economists SHOULD (normative hat time) be making the trade-offs clear and concise, not grabbing hold of the economic levers and designing the society they want!

The counter to this is probably “but we do have the analysis, and we should make these changes based on it”.  To which I’d answer “where”?  Where the hell has someone actually done a god honest analysis of the fundamental trade-offs, then tried to determine the normative principles that society holds?  I’ve seen Saez talk about the revenue maximising level of tax (fairly irrelevant to this), and I’ve seen Stiglitz just assume that the 1% are rent seekers (fairly bold claim).  But where is the simulation work (eg behavioural microsimulation modeling), the work on implied labour demand responses, the estimates of where the tax burden actually falls (rather than where we place the tax)?

In fact, can you please tell me where this work is, as I would actually like to read it.  I’ve seen bits and pieces in my travel, but a full objective analysis – and a full discussion around the normative principles that would be satisfied by counterfactual policy changes, given an estimate of a social welfare function – are the things the US needs before we can even try to say one sides policy prescriptions are “right or wrong” in any intelligible way.  Even parts of that stuff – if you could just leave the papers in the comments I will send you a <3 .  And if you add how you are using this analysis to form your views around policy you’ll get an extra <3 .

Economists will tell their first year students how amazingly important these concepts are … and then a surprising number will talk around them, give (inadvertently) misleading analogies, and/or avoid measurement.  Mankiw comes out and lays his framework at people’s feet, and tries to articulate “why” the value judgments he’s applying lead to the policy … instead of just couching them in hidden terms, and demanding agreement.  Can’t we have a bit more of that?