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Mankiw Vs. Colbert: The Nerd Humor Battle Continues…

October 26th, 2010 · 13 Comments
Econ 101 · Just For Fun

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
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

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?

Tags: Econ 101 · Just For Fun

13 responses so far ↓

  • 1 Dan L // Oct 26, 2010 at 2:50 pm

    At odds with textbook economics? Presumably not N. Gregory Mankiw’s favorite textbook!

    I wouldn’t say that it’s “distasteful for anyone to imply that he works solely for the monetary rewards.” But when you specifically trumpet that the only reason why you write columns is out of selfish interest, don’t you lose your credibility altogether? This is a slight variant of what DeLong wrote, but I think that the situation is even worse. If you are a 100% self-interested logical econobot (as Mankiw more or less presents himself), then your secondary motivation in writing columns (beyond the paycheck) is not to educate or to better society overall, but rather to convince chumps to choose policies that will enrich your selfish interests.

    To be fair, I doubt that he is really that evil, and he surely believes in what he writes. But he’s full of shit when he says that he just writes columns for the money; clearly he does it for the fame.

    And just because you know the guy, that doesn’t mean he’s not a douchebag. (Maybe you’d help your case here if you actually gave an example of him being nice rather than douchey.)

  • 2 econgirl // Oct 26, 2010 at 3:30 pm

    To be fair, I personally think that the example that I gave is more in line with econobot much moreso than douchebag, and that is consistent with his viewpoints in general. Furthermore, the fact that he is participating in the parodies to any degree shows that he’s a good sport. He’s also very generous with his time when it comes to talking to people about economics- educators, grad students, undergraduates, whoever- and seems pretty dedicated to helping the field of economcs answer what he considers to be important questions. (And I’m not just saying this because he bribes me with Ec10 coffee mugs.)

  • 3 Rhiannon // Oct 26, 2010 at 9:28 pm

    I get the feeling that Mr Mankiw is being a little tongue in cheek about it all – and it seriously amuses me that it was taken as far as Stephen Colbert. It just reinforces how funny this subject really is.

    But, I do see the logic in his arguments. Theoretically, if you can make any extra money than you will do so, allowing for leisure, your own personal tastes in regards to work, education, etc. However, I have come across people who don’t see the point in working harder if they’re not going to get much more pay to compensate them. Why should they battle to finish all their intense work throughout the day to earn the same amount as the uneducated and lazy employee next to them, who technically earns more because of the tax brackets? There are families in Australia, so I have heard, that refuse to work harder or get a better compensating job because they will move up a tax bracket and lose their social security payments, and thus lose money. Now, I do believe that many of these people also do not make intertemporal decisions – they are not considering where this job will get them to, they are mainly considered with the now. Probably illogical, but sadly, we are not Vulcans.

    But, logically, if Mr Mankiw is going to be paid less for the same work he is doing now, it seems to me that he should work less as he is no longer getting the compensation for the work that he considers fair. It also means he may drop into a lower tax bracket, and thus might still earn the same amount, or close to it. Maybe.

    I think part of the problem is that these ‘rich’ people don’t seem to look at the total of what they are earning, say, $250,000, but at how hard they have to work to get the next $1,000. Despite the fact that it is much easier, and probably means less to a rich person to get $1,000, than it is for someone who earns $30,000.

    But, regardless of all of that, logic says, as per the text book, that we will work harder (given our various leisure and work tastes) until we reach a certain income, and then start working less. It just so happens that Mr Mankiw does not feel that he should work as much as he does, if he is not going to get paid as much.

    Further more, will it really hurt the economy that badly? I don’t seriously think that the government will be keeping all that money that they tax, wouldn’t it be going into the health care system, social securities, and capital works in the country? And wouldn’t all of this help to stimulate the economy? It might make the rich work less, but the poor will be higher employed, and better cared for. Which will have a flow on effect.

    Anyway, I’ll stop writing now. Tax and social welfare are some of my favourite subjects, I could go on forever! Love your work econgirl!

  • 4 Rhiannon // Oct 26, 2010 at 9:37 pm

    Haha – I just realised part of your argument. Man, I should really read these things more carefully!

    It is surprising that at Mr Mankiw isn’t at the backwards curve, but it must be that his personal tastes are different. Wow, I feel kind of stupid now, having written all of that and missing the main point of your article!!

    Sorry. :)

  • 5 Uncle Jeffy // Oct 26, 2010 at 11:09 pm

    Probably far too long ago for most of your readers to remember, but…..

    Once upon a time (in the oral tradition of Univ. of Chicago) there was a stock analyst who wrote under the pen name “Adam Smith.” And in a book called “Supermoney,” he described the experience of visiting a GM plant in Ohio and talking to one of the workers at the Pink Elephant bar (no, I’m not making this up). The worker had been identified by others as having never worked a five-day week since the plant had opened. When asked why he only worked a 4-day week, the individual responded “Well, I can’t get by on only three days.”

    So, Greg, it all depends on your taste for leisure.

  • 6 econgirl // Oct 26, 2010 at 11:18 pm

    I’m pretty sure my grandfather and uncle worked at that GM plant. Lordstown, Ohio? And don’t worry- my grandfather was working 6 or 7 days a week to make up for that guy’s 4. =P

  • 7 Dan L // Oct 27, 2010 at 10:22 am

    “To be fair, I personally think that the example that I gave is more in line with econobot much moreso than douchebag…”

    …thus demonstrating how easy it is to be an econobot and a douchebag at the same time.

  • 8 econgirl // Oct 27, 2010 at 4:21 pm

    You aren’t wrong. :)

  • 9 Nudge blog · Assorted links // Oct 27, 2010 at 10:58 pm

    [...] 1) Jodi Beggs on Greg Mankiw’s NYT column about work and taxes. [...]

  • 10 Amarsir // Oct 28, 2010 at 4:23 am

    It all seems not only petty, but irrelevant. It’s not a wage tax, but an income tax. Due to finite supply my labor curve might bend back but I can’t imagine that investments would, and that’s what really matters.

    When would lower reward ever incentivize greater risk taking like, say, hiring people? (OK risk taking would go up at the margins, out of desperation. But that’s not hiring.)

  • 11 Joao Pedro Afonso // Nov 1, 2010 at 8:19 am

    Mankiw’s chosen example, is a kind of an oddity to me: it argues that the taxes on the rich will discourage him from working/writing more, but then, had it his way, what he would have done in his example would be to suppress the need of his children to work more… in order to fulfill what he thinks would be rightful necessities (to help them with their houses? To send their kids to college? Of course they are).

    I can approach this example in two ways, neither insuring Mankiw’s desired outcome: First, is unconvincing an argument of the kind ((+taxes =>-work)=bad), when the pretended outcome is precisely to save the work of others. If the idea is to promote production and work, Mankiw’s example only assures there will be consequences on the distribution of these between different workers/producers, when the fiscal approach change, not that they’ll increase or decrease. This is not a light matter considering the unemployment and the social inequalities (gap rich-poor) in the present economic life of the nations. If Mankiw doesn’t work, maybe others more in need, will work instead of him. Hell, if there was not the taxes he was complaining about, he might say he would be accepting the opportunities that he now rejects, but what assures him he would have them, for a start? I’m not talking about the fact that, by living in the “perfect” world for him, he wouldn’t have the appeal of a “rebel” to it, instead, I’m talking about the fact that, as he has been rejecting the opportunities that comes to him, others must have been doing that too (actually, this is the central point of his argument as he is generalizing what he feels about taxes). So, imagine the “perfect” world, where opportunity rejection is much less but, actually, incidentally, he is not the first choice of those opportunities… Maybe he is deceiving himself about what he would gain with this.

    Reading carefully what he wrote, I think his answer (if he insists on an easy one) would be, “yes, others will work, but it is not MY work”. So, everything reduces to know how much we want his extra work against the work of others. Accepting we want it, let’s proceed to my second approach:

    If Mankiw were really serious about setting money for his children, then to get the same in the tax case vs non-taxes case, he would have to work 10 times more than now. Mankiw goes to considerable length to explain that he is not expecting all the world to appreciate his work, but that those who happens to like it and probably want more, will be fooled in that desire by the taxes, because they’ll depress him into write less. But the example presented contradicts that idea, since kids are always a powerful motivation to work: if there are certain goals of comfort to provide, to receive less for each work means he must produce more, isn’t?

    Actually, this is a remark I should extend to the curve presented by Jodi (which only goes to show I probably would have flunked at Economics 101): How it goes along with the reality of people who had to work two jobs to sustain themselves? The curve appears to imply the lesser the wage rate, less hours people will work, but the simple math of people who have to work overtime to have the neck above the water, belies this.

    In the end, I think what really hinders Mankiw from producing more, is related, again, with the self perceived importance of HIS work. If his attitude was really a little mercenary, as he tried to convince us, he would simply worked more to gain the same (there is no substitution effect here since everyone is subjected to the same fiscal approaches… the ones who’ll work more, will receive more). But if each work has an special individual importance to him, then he might resent the implicit devaluation more taxes imply to him (since he wins less with it). It is hard to shake that devaluation notion since it is not well visible that ALL the works in the same condition will devalue in the same degree… in relative terms, there will be no devaluation.

    One last word about his example: by running one where he compares a situation with no taxes to one where there are, he is not simply camouflaging the real impact (likely much less impressive) of the situation exemption vs no-exemption, he is also defying gravity. “No free lunches!”, he picks the pluses of the actual society (8% grow) and take out all the minuses (taxes) to get a ten-fold gain over 30 years. What he forgets is to take out the services which came with the minuses too, like the justice system which ensures he is not going to be rip off by his investment targets, or which will protect them, or that he will be payed by the work he does; or like the schools that prepare the workforce for the companies to run smoothly, or the social services which prevents social unrest which preempts the need of costly private armies for the companies; or… I could go on, but I think the main point was made: the numbers used are deceiving about what would really happen. Actually, there is failed states in Africa where his “perfect” world near exists. They are great to do money if we have the balls, but the ones who succeed to do it, prefer to live in other parts of world… why is that? :-)

  • 12 MaT // Nov 5, 2010 at 9:55 am

    Hi ! I’ve been studing economics for almost two year now, i’m from argentina (so forgive me if my english it’s kind of clumsy).
    So i read up here, doesn’t truly matter if Mankiw works more or less, he belongs to a social class with high incomes and the taxes hi is complaining about are going to give the state more cash flow to boost the economy through an increase of public spending (don’t know if this is the correct term in english). This increase woul probably go/can go to help people with lower incomes than Mankiw, much lower, and the social clases with lower incomes are the ones with more tendency to spend more money than save it, so this could be a way to make the economy increase through the consume.
    But again, i’m just in second year (of five), so maybe my point of view is not very accurate and i don’t know if i explain my self well, i never discuss economy in english XD.

    econgirl, you have a great job done in this site !

    cya !

  • 13 Amarsir // Nov 7, 2010 at 9:40 am

    @MaT – “doesn’t truly matter if Mankiw works more or less, he belongs to a social class with high incomes and the taxes hi is complaining about are going to give the state more cash flow”

    But if he works less, won’t he have less income and then less taxes, giving LESS cash flow? Are you sure it doesn’t matter?

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