Mankiw on Wealth: If You're So Smart, Why Aren't You Poor?

Greg Mankiw,who has deployed all the resources of a formidable intellect to proving that it's okay to be rich, is at it again, this time tangling with Paul Krugman. I won't attempt to defend Krugman (who is not exactly begging for my succor anyway), but I will focus on one of Mankiw's consoling platitudes first principles:

2. More talented people tend to earn higher incomes.

My guess is that the story here is far more complex than Mankiw wants to admit (perhaps even to himself), but in general not nearly so true as he thinks it is, or at least not in the same way.

We can start by dispensing with the circularity: rich people on the whole probably have a talent for getting rich. I say "probably" here to include cases of sheer accident, like The Inheritors. But setting them aside, my point is that if we want to make any sense out of this analysis we have to define "talent" as something other than "whatever got you here."

In fairness, I don't think Mankiw makes this error. He seems willing to concede that we can measure talent by something exogenous like, say, IQ tests, so let's play along. Specifically, my suspicion is that the relation between talent=IQ and high incomes is not nearly as linear or highly correlated as Mankiw thinks it is. Or rather: up to a point I suppose that IQ leads to higher income, but I suspect the point is fairly modest and well defined. Say, maybe 125-130.

What happens beyond 130? Two things. One is that beyond this point, extra intelligence doesn't really help all that much. For most high-income jobs, you probably have to read, to remember a bunch of stuff, for some perhaps to add and subtract. But the number of jobs that require really first-rate IQ is pretty modest (more on those jobs in a moment). And two, the flip side--for many high-income jobs, high intelligence probably gets in the way of good performance. It is very likely to associate with poor social skills, maybe with some degree of Asperger's Syndrome (if there is such a thing. If you are a lawyer, they probably keep you in the library writing briefs; if a doctor, maybe you are in a skill that does not require a bedside manner, like maybe pathology. But short of that, if you are really bright, there is a good chance you are in your mother's basement waiting for a guest spot on Wayne's World.

To test yourself on this, among presidents, whom do you prefer: the really bright guys like Woodrow Wilson or Jimmy Carter or Richard Nixon? Or the less bright but more stable and balanced like Franklin D. Roosevelt or Dwight D. Eisenhower or Ronald Reagan?

As an example for his own case, Mankiw deploys Krugman himself, a presumptively bright guy. But the choice of Krugman shows just how weak his argument is. Because the thing about Krugman is that he is a professor--and let's face it, academia is one place where poor social skills are actually rewarded. I'm a great Krugman admirer and I think he is right far more often than Greg Mankiw. But I've heard Krugman himself say that nobody should trust him with a government job and I couldn't agree more. Hell, we've already got ourselves into enough trouble with this guy.

WTF? Greg Mankiw Department

In a comment on Barack Obama, Greg Mankiw, hugely popular and successful econ prof--and gold medalist in the "running dogs of the oligarchy" sweepstakes--offers this exremely odd bit of snark:

The sloppiest sentence so far [in Obama's Audacity of Hope] (page 146):

Over the past decade, we've seen...hefty corporate profits, but a shrinking share of those profits going to workers.

I am pretty sure that the share of profits going to workers has been stable--at zero. Profits are what owners get to keep after workers have been paid.

WTF? Is Mr. Free Market conceding that owners walk off with all the rents, while working stiffs have to slug it out at marginal cost? Is there a dog-eared copy of Ricardo tucked under his pillow? Of Marx?

Or, come to think of it, is he conceding that labor unions offer absolutely no obstacle to owner's attempt to walk off with all the swag?

Greg Mankiw Will Take his Ball and Bat and Go Home

I was going to write on this, but BlueMatter just did it about 10 times as well as I would have (link).

Wolf and Mankiw on What To Do Now

Martin Wolf, one of the doyens of free-market orthodoxy, says it is time for public regulation of bankers' pay (link):

No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble.

Yet they are right to expect rescue. They know that as long as they make the same mistakes together – as “sound bankers” do – the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.

Nor is it all that difficult to understand the incentives at work. …

It is the nature of limited liability businesses to create conflicts of interest – between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far harder to manage than in any other industry.

That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world’s most sophisticated financial system demonstrates that.

I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself – across the globe. So it is time to start thinking radical thoughts about how to fix the problems.

Up to now the main official effort has been to combine support with regulation: capital ratios, risk-management systems and so forth. I myself argued for higher capital requirements. Yet there are obvious difficulties with all these efforts: it is child’s play for brilliant and motivated insiders to game such regulation for their benefit.

So what are the alternatives? Many market liberals would prefer to leave the financial sector to the rigours of the free market. Alas, the evidence of history is clear: we, the public, are unable to live with the consequences. . . .

No, the only way to deal with this challenge is to address the incentives head on and, … the central conflict is between the employees (above all, management) and everybody else. By paying huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible, banks create gigantic incentives to disguise risk-taking as value-creation.

We would be better off with Jupiter’s 12-year “year”, since it takes about that long to know how profitable strategies have been. The point is that a year is an astronomical, not an economic, phenomenon (as it once was, when harvests were decisive). So we must ensure that a substantial part of pay is better aligned to the realities of the business: that is, is made in restricted stock redeemable over a run of years (ideally, as many as 10).

Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.

The big points here are, first, we cannot pretend that the way the financial system behaves is not a matter of public interest – just look at what is happening in the US and UK today; and, second, if the problem is to be fixed, incentives for decision-makers have to be better aligned with the outcomes.

Meanwhile, Harvard’s most popular economics professor says we’d better be chary about proposals to give more food stamps to the poor. Might not be doing them a favor says Greg Mankiw (link):

Marty Feldstein may well be right that those on food stamps have a higher-than-average marginal propensity to consume. Nonetheless, I wonder if we really want to target such cyclical measures on the poorest members of society. That is, for any mean level of food stamps, wouldn't the poor be better off with a constant stream of benefits than with a benefit that fluctuates over the business cycle? Using food stamps as a cyclical tool seems to risk destabilizing some families' food consumption in an attempt to stabilize the overall business cycle.

If we are going to use fiscal policy to smooth out the business cycle on a regular basis, then we should think harder about improving the economy's automatic stabilizers. For example, imagine we enacted an investment tax credit, the size of which was a function of the unemployment rate. Firms would have an incentive to time their investment projects toward those periods when the economy was weakest and most needed a shot in the arm.

I can more easily imagine, when the economy starts to overheat, telling corporations that their investment credit has shrunk or disappeared than telling poor families that their food budget has been cut.

So far as I can tell, Mankiw has not weighed in on the question whether the president of Countrywide Financial, the poster-child of irresponsible mortgage lending, should receive a $84 million payday (link).

Will Work for Nothing in Particular

Mark Thoma, once more hunting the "Tax Cuts Pay for Themselves" snark, offers a concise summary (from one "Alex") (link):

1. Mr. Laffer did state the evident and nothing else: (1) if government will collect 100% nobody will show up for work, (2) if government won't collect nothing it will have no revenues and (3) there is a maximum somewhere in between.

I'm in sympathy with the general line of argument here, but I don't think it is quite right. My intuition is that even at 100 percent , some work would get done. I'm not for 100 percent taxes, and I do think taxes can dampen productivity. But the fact is, a lot of work gets done for reasons that have nothing to do with money. The best evidence is before us everywhere--the Richter 9 explosion of free content available on the web. Apparently the world is full of people who will work flat-out, nights and weekends especially, at a labor price of zero. Hard to see how taxes will affect them, one way or another.

An Asssignment for Somebody Else: Might be fun for somebody--perhaps an Econ 10 slut to plot the productivity of, say George Mason Econ professors, against changes in the marginal tax rate, to see if they can identify any effect.

The Dangers of Blogging

Greg Mankiw is worrying that blogging might keep "extaordinarily talented individuals" like, e.g., Greg Mankiw, from doing important work in the world (link).

I have to admit, I have not hitherto worried about that problem myself. I do, however remember Molière (link):

Writing is like prostitution. First you do it for love, then you do it for a few friends, the next thing you know, you are doing it for money.

Being Around the Rich

Do you want to be around people richer than you? Or do you like to be the richest guy on the block? Greg Mankiw (link) conceptualizes this issue pretty much in terms of a pecker-measuring contest, which is fair enough in itself but probably too limited. Consider going to the opera: when you take the elevator up at the San Francisco Opera House, the operator (sic) announces the floors: Mezzanine! Orchestra! And then, as your nose begins to bleed: Music Lovers! Translated, that would be: balcony, the cheap seats.

We tend to join the Music Lovers. It's part parsimony, part sheer constraint--but not least, because the people in the balcony are on the whole rather nicer than the folks down below. I've sat in my share of $300 seats and I can testify: the folks down there are far more interested in the display than the music; they arrive with a vast sense of entitlement and a near-unlimited self-absorption. I'll take the the Music Lovers any day.

I think the same principle may work at home. Mr. and Mrs. Buce live in a fairly modest neighborhood, in the sense that we could probably afford better. I suspect we are better off than (many of) our neighbors, but actually, I am not sure: a couple of these folks are old-time locals who could well have a lot stashed away somewhere, and others are people of considerable enterprise and industry. Anyway, the plain fact is I don't think about it much--not nearly as much as I reflect on the inescapable truth that they are mostly darn good neighbors. There is one sorehead, but for the rest, they are all you would want: they keep their nose out of our business, but they are civil and cheery when you meet them, and they keep an eye on the house when we are away--I got a concerned call on my cellphone one night when I was crossing Sixth Avenue in Greenwich Village, 3,000 miles from home. I'm even cautiously optimistic that we will be able to make a deal on rebuilding the common fence. On the whole, they fit the old joke about how the only reason to lock your car here is to keep folks from stuffing it with zucchini.

So, caution to Greg Mankiw: Wealth and comparative status may not be the only vectors.

When Stupidity Is Not Enough

Eugene Robinson seems to think Al Gore is smart, in the sense of braniac (link). Greg Mankiw counterpunches with the proposition that Gore’s college grades fell lower than George W. Bush’s, and that if you want a braniac for president, there is only one valedictorian in the race (hint: think Brigham Young) (link). I think they both miss the point, or a lot of points.

First, re Gore, and whether he is smart. I recall that back in 2000, someone asked Al Gore his favorite novel. He answered, Charterhouse of Parma.

What a lunk-headed answer that was. In fact, Charterhouse of Parma is a great political novel, perhaps the best. But for a politician to say it is favorite novel—now, that is really stupid. It means either (a) you are sincere but clueless; or (b) that you are a pretentious jackass. On this front, I have never quite made up my mind about Gore. I tend towards (a) (sincere but clueless). If correct it could well mean that Gore is indeed a serious reader and thinker, but yet ill-equipped to exercise the kind of leadership that we should want.

[As a semi-aside--I am not much troubled by the fact that Gore had one bad semester. Hey, I bombed out of college altogether and look at me.]

But for Mankiw to rebound with Romney’s supposed superior cortical power—you know, that is pretty rich from a party that has spent most of the last eight years telling us that brains didn’t really matter in a president and that we were much better off with the good-natured but dopey W than his truly brainy predecessor.

[I admit I cant find enough evidence to lay this trip on Mankiw personally, but it certainly has been part of the running dogs’ mantra.]

In fact, I think the running dogs were in principle right on the character issue. Brains are on the list of important qualities for a good president, but they are not at the top of the list. Richard Nixon may be the brainiest president of the 20^th Century and look what that got us. Woodrow Wilson, Herbert Hoover and Jimmy Carter are three presidents who let their brains get in the way of doing a good job. Bill Clinton was actually a pretty good president, but his fabled brainpower was only one of the reasons, and not the most important.

In fact, good character has not been in plentiful supply among 20^th Century presidents. Eisenhower probably makes the cut, and Truman, and Coolidge. I’ve always had a soft spot for Gerald Ford—you gotta love a president who cooks breakfast for his wife—although I have to admit it grieves me to think of him as the man who gave us Don Rumsfeld and Dick Cheney.

But the trouble with W is not his weak brainpower, but his utter lack of character—his narcissistic self-absorption and his utter indifference to received institutions and the rule of law.

I don’t think Gore would make a great president because I think he lacks the essential political schools. He may be the kind of braniac that Robinson has in mind, I’m not sure. He almost certainly scores higher on the character chart than W. Where exactly Romney fits in this calculus, I don’t really know; I find him creepy but I doubt very much that he as insistently evil as the incumbent. My immediate point is to try to get the agenda straight: brains can be overrated. Without decent character, even stupidity is not enough.

Supply Side as Fantasy

I’m no economist, but I have long suspected that supply-side had a lot more to do with political marketing hype than it did with true economics. Comes now Paul Krugman (and Brad DeLong) weighing in with a more explicit articulation of the point (link). Part of what seems to be a burgeoning on-line discussion of the nature of supply-side, kicked off by the estimable Mark Thoma (link).

I’ve always been particularly irritated by the legendary Laffer Curve. I mean—of course it is true that “too much” taxing reduces revenue; the question is “how much.” And to draw a curve and find a limit, applying the methods of first-semester calculus—why, from 1870 to 1950, economists did almost nothing else. Laffer has about as much to do with the invention of supply-side as Abner Doubleday has to do with the invention of baseball (remarkably, one person who seems to agree with me on this is Laffer himself—see the Wiki article supra; he attributes it to, inter alia, John Maynard Keynes).

A somewhat more charitable view of supply-side comes from Greg Mankiw (link), who dredges up what may be the money quote (from Herb Stein): “"There is nothing wrong with supply-side economics that division by ten wouldn't fix."