In case you haven’t been following, here is the recent series of events that has transpired:
Greg Mankiw wrote an, um, interesting Economic View piece for the New York Times entitled “I Can Afford Higher Taxes. But They’ll Make Me Work Less.” He used himself as a case study, so it’s difficult to say that he’s wrong when he states that higher marginal taxes rates will induce him to produce fewer op-ed pieces or textbooks or whatever else it is that he produces. However, that didn’t stop the econ wonkosphere (can we make that a thing please?) from jumping all over him with criticisms of varying degrees of relevance. Some argued that it was misleading to add in a “no tax” scenario to his analysis since it distorts the framing of the argument and makes a tax increase look extra bad by comparison. Some criticized Mankiw for not acknowledging the existence of tax shelters and the like. Some don’t appreciate the fact that Mankiw likes to point out that he works at Harvard and writes a popular textbook. Some point out that it’s distasteful for anyone to imply that he works solely for the monetary rewards. Some snarkily conclude that Obama should raise taxes because fewer Mankiw columns would be a good thing. My favorite was a response from Brad DeLong at UC Berkeley, mainly because it includes the following visual:
Personally, my biggest gripe about the article, and with this sort of analysis in general, is that it is potentially at odds with textbook economics. You may recall that your economics instructors told you that the labor supply curve looks like this:
That backward-bending part at the top is what’s important here. Economists generally agree that, at some point, the number of hours worked actually declines as wages go up. Think about it- if you made a million dollars an hour, would you work a 40 hour week? Probably not. The technical explanation is that there are two competing effects in play when discussing the tradeoff between labor and leisure: first, as one’s wage increases, the opportunity cost of sitting on the couch and eating cheetos goes up, since every cheeto-filled hour is an hour not getting a paycheck. This effect suggests that people will work more (i.e. consume less leisure) as leisure becomes more expensive and is called the substitution effect. Second, there is an income effect in play, and this tends to work in the opposite direction from the substitution effect. People’s preferences and willingness to pay for leisure goes up as income rises. Therefore, the income effect suggests that people will work less as their wages increase.
If we put these two effects together, we get an ambigious result. Economists think that the substitution effect dominates the income effect at lower wages and the opposite is true at higher wages, which is why the textbook labor supply curve looks like the picture above. Since taxes decrease effective (read, after tax) wages, Mankiw is arguing that he is on the upward-sloping part of the supply curve. I know better than to argue with one’s preferences, but I do question whether he is representative of his income bracket- after all, if Mankiw isn’t on the backward-bending part of the labor supply curve, who is? I will acknowledge that Mankiw, perhaps unintentially, makes a good point in this regard- he states that he lives well within his means and therefore doesn’t have to worry about maintaining income in line with his current level of consumption. If he were instead out buying Ferraris and summer homes and G6′s and whatnot, he might have a different take on the matter since he would need to work more to make up for the income lost due to the tax increase in order to keep buying all of the shiny stuff.
Mankiw did indulge some of these critics and made some follow-up comments on his blog. However, one of the most notable responses was from Barry Ritholtz of The Big Picture, a pretty popular economics blog. (Feedburner says that Ritholtz has about 147,000 subscribers, which if I recall correctly is more than Greg has for his blog. Not that that matters, of course.) Mankiw didn’t help his case by responding to Ritholtz with the following:
Addendum: Some blogger named Barry Ritholtz poses a bunch of questions for me, which I won’t bother taking the time to answer. Unless, of course, he offers to incentivize me sufficiently. For free, however, I will answer one of them: “You teach at Harvard and live in ‘Taxachusetts.’ If state taxes are so important, have you considered teaching at Yale, and living in much lower state tax land of Connecticut?”
First of all, the top state income tax rate is higher in Connecticut than it is in Massachusetts.
Second, Yale? Are you serious? Yale?
Sigh. You’re probably not surprised that the aforementioned wonkosphere didn’t take kindly to the “some blogger” characterization. I’ll bet you never guessed that there was so much drama over here in nerd land, but I’m telling you it’s like a soap opera sometimes. (Do I need to remind you of the octagon post?)
Even “some comedian” got in on the action:
|The Colbert Report||Mon – Thurs 11:30pm / 10:30c|
|Tax Shelter Skelter|
I have to admit that I feel a little bad for Greg here- I promise you that he’s a really good person and the preceived level of douchebaggery as a result of some of his comments isn’t really representative. (Then again, his response to my advisor leaving because he didn’t get tenure was something along the lines of “it was dumb to choose an advisor who didn’t have tenure” followed by a statement about “knowable information.” I mean, he’s not wrong, but I can certainly see how his comments can be taken poorly.) These sorts of issues could all be solved by a good PR person, and hey, wouldn’t that stimulate the economy too?
Economists may make assumptions about rationality and self interest, but I am here to tell you that we have feelings too, and all you haters made Greg feel bad:
See? Now can we all please play nice?