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.

Going Postal in Palookaville

Would you want it run by the governmente? Paul Krugman is strangely restrained on this one, but I basically agree with him: I've had far more annoyance and inconvenience from my (gold plated, as it happens) private health care plan than I've ever had from any public agency anywhere. As to DMV--like most folks, I don't go there often, so I always forget to accord myself the privilege of making an appointment. But I take a butcher-shop number and have never had to wait more than 10 minutes (the last time in, I swear the lady was trying to flirt with me--now, that is desperation).

I do have some big beefs with the Postal Service on issues like, e.g., the obscene subsidy to junk mail (why can' we have a do-not-mail list?). Meanwhile the Postal service staffers, both in the office and in the field, are unfailingly courteous and helpful. Every afternoon Joe the mailman is out there making his rounds, and cheerily singing hymns. Kinda sweet, if you ask me, and I am a heathen.

Krugman v. Taylor

I'm still new enough at this internet thingy that I still think free video-on-demand is a marvel. Anyway, I was delighted to be able to go back and pick up the "debate" (if you can call it that) between Paul Krugman and John B. Taylor over health care and the deficit. For your convenience, see link infra.

..but I have to say I thought it a disappointment. Here we have two of the most highly regarded economists, orchestrated by one of the most discriminating of TV hosts (Fareed Zakaria) and this is the best they can do? Oh dear... Maybe there just wasn't enough time. My screen says it ran for 16 minutes, which is an eon in TV-talk, but not very much for a decent debate. Or maybe the debate format itself is inadequate, unless you are Lincoln and Douglas. But they barely joined issue. Are the deficits inflationary? Taylor (who, I must say, never seems to have had this problem with Bush deficits) said oh no doubt about it. Krugman seemed to try to make a few points as to why they are not, but got distracted, or distracted himself. Is government health care bound to be inefficient. Krugman said no, look at Medicare. Taylor said Medicare is different, but never got around to explaining how. Both of these are central issues--and issues where, I suspecct, there are at least coherent arguments on each side. I don't doubt for a moment that these guys are on top of their brief, but that is the point: if they can't get a handle on the format, I doubt that anyone can.

Just Askin'

People are beating up on poor Paul for his alleged radicalism, but in what respect(s) does the Krugman message vary from the message of that beacon of market orthodoxy, Martin Wolf?

Current Reading: Finance

Getting ready to teach a finance class to law students, again after an eight months' break, I figured I ought to do some mainstream reading to see what kind of notions were in the showcase. On the eve of the new semester, I squeezed in four (well, three plus--I'm still not quite finished with the last one). All worth my time, in instructively different ways.

The best of the lot is surely Charles Barnard, The Two Trillion Dollar Meltdown. It's hard to imagine a more helpful account of what has gone haywire in the financial system over the past few years, including an accessible under-the-hood account of some of the more momentous banking innovations. I look forward to stealing from this guy a lot, or at any rate paraphrasing a lot of what he has to say, and perhaps the worse for the paraphrase.

I'd say almost as much for Paul Krugman, The Return of Depression Economics. Krugman is kind of a cult villain in moonbat land, but even those who don't like his politics or his combatative style will have to admit he is (a) state-of-the art technician in macro theory; and (b) a top-notch explainer of abstruse concepts. You can see why Princeton students would want to pay 30 (40? 50?) thou a year to sit at his feet and listen (to what the rest of us can get for 20 bucks, or free). The book is hampered by the fact that it was first written ad an account of the Asian meltdown of the late 90s, then reengineered, rather hastily I must say, for the current uproar. There is a connection, of course, and history is part of the point here. But if he'd written from scratch, he wouldn't be quite so top-heavy with the collapse of the bhat. Also, I can't imagine how the publisher let him get away with that title. While it does, in a sense, accurately represent the contents, I suspect that the kind of reader he's looking for will simply not recognize that this book is for him (her).

Niall Ferguson's The Ascent of Money, I wrote about earlier. I got snide with him for getting confused about bankruptcy but then I conceded that the book was, overall, quite an excellent general over view of a long and complicated history. Still true, although after reading Morris and Krugman, you're reminded of just how broad-brush his presentation is--and must be, considering how broad the task he has set for himself. I oonfess that after having read the book, I couldn't bear to watch the PBS special: the sonorous anecdotes and the jump-cut video was new when I first saw Alistair Cooke's America nearly 40 years ago, but by now the formula is getting kind of stale.

Raghuram G. Rajan and Luigi Zingales Saving Capitalism from Capitalists, is a somewhat more complicated matter. As I say, I'm not quite finished with it, but I think I get the drift: if this were a Victorian political tract, it would be entitled Incumbency: An Account of the Evil Thereof, with Proposals for a Remedy. Their point is intelligible enough: crony capitalism is not capitalism; incumbents dig in and protect themselves against (further) competition. Freeing us from the dead hand of incumbency can make life better for all, and in particular, can give opportunities to the otherwise dispossessed. This is an important, if often overlooked, home truth. I'd say it is fairly generally accepted among economists* --perhaps particularly by economists writing about development, like Dani Rodrik or William Baumol. Indeed, it probably helps to explain the disconnect between self-conceived "liberal" economists (Krugman is a sufficient example) and the voting public on issues like free trade.

RZ hew consistently to their theme and they offer a collation of helpful instances of the evils of incumbency. They make passing reference to their recipe for reform: secure property rights; transparency (which would include mandated disclosure and quality accounting standards). They are also insistent on a point that is a hobbyhorse of mine: a market is a cultural artifact--markets don't just fall from the sky they can be tweaked and formed for good or evil, and we can't expect good results just by leaving them alone.

So far, so good. But unless they are planning a boffo final chapter, they don't seem as systematic as I would like. They cover a lot of ground at a brisk pace. I complained earlier that they really stewed the pooch on the details of bankruptcy and I while I haven't spotted that kind of slipup elsewhere, I must say it does make me wonder about how good they really are at other issues I know less about. So, well worth the effort, and I do expect to finish it, perhaps this afternoon. But to be used with caution.

Oh, and one other that I almost forgot: Kenneth Pomeranz and Steven Topik, The World that Trade Made. Perhaps the reason I forgot it is that it is not a book so much as a collection of anecdotes--a kind of readers' digest of snippets from the economic history of the (post-Medieval) modern era. Apparently these were written piecemeal for some sort of trade journal. There are no footnotes (although they do add a helpful bibliography). But the stories, one by one, are well told and mostly instructive. Amazon reviewers say that this would be a great prep book for the AP history exam. All I can say is that history must be a lot more interesting than it was when I went to high school.

Takeaway point: there really is an awful lot of good, intelligent, nontechnical writing out there. I'd love to kick back and just read a dozen more (isn't that what being a professor is supposed to be about?). But as the philosopher says, stuff happens. I know that 14 weeks from now, I will look back on a semester of either success or failure and wonder--what the heck happened to all my time?
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*Maybe it is the definition of an economist. Cf. Adam Smith:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is im-possible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and jus-tice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Martin Wolf on the Obama Plan

Lot of buzz today about the Paul Krugman column in this morning's New York Times arguing that the Obama stimulus package may be too chintzy (see, e.g). Joel points to Martin Wolf of the Financial Times, making a similar argument here. Note in particular Wolf observing that Obama may be able to palliate matters in the short term, while the long term looks far dicier: "The opnly real way out for the Americans is to become a net exporter. … That's only possible if the rest of the world starts spending and buying American products, and that's stopped." I think I heard Krugman say something similar a couple of weeks ago: he could see relief in the near future, but he had difficulty writing the drama after that.

I've been reading some financial history lately, and it is unsettling to recall that there was a time when America made just a heck of a lot of stuff--cars and steel and aluminum and plastics and drugs and whatnot. Moreover we often made them under protection, de facto or otherwise. It's worrying to wonder whether we can learn to compete again--whether we ever knew how in the first place.

I'm From the Old Country

Long Island (kavoom foosh!).

Humble Paul

"Now he'll be really insufferable." That was my friend Gary when Paul Krugman won the Nobel Prize. Not a crazy call, really: for all his acuity, Krugman has always a had a tendency to run to shrill. One could hardly be surprised if winning The Big One only made him moreso.

But not so, not so? My impression, from what I've seen of Krugman since the prize, is that if anything, it has left humbled. It's hard to imagine he didn't expect it, or at least assume he was entitled to it--but maybe not just yet. And anyway, when it comes--Ma! It's the Nobel!

So maybe he is just in a state of shock. Let him get to Stockholm, let him put on the fancy duds,* let him take the podium. Maybe once it sinks in, we'll see the real Paul. I kind of hope not; the humble one, I kind of like.
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*Claude Summers, Penn law prof who won the labor equivalent of a Nobel, likes to tell about how he went to the rental shop to get decked out for the ceremony. The clerk asked-Clyde can do this in Swedish--is it for the funeral, or for the prize?

Tracking Krugman Tracking Gore

Paul Krugman, who ought to know better, says that a certain claim is “is no more real than Al Gore’s claim that he invented the Internet” (link).

Look, for the eight billionth time, Al Gore did not claim that he invented the internet. For details, go here and here and here.

Isn’t it time to trade the old canard for a new canard. Shouldn’t someone like Krugman, at least, be saying “no more real than the claim that Al Gore claimed to have invented the Internet”? Probably nobody would much notice, but it would have the virtue of being correct.