Sunday, June 22, 2014

Greg Mankiw: as duteous to the vices of plutocracy as badness would require

 - by New Deal democrat

There is a drastic moral difference between those who write garbage analysis because they are mistaken, and those who write garbage analysis that is loathesome.  Greg Mankiw embarrasses Harvard with an "analysis" of inherited wealth that not only showcases the execrable insistence of many economists to utterly dismiss historical evidence, and utterly dismiss evidence of actual human behavior from the other social sciences, but also is so facile that it fatally fails even by its own logic.

Vile and illocigal.  What's not to like?

Here's Mankiw's premise:
So what? What’s wrong with inherited wealth? From a policy perspective, ... one might worry that inherited wealth makes things worse. Yet standard economic analysis suggests otherwise.
Mankiw starts with the truism that people love their children, but then blithely asserts, with not a scintilla of evidence, that
each person’s utility depends not only on what happens during his own lifetime but also on the circumstances he expects for his infinite stream of descendants, most of whom he will never meet.
Right now we  already have a big problem for Mankiw's analysis.  DNA studies have suggested that after 1000 years, all Europeans are related to one another. All are descended from Charlemagne.

So, if ultimately everybody is your descendant, and if inherited wealth gives people a leg up on consumption, wouldn't you make sure that everybody alive today inherited from you, the better to ensure that there was the maximum economic growth over the next 1000 years?  That way, by the time everybody is your descendant, they will have the biggest economic pie possible to consume.

By the way, Mankiw's argument certainly means that the wealthy will be using all their economic muscle to prevent global warming from visiting catastrophe on humanity, a/k/a their descendants 100's and 1000 years from now.  Oh, wait, they're not.

Apparently "intergeneration altruism" doesn't go out infinitely like Mankiw reasons.  But there I go bringing empirical social science into the discussion.  Macho macroeconomists like Mankiw don't need no stinkin' empirical facts.

In addition to "Intergenerational altruism,"
.... According to a recent study, if your income is at the 98th percentile of the income distribution ... the best guess is that your children, when they are adults, ... will enjoy higher income than average, but much closer to that of the typical earner. ....
Because of regression toward the mean, they expect their descendants to be less financially successful than they are. Hence, to smooth consumption across generations, they need to save some of their income so future generations can consume out of inherited wealth.

The poor, on the other hand, don't leave inheritances because they are broke, they consume all of their bread crumbs now because they know their descendants will be able to eat cake:
[Contrarily, regression to the means means that for the bottom half of the income distribution, t]heir descendants will very likely rank higher than they do. Even those near the middle can expect their children and grandchildren to earn higher incomes as technological progress pushes productivity and incomes higher. Only for those with top incomes does the combination of intergenerational altruism, consumption smoothing and regression toward the mean lead to a significant role for inherited wealth.
Notice that intergenerational altruism has disappeared from the analysis of why the poor don't leave inheritances, and both intergenerational altruism and regression toward the mean have disappeared from the analysis of middle class bequests. Mankiw's argument is ultimately that of "intergenerational consumption smoothing uber alles.

Which is really interesting, because the reason Mankiw gives for the desirability of such intergenerational smoothing is
People ... exhibit “diminishing marginal utility”: The more you are already consuming, the less benefit you get from the next increase in consumption. Your utility increases if you move from a one- to a two-bathroom home. It rises less if you move from a four- to a five-bathroom home.
STOP RIGHT THERE.   What Mankiw saying is that the further you go down the income scale, the greater the increased good from each dollar. (So much for not being able to do interpersonal comparisons of utility.)  Right here we have a fatal problem for Mankiw's argument.  If a dollar increases more happiness the further you go down the income scale -- which is plainly Mankiw's assertion in the above quote -- then utility is maximized by ensuring that estates are distributed to the poorest in society, not by ensuring as much as possible the wealth of the descendants of the rich.

Of course Mankiw doesn't really mean that.  Every economist worth their salt will tell you that you can't compare the subjective happiness among two or more people.  Well, whatever you need to do to arrive at the predetermined result, which is:
When a family saves for future generations, it provides resources to finance capital investments .... 
Because ... increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers. ... Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards
[my emphasis]

And there you have it.  The entire linchpin of Mankiw's argument in favor of inherited wealth is that higher labor productivity leads to higher wages.  Since I have no doubt that Mankiw is familiar with graphs like this:

It isn't that he doesn't know that for the last 40 years, his linchpin assertion has been shown to be empirically false.  It's that he doesn't care.  Which is a far more serious issue.

So, to sum up, Mankiw makes an argument that is contradicted by well established empirical psychology (g*d I would like to march economists like him down to their universities' psychology departments and force them, Clockwork Orange-like, to memorize actual empirical facts about human behavior), is contradicted by history including the economic history of the last 40  years, and fails fatally on its own merits.

To the contrary, if we accept Mankiw's own assertions about marginal utility and caring about ultimate descendants, then society ought to confiscate as much of estates as is possible consistent with a "Laffer curve" type analysis, i.e., we confiscate right up to the point where a wealthy person gets less pleasure from viewing their increasing financial statements than they are pained by the fact
that the wealth shown in those statements will be spread among society at large after their deaths.