07 January 2015

Ideological Blinders

Greg Mankiw muses as to why people doubt his sincerity.  I think he should be flattered that people think he is evil and smart as opposed to the alternative.

Mankiw has a recent paper questioning whether wealth is concentrating, as Thomas Piketty shows, and questioning whether a global tax on wealth is a reasonable strategy.  The paper provides some good examples as to how ideology may prevent one from seeing various alternatives.  If you consistently appear to fail to see alternatives, it raises questions about whether you are smart or are somehow motivated to not see those alternatives.

Dylan Matthews provides one of the comments on Mankiw's paper via Brad DeLong: Mankiw completely misses the point that the founding fathers of America owned slaves.  Which is pretty much Piketty's point -- slavery being an extreme example of inequality.

In his paper, Mankiw creates a simple model of a steady state economy that consists of workers and capitalists.  The workers earn a wage and spend everything they make.  The capitalists take all the other output, and, after replenishing their capital and growing the economy, consume the excess production.  There's an optional amount of taxation as well to transfer consumption from capitalists to workers.

Mankiw asks the extent to which taxes can be used to make the consumption of workers and capitalists more equal, and suggests two possibilities. First, we might try to maximize worker income by minimizing taxes.  Second we might try to make the ratio of worker income to capitalist income as close to 1 as possible, essentially by destroying wealth.

However, there's a 3rd alternative.  In the model the workers end up looking a lot like slaves.  They are not allowed to own any capital of their own.  They are not paid high enough wages that they can afford to save any of their income.  There's a little bit of capitalist in all of us, and a little bit of worker in all of us.  In an alternative model, the workers would be able to save up some of their earnings and the capitalists would earn some wages for the work they do.

In Mankiw's model, there are N workers per capitalist.  Piketty's point is not to have two distinct classes whose incomes are made similar through redistributive taxation.  Piketty's goal is to have a single class where incomes are made similar by having N approach 1.

Mankiw takes a model that has complete inequality as its core feature and concludes that inequality is completely natural and normal.  But a more natural model starts with a society where all men are created equal.

Apparently Mankiw's ideology prevents him from seeing this flaw in his argument.  Do the ideological blinders make him evil?  Or the alternative? 

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