Thursday 27 June 2013

Greg Mankiw at it again...

Greg Mankiw came up with a defense of the top 1% (note: I provide the link because that's the done thing. I don't actually recommend that you follow it...). Many people, such as Dean Baker, Harold Pollack, Paul Krugman and even The Economist take this apart (and this time I do recommend you follow the links), take this apart.

And yet, they are being much too kind.

Greg Mankiw has written an Economics textbook that is very well regarded, and is still the leader in the undergraduate universities market in the US (although Paul Krugman's seemed to be catching up fast). Because of that, a lot of people will like him or, at any rate, not want to appear to have too bad a word for him. Yet there is a point where this becomes enforced blindness.

And with Mankiw we are now long past that point, though people may need a different tipping point to come to realise it. I remember that the first time I posted a critical comment about something he had said, I felt compelled to add that he of course had to be a much better economist than me and that this made it all the more surprising to see him say something so demonstrably false. I got several replies (including by professional economists) saying in essence that I was probably a better economist than him, if only because I retained intellectual integrity.

I had not reached my tipping point then, but I think I had before the event that should have made every observer come to the obvious conclusion: his willingness, in promoting Mitt Romney's campaign, to make countless statements that were in flat contradiction of his main claim to fame, namely his own textbook. I have already written in these pages about my puzzlement at how willingly some academics will sell their intellectual integrity to the highest bidder. This should be the ultimate crime in any intellectual field, yet in economics it seems to be a career booster.

Presumably, the wisest thing would be to ignore him entirely. But he is, regrettably, still trotted out as a credible voice in the media, and indeed by people in positions of power. So, just look at what can pass for wisdom these days:

Using Paul Krugman's summary, "Mankiw argues that the 1 percent make so much because of their high contribution to output — basically, that they have high marginal productivity. So they earn what they get; and Mankiw further argues that economic opportunity is in fact relatively if not perfectly equal."

Mankiw comes up with Steve Jobs and J.K. Rowling as evidence that it's all about phenomenal marginal productivity. Well, I would dispute that it was true even of those, but that is beyond disingenuous: the top 1% is not near being fairly represented by this sample.

On the other hand, it has been shown that CEO's (and other top management positions) compensations were typically allocated in a "you scratch my back I'll scratch yours" process, by boards made up of other executive directors, and with an almost complete disregard for actual performance -CEOs of companies that had lost money tended to nonetheless get big pay rises. This has produced a situation in which the ratio of top to median salary in big organisations has gone through the roof since the early 80s, despite innovations and growth not improving over the period.

It's also amazing to talk of rising inequality without giving an example in finance (which has captured over 50% of the additional value added in the last decades). It's hard to claim that traders have a stellar contribution to output -indeed, beyond the level where they provide sufficient liquidity -and we are well beyond that- they probably have a negative contribution.
Still, one may retort that what matters for compensation is not contribution to output in general (i.e., contribution to the social good), but rather to the profits of one's employer. This would hardly be a positive feature of the current system (and therefore this would be something that the state would have some grounds to try and redress), but a feature nonetheless.

But, on top of that not explaining the top managers getting pay rises when doing poorly, or golden parachutes, what then would you make of the hedge funds managers raking in over a billion dollars a year (admittedly there are not many of them) despite trailing the leading indexes over a decade? Their productivity was less than that of a few lines of software that would pass random orders. A billion dollars (taxed at 15% only, to boot) for that? Surely a sign that the system is the best there can be.

Mankiw's odd choice of examples (though even they are unconvincing) should not be seen as just an oversight. This looks much more like propaganda.

Of course, even if the incredible compensations were related to high marginal productivity, that would not mean that they should stay that way. No one gets wealthy on a desert island, and the environment that led to high productivity needs to be paid for, presumably to a greater extent by those who benefit from it the most -Dean Baker touches on that subject. But that Mankiw's conclusions would not even follow from his point should not let us concede it when it is blatantly disingenuous.

As for equality of opportunity, it defies belief. Here we have a Harvard professor, allegedly of a scientific field, making his point based, in the great Tom Friedman tradition, on his own (highly implausible) perception of a single anecdote, despite there being tons of easily available data on the subject. Data that, should we be surprised about it, would have flat out contradicted his point.

I don't think I should take too much time to describe how much -especially in a society where who you know is getting increasingly more important than what you know- a child growing in a destitute environment will (and certainly all other things being equal) have inferior opportunities from one growing in a highly privileged one. If you want anecdotal evidence, look at the Bush family, and its incredible succession of great rewards to extremely mediocre individuals, but the usual way to do that is to look at interquintiles mobility:

(actually even that will only be an incomplete picture of the gap: the increase in inequality has mostly been between the top 0.1% and the rest. Even the top quintile only has 0.5% of its members in that particular stratosphere).

That Mankiw should so strongly violate a major principle of academics when, by an oh-so-unexpected coincidence, doing so would so greatly serve his predetermined conclusion should not be viewed, as Krugman and Pollack appear to do, as mere lack of observation and curiosity. It is dishonesty of the highest order. And, as I earlier pointed out, Mankiw had already long, long got past the point where there was any doubt to give him the benefit of.

Of course, I believe that Baker, Krugman and Pollack know that, but that they cannot openly say so in major publications (would that be a case for libel?). This is not -yet, at any rate ;-) - a major publication, so let's state it plainly. Greg Mankiw is dishonest.

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