Talking Inequality with Greg Mankiw and Charlie Wheelan at Dartmouth

May 12th, 2014 at 10:58 pm

Had a good debate on the issue of income inequality with Greg Mankiw at Dartmouth, well moderated by Charlie Wheelan.  If there’s a forthcoming video of the event, I’ll link to it.

It was a real treat to have the time to stretch out on the issue–to get away from sound bites–and to do so with Greg, who gracefully and cogently applies clearheaded mainstream economics to the issue.

Obviously, there’s much we disagree on, but I think we disagreed without being disagreeable.  They may not sound like much, but I consider it an advance.

He clearly has a much more benign view of the impact of inequality on society, opportunity, politics, and so on, and he worries a lot more than I do about unintended consequences of pushing back on it.  I worry about the consequences of allowing worries about unintended consequences to prevent countervailing actions.

Two factual disagreements, which ain’t much after an hour-and-a-half (i.e, we agreed on most of the basic facts).  Greg argues that CBO household income data show federal effective tax rates of the top 1% to be about the same now as they were in the late 1970s.

Those data go from 1979-2010 and show the effective rate of the top 1% to be 35% in 1979 and 29% in 2010.  So that’s my point.  His point comes from the last chart on this page where CBO guesstimates effective rates in 2013 under current law–that dot does look close to the ’79 level, so he’s got a point too (TPC data show also pretty hefty increases in the effective rates of the top 1% post 2012, also supporting Greg’s assertion).  However, since then, based on profitability and asset appreciation, the effective rate of the top 1% may now be below that last dot.

It’s true that the top 1% are paying a share of the federal tax bill, but as I suggested, that’s because they’re getting most of the income gains and thus their effective rates have fallen since the late 1970s.  Top statutory rates on both income and cap gains are significantly lower now than in the late 1970s, even with the upper income changes associated with the 2012 fiscal cliff deal–remember, that deal locked in 80% of what were then the Bush tax cuts.

Second, and here Greg may well be right, we disagreed as to whether high-frequency trading actually raised (Greg) or lowered (me) liquidity in equity markets.  As I said, based on one and only one paper I’ve read on this (though I found it convincing), HFT lowers liquidity as liquidity providers can get burned as faster traders pick off stale quotes (millisecond price differences) before the original sellers can adjust.

Someone asked for the list I ticked off of examples of “rents” or rent-like distortions that drive inequality higher:

–As per Bertrand et al, oil industry CEOs paid for luck as their comp moves up with world oil prices;
–Tippy-top exec comp that moves up and down with the stock market;
Discontinuity as the top 0.1% of comp increases sharply relative to the average;
–Top inequality driven not by educational wage premiums but by relative gains of the wealthiest;
–Financial “innovators” overpaid relative to risks they created;
–“Regulatory capture” as financial sector pay rose as deregulation faded;
–Low accountability of comp in finance (JP Morgan gets fined; Jamie Dimon gets raise);
–Persistent race and gender earnings differentials;
–Tax loopholes, like carried interest and international tax avoidance;
–Piketty effects: accumulated wealth builds while labor income falls;
–HFT, as noted above;
–Rents in US health care, like big pharma.

And that’s surely a partial list.  What else, OTEers??

As I recall, Greg agreed with some of these but not all.

Anyway, the debate led me to believe that there’s a non-trivial set of ideas that reasonable people with differing views could agree on, as you’ll see if there’s a video.

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11 comments in reply to "Talking Inequality with Greg Mankiw and Charlie Wheelan at Dartmouth"

  1. Smith says:

    You’re looking at this all wrong!

    The top 1% doubles it’s income share of GDP and is taxed at the same rate?

    That’s crazy and says the tax code is very out of whack and extremely less progressive than it was previously. It’s a lot worse than you think because according to Piketty (frequently echoed by Krugman), it’s not really the 1%, it’s the .1% and .01% where much of the money is going. This means the tax code is drastically less progressive or the effective rates would produce much higher levels of taxation. Mankiw’s own argument that the effective rates are nearly equal show that the tax burden has dropped tremendously for the 1%. Of course this is so because maximum marginal rates for income dropped from Eisenhower 90% (at $2 million) to Reagan 70%, then Reagan 50% then lower, now around 40%, while corporate, dividend, and capital gains tax also declined. If the 1% percent get double the share of income, it means the effective rate needs to double. Furthermore, Picketty and Saez demonstrate how the decline in effective corporate rates, capital gains, and qualified dividends undermine any notion of a progressive tax system as it effects true income and wealth accumulation of the rich.
    If my income doubles, I’m going to pay a higher share of taxes. Why do the 1% have the reverse situation. Warren Buffet acknowledged the problem. Krugman in a blog post missed it discussing the exact same scenario. Mankiw has used it on his blog. It’s a common claim of conservatives, the 1% are being taxed at the same rate as 1979, what are you liberals complaining about? We’re complaining that the 1% are being taxed at the same rate as 1979, with double the income.

    Progressives need to read, debate, and become familiar with the arguments of the opposition, especially when there are powerful points made by their side that leave liberals dumbfounded until they see the logical fallacy. Then the conservatives own point can be used against them. Rhetoric, highly valued by the ancient Greeks, but not taught except in the context of critical thinking, which has a different emphasis, needs more attention.

    Again, the take away, effective rates the same level? Proof rates are much too low and a major cause of inequality.

    • Smith says:

      Again, my point is not that J.B. missed the huge drop in effective rates, but that the argument needed to be framed differently. One car readily concede that effective rates are the exact same on the 1% in 2010 as they were in 1979 and still use that fact as a bludgeon against the current system. Even after-tax CBO measurements that include all manner of transfer payments show the 1%’s share rising significantly, let’s say at least a 1/3, vs. Piketty’s doubling. Again, is there no progressive tax system where rising incomes are taxed at greater rates? There is for middle incomes, and even more so for low incomes. How can anyone defend rising income of the wealthiest not being taxed heavier when we do so for the middle class and poor? Another point is that only confiscatory income rates will discourage excessive compensation thereby reducing inequality without a wealth tax. Conservatives readily concede the point arguing higher rates reduce incentive to earn higher income. For progressives, that’s a feature, not a bug.

  2. Perplexed says:

    “Had a good debate on the issue of income inequality with Greg Mankiw at Dartmouth, well moderated by Charlie Wheelan.”

    Sounds like an interesting discussion, but isn’t the more important issue for society one of who we look to for real answers on inequality now that we know that economists will not and can not help us find them? Economists are so steeped in, and entrenched in “marginal products theology” that they have, as a group, intentionally blinded themselves to seeking a “scientific” understanding of an economic “system” that systematically produces such an irresponsibly unequal distribution of income as we have. Just look at this post for the evidence. Instead of working to understand and quantify the specifics of income distribution that results in extreme inequality economist assume “marginal products distribution” and head right for tax and other redistribution policies leaving the power distribution of income largely un-scrutinized and certainly not understood by any stretch of the imagination. Economists can not even begin to tell us even the basics like what percentage of the economy is rents, where they originate, and how they’re distributed. They have intentionally blinded themselves to any understanding of the actual workings and mechanics and expect the rest of society to accept their marginal products religion as well. When asked to talk about rents they can’t even list the most important sources like patent monopolies, monopsonies, committee set compensation systems, salaries set by so called “markets” that exclude huge percentages of available workers and operate with little, if any, market discipline at all, and government handouts acquired through government capture and propaganda. By their own choice, Economist have no better actual “scientific” understanding of how extreme inequality is generated than do biologists or astronomers. The only difference is that biologists and astronomers haven’t specifically refused to study the issues and find out what’s really happening; maybe they can help us, its important that society find some science that will before the inequality destroys our society and democracy. I wonder how much time we really have? Economists probably can’t help much with that question either I suppose. If economists haven’t worked to develop the science that credibly explains the inequality development process, why should we be interested in what they have to say about. More fun to just belly up to the bar & discuss it with whoever is sitting next to you as just as informative.

    • Smith says:

      Progressive economists have consistently pushed for an end to austerity and stimulus to restore full employment and “End This Depression Now” (Krugman’s book). This is a necessary step to restore some power to labor and lessen inequality. Debt overhang drains resources of all but the rich thus contributing to rising inequality. Debt relief has occasionally appeared in some notable economists policy prescriptions. Krugman has argued for basic anti trust enforcement (column on Comcast Time Warner as has also the Times editorial page). Currency manipulation by China has surfaced here and elsewhere as a drain on our economy, indirectly leading to ever greater inequality.

      High taxes on high incomes are not primarily for redistribution. They are confiscatory and inhibit excessive compensation, removing incentives as conservatives readily proclaim. They fund needed programs like research, infrastructure, and education, that are needed by middle class and poor from the best and most available source. Taxing the rich and spending on needed programs increases demand more than taxing middle class since the rich have save more (a lot more). Lower taxes for the rich play a central role in rising inequality. We tax the rich because that’s where the money is.

      Bloated unregulated financial services also play a major role in rising inequality as well as debt overhang and depression induced unemployment causing weak labor, stagnant wages, rising inequality.

      Economist Paul Stiglitz wrote a whole book “The Price of Inequality” full of facts and figures, as did now the very popular Piketty. Krugman just left Princeton to join an academic group studying inequality.

      So while some economists are blinded by ideology, self interest, corruption, and ignorance, there are also many conducting science, and assembling numbers, and recommending policies. There is hope. There is a need for more forceful and effective advocacy of progressive common sense policy. Mostly what is needed is a restoration of the New Deal.

  3. Robert Buttons says:

    Public school teachers making (don’t forget benefits!) making multiples of what private sector teachers earn.

    Jamie Dimon getting more $$ because of his skill at minimizing the govt imposed penalties for malfeasance ( rather than his skill at creating wealth.

    Organized labor (UAW) having no qualms about increasing production costs because they know their companies will be backstopped by taxpayers.

    • Smith says:

      Private schools pay scales do not provide any model for income distribution, and public school salaries are not a source of rising income equality since studies show gains go to the 1%. No one gets to the 1% on a public school salary.

      Dimon owes his job to the U.S. tax payer because while his bank didn’t need a bailout, it would have if the banks that did need a bailout weren’t rescued. So his pay needs to be taxed at rates rising to 90% at $2 million matching Eisenhower rate, and including all forms of renumeration like stock options.

      UAW is a sellout union that gave concessions to the auto oligopoly allowing them to pay new entrants a different pay scale. The failure of the GM and Chrysler was management failure, not labor costs. They sold the wrong vehicles, they have difficulty competing with reliable fuel efficient imports, they are dragged kicking and screaming into innovation leveraged by the bailout, or mandated by California pollution legislation. Germany has equal or higher labor costs, but probably not many Germans looking to buy American engineering.

      • Robert Buttons says:

        Counting salary, pension benefits, healthcare and converting for a short work year (38.6 wks), my back of the envelope calculations suggest an average Chicago teacher compensation of $131,000, which is the top 15%. Shall we run the administrators?

    • readerOfTeaLeaves says:

      Well, in my state (WA), to be a teacher in the public schools, one must have both a BS (or BA), as well as a Masters. Minimum costs of obtaining those at a four-year institution (public) is around $120,000, so many teachers are in long term debt simply to obtain the credentials to teach. This is not true of private school teachers in my state, who are not required (by state law) to obtain these credentials.

      In addition, why does our society accept the notion that some private schools’ shareholders (and managers) should be creaming profits off the educations of 6, 8, 10, 12, and 16 year olds?
      Since when did my children’s education become a potential ‘profit center’ for ‘private enterprise’? There are plenty of rents created by privatizing schools, particularly if they are structured as ‘corporations’ that pay ‘investors’ or ‘shareholders’.

      Some things should be **public** responsibilities.
      I personally don’t count public teacher salaries and benefits as ‘rent’, in part because if I live long enough I’d like to have some faith that whoever gives my meds is well enough educated to know what they are doing. In my state, all public schools must meet rigorous testing standards (testing has become a huge industry, in a sense a ‘rent’ in an effort to create greater accountability for public dollars).

      Other rents:
      Extended copyrights.
      Commodities price manipulation.
      National sports franchises (city governments could certainly own, operate, and get the profits from these).
      Any money in a tax haven, because havens are a way for wealth to dodge and evade its social responsibilities to the societies in which the revenue was produced.

      As for HFT, I don’t see ‘liquidity’ as the key factor.
      The main point is, the HFT traders are gaming the system. My mutual funds, pension funds, and other savings are getting hammered first by ZIRP, and now also by these HFT traders who have an information advantage. Liquidity is a side issue, but it doesn’t surprise me that that’s where Mankiw wants to focus attention — in order to keep the spotlight away from what is basically a very elaborate, high-tech form of theft.

      As for Mankiw, his blog mentions Piketty as someone who ‘philosophically’ believes in ‘redistribution’. I’m not reading Piketty that way. I read Piketty as a man who has identified very real problems with capitalism — if left unregulated, it will destroy itself. A wealth tax is one vehicle to keep capitalism functioning over time; inequality being a measure of the health of capitalism (much like a physician measures blood pressure, cholesterol, or hormone levels). Too much inequality is a symptom of a system out of whack. It’s interesting that Mankiw appears to have difficulty reading Piketty in that light.

  4. Smith says:

    My point is the major concern about rising inequality is most and lately all, of the gains in income, are going to the 1% The top 80th percentile, 3.3 million public school teachers above and below included, or 85%, are not the problem. They’re an easy target because tax dollars pay their salary and we know their salary. Marketing managers who sell you stuff you don’t need may make more, but their cost is invisible to you though you surly pay for their salary too. And then come the bankers you support with deposits they use to lend others, and whose banks you bailed out. That’s not to say I wouldn’t like to know how the U.S. spends over $10,000 per student, 20 to 23 students per class (in New York it’s $16,000). In Finland, education has been propelled party by elevating the status of teachers.

    I would claim teachers are closer to the 80th percentile instead of 85% partly because I’m not looking at just a high cost urban city, and partly because I don’t buy into the notion of adding to salaries the imputed value of unpaid vacation, which admittedly many teachers work through to make additional money. Some also correct homework in the evening.
    U.S. $56,383 average salary for teachers (2010 figures)
    Average for states with high cost of living
    N.J. $68,797
    N.Y. $75,279
    Ill. $59,113

    In NY, total cost $110,000, made up of salary $71,000, pension $23,000, $16,000 healthcare, social security, etc (2011 figures)

    Rising Inequality from growth of1%’s share 1979 to 2007
    Page X, Summary Figure 1.
    Also look at Figure 2 on page 3.

    Chicago is 16% more expensive than U.S. so $56,000 x 1.16 = $64,500

    New York City Chancellor Carmen Fariña will earn $212,614 a year in salary on top of her pension of about $200,000.

    She makes it into the 1%. but just barely, crossing the threshold with
    $371,689 (or $393,941 including capital gains)
    P99 Income Threshold

  5. Bill Northlich says:

    “we disagreed as to whether high-frequency trading actually raised (Greg) or lowered (me) liquidity in equity markets”

    The issue in HFT is Flash Crashes. The system, by demonstration, is unstable. This leads to real losses by real people. There are lots of mini flash crashes which don’t get reported.