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Defending the One Percent? Mankiw on Inequality and Just Deserts

Harvard economist Greg Mankiw has written a forthcoming article, titled “Defending the One Percent,” that should be required reading for anyone interested in economic justice and inequality – perhaps especially for those like myself who will dispute Mankiw’s conclusions. As a WaPo opinion piece rightly suggests, Mankiw’s anecdotal affirmation of equality of opportunity is problematic. However, it would be wrong to dismiss the piece because of this, for it is a remarkable (and remarkably candid) laying-out of the fundamental challenges from mainstream economics to Catholic concerns about inequality.

Mankiw’s overall argument suggests that we have three possible ways of deeming whether wealth inequality is wrong: a strictly utilitarian perspective, a “veil of ignorance” perspective, and his preferred alternative, what he calls the “just-deserts” perspective, in which “people should receive compensation congruent with their contributions.” In defending the latter perspective, Mankiw makes a number of provocative claims:

He disputes the claim about inequality-of-opportunity partly on grounds that genetic inheritance plays a role in various traits that correlate with high income. He rejects claims that most high-income individuals are compensated beyond their productivity, and (rather carefully) refutes the standard arguments against such compensation. He instead argues that high compensation at the top is the result of increasing demand for high-skilled workers relative to low-skilled, and technological change which allows some of these high-skilled individuals to leverage their talents across enormously large fields of demand. If the best possible doctor could be seen by as many people as Twins catcher Joe Mauer, he would probably make more than Joe Mauer. He accepts that the wealthy benefit not only from government infrastructure and research but also from transfer payments, but suggests that the 1% already contribute disproportionately to public funds through progressive taxation, and that over time, government spending has increasingly shifted from infrastructure investment toward transfer payments.

Mankiw is a worthy conversation partner, largely because he is not a doctrinaire conservative. He actively supports Pigovian taxes on negative externalities (e.g. higher gas taxes), and is far more careful to accept the existence of distorting, “rent-seeking” problems in present systems. He accepts, for example, the claim that some activity in the financial sector is excessive not because of its primary work of efficient allocation of investment capital, but because of opportunistic use of split-second information and the like. So Mankiw is not blind to our problems. But he does want to fundamentally defend the present system as largely just and effective. I want to call attention to three underlying tenets of his argument, because I think these – and not the empirical issues above – are what should be disputed by Catholic social thought:

First, he argues that both utilitarian and “veil of ignorance” approaches fail because they support conclusions that contradict our “innate moral intuitions.” He gives examples: strict utilitarianism would have to support not simply national but global progressive taxation and redistribution, as well as lead to a “best-case” scenario where the most productive workers actually had less leisure and consumption than less productive workers (since this would create the maximum total utility for the society); “veil of ignorance” tests would support programs like forced kidney donation (since you don’t know if you will be the one in need, and surely if you were, you’d want one available).

But we should note something about his (quite standard) use of utilitarianism: he explicitly assumes that consumption and leisure equal utility, while work effort equals disutility. This is really where Catholics – who have a rich encyclical, Laborem Exercens, on the dignity of work as not only good, but imago Dei – should pick the argument. So long as work is fundamentally a disutility, then no doubt Mankiw’s central conclusion – that higher compensation should come from more work productivity – follows. Even in the article, Mankiw is forced to defend his (lower) compensation as an economics professor on the grounds of “personal and intellectual freedom” – that is, on leisure and consumption grounds, rather than on the more obvious grounds: he likes the work more! On his grounds, one goes into academia (despite lower salaries) not because one wants to teach or write, but because one wants the more flexible schedule. What needs to be challenged here is the whole perspective that work is a disutility. Is it really a disutility for Joe Mauer? C’mon… as the WaPo article nicely captured in a closing vignette on a late-night highway tow truck patrolman, the guy who has to drive around all night and stop to helping stranded motorists seems to do encountering some real disutility, doing work that many of us would refuse. How is it that he only “deserves” $31,000 a year?

The second challenge is the story Mankiw tells about rising inequality as hinging on education and skill development. Setting aside genetics, he commendably suggests that we “focus on the left tail” of the income distribution spectrum, for it is “easy to believe that children raised in these circumstances do not receive the right investments in human capital.” A bit inhumanly-worded, but the point is well-taken. However, this is followed by the problematic anecdote of the equality of opportunity had by the middle-class relative to the 1%. The argument here is, don’t knock the 1%, just bring up the bottom.

Such an argument is appealing to those who have succeeded in the meritocracy. Like Mankiw’s, my parents didn’t go to college, and I have ridden the meritocracy to where I am (such as it is), and certainly could have ridden it further (in monetary terms) if I’d taken other available choices in my life. But Mankiw’s perspective seems to neglect exactly the “winner-take-all” point that he made before. My Jesuit high school education, my prestigious liberal-arts college education – both were vastly more affordable and less competitive 15 years ago than they are today. Education and skill development cannot be universally available if the post-graduation employment market is increasingly competitive and winner-take-all – what happens is that the dynamics of the job market just “backs up” into the educational universe.

The third and final point is Mankiw’s recourse to the piece of economics that I find the most problematic of all: the assertion that, because consumption utility is based on subjective preferences and we have no way to quantify those preferences, “it is impossible to compare utilities across people” and so there “is no scientific way to establish whether the marginal dollar consumed by one person produces more or less utility than the marginal dollar produced by a neighbor.” 

What this means concretely is that we really can’t figure out if medication for a poor child’s simple illness “produces more utility” than the $50 spent on the gizmo in the SkyMall to keep you dog amused for an extra hour… or to monogram your designer light-up bathroom mirror… or, well, you get the picture. If there’s any observation in the article that should go against our “basic moral intuitions,” it is this one. From Aquinas’ distinction between natural and artificial wealth to Keynes’ distinction between absolute and relative (emulative) needs, there are crucial arguments that suggest satiable basic needs should have priority over insatiable, socially-competitive ones. This moral scrutiny of spending really should be the Christian response to inequality, as it was in the works of earlier Catholic writers like John Ryan, who criticized the “higher-standard-of-living fallacy” which believes that “right life consists in the indefinite expansion and satisfaction of material wants.” The problem isn’t having a lot of money, or even that they got it in some “unjust” way; the problem is believing that there is no social claim on that money, simply because it is a “just desert” based on their economic productivity. Mankiw may be right economically that, in a lot of cases, it really is a just reward. The problem is that the 1% should be challenged on how they spend it.

Of course, it’s easier for Christians to avoid this problem and make other arguments, because it would (rightly) call attention to our own  non-1% spending habits as open to moral scrutiny. I say, bring it on.
 

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Let me suggest the following like of reflection:

Let the distributable goods available in a society be thought of as a banquet. Some of the goods, e.g., the music played at the banquet are equally available to everyone in attendance. No one loses by what another gains. But other goods can be distributed to individual participants. There may well be reasons to distribute these goods such that some people get more than others. Among these goods, some tend to give their recipients opportunities for greater protions of these distributable goods.

If this picture has any plausibility, then would it not be proper to claim, from the perspective of Christian principles of social justice, that no one ever has an absolute title to whatver his or her portion, regardless of the consequences of his or her having that portion impact his or her fellow banqueters?

If so, then public policies and practices  e.g., taxes, budgets, grants, etc. should always provide  occasions for redistributions aimed to ensure that every participant has sufficient goods to lead a normal life. The "market" (whatever that means) may well be included in the these policies and practices, but it is never sufficient of itself. 

More abstractly, economic rationality alone does not yield either sound political practice or moral principles. 

"...because consumption utility is based on subjective preferences and we have no way to quantify those preferences"

The same is true of productivity. There's no way to measure it, unless we assume that employers are generously giving their employees the value of their marginal productivity, which is laughable, So there's no way to "scientifically" assure ourselves that the rich are more productive than the poor. This is especially true of the banking sector. There are long-running academic arguments about how to measure the banks' role in the economy, with some even suggesting that they have no economic productivity. Yet they consume an ever growing share of income.

You don't have to be a Marxist to be extremely skeptical of orthodox economics. Having any job other than being an economist will do.

But we should note something about his (quite standard) use of utilitarianism: he explicitly assumes that consumption and leisure equal utility, while work effort equals disutility.

I expect that, by "quite standard", you are indicating that this framework is not actually his own, but Mirrlees'?

This is really where Catholics – who have a rich encyclical, Laborem Exercens, on the dignity of work as not only good, but imago Dei – should pick the argument. So long as work is fundamentally a disutility, then no doubt Mankiw’s central conclusion – that higher compensation should come from more work productivity – follows. Even in the article, Mankiw is forced to defend his (lower) compensation as an economics professor on the grounds of “personal and intellectual freedom” – that is, on leisure and consumption grounds, rather than on the more obvious grounds: he likes the work more! On his grounds, one goes into academia (despite lower salaries) not because one wants to teach or write, but because one wants the more flexible schedule. What needs to be challenged here is the whole perspective that work is a disutility. Is it really a disutility for Joe Mauer? C’mon… as the WaPo article nicely captured in a closing vignette on a late-night highway tow truck patrolman, the guy who has to drive around all night and stop to helping stranded motorists seems to do encountering some real disutility, doing work that many of us would refuse. How is it that he only “deserves” $31,000 a year? 

My take on Mankiw's arguement here (presumably following Mirrlees) is not that "work is fundamementally a disutility" but that work *effort* is fundamentally a disutility.  I do think the latter insight is intuitive, and doesn't contradict the Catholic social-teaching view you're propounding here.

Suppose I am a heart surgeon.  And suppose I love what I do - curing serious ailments and saving lives brings me a lot of satisfaction, high wages, enjoyable collaboration with colleagues - all things that, bundled together, add up to "utility" for me.  I would think that Catholic social teaching would approve of my career, because it is what I am meant to do - what I am called to do; it imparts on me the dignity of a profession; it contributes to the well-being of those in need and society as whole; and for other reasons.

Because my services are highly in demand, I can do heart surgery 40 hours a week, or 65 hours a week, or 100 hours a week.  I might save more lives working 100 hours than working 40 (which is to say, my total productivity would increase).  But at 100 hours every week, the quality of my work would be at risk; and my time for my family, or golfing, or teaching, or whatever other things I do when I am not practicing medicine, would need to give way for it.  Thus, I am disincentivized (after a certain point) to apply more work effort to my work.  And I think the church is fine with that way of thinking.

Utility is all about trade-offs and the criteria we use in making them.  Mankiw seems to think of himself what quite a few of us think about our professions: that had I chosen Y instead of X, back at that critical stage of life where we make the choices that determine the rest of our working lives, I might be earning more money.  As a professional economist, he might have approached it more rationally than most of us do, and said to himself, "Slaving at a big law firm for 80 or more hours every week to make partner is not what I want to do; I won't make as much money in the long run teaching economics at Harvard, but I love the work, I love teaching, I love the lifestyle, I love the flexibility it gives me to write."  All of those things, in combination, add up to that thing that economists call "utility".  

Regarding the tow truck worker - if the labor market for tow truck drivers is efficient and fair, then he "deserves" $31,000 in the economic sense that it is what the market will bear for that skill set.  Driving a truck, hooking up disabled vehicles and bringing them to the nearest garage is not nothing, but it's something that an awful lot of people are qualified to do, or can easily become qualified to do.  

Btw, I agree pretty strongly with Mankiw that the proper focus for our social concern - and in this forum, we could say, the proper focus for our Catholic moral concern - is the situation of that tow truck driver: a worker who is relatively near the left tail of the income distribution.  He is trying to support a family of three on $31,000/year.  What can be done for him?  

 

Paul Krugman has something to say about Mankiw's article on June 22nd at his blog.  See "Greg Mankiw and the Gatsby Curve".  Krugman  summarizes the thoughts of several other critics:  1)  the size of the rewards of the 1% is determined ultimately by policy and taxation as well as by productivity, 2) that the children of the rich have more opportunity than those of the non-rich, and 3) perfect equality would require unacceptable force (I'm not too sure of this point).

http://krugman.blogs.nytimes.com/2013/06/22/greg-mankiw-and-the-gatsby-c...

He adds a few thoughts about"equal opportuniy and the boomers not realizing that times have changed since he/they were young.  See "We Were  Middle-Class Once, and Young".

Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

To repeat one of my mantras:  the most important unanswered questions in economics are:  what is a fair wage?  And:  what is a fair price?

I think it's obvious that both utility and disutility have a lot to do with the answer about a fair wage.  But I ask:  WHY should productivity count for so much (as the conservatives tend to think it does)? Sure, no product, no reward.  Still, there's more to a fair wage than that.

what is a fair wage?

 

Perhaps our perception of 'fair' is the real issue.  The gospel story of the vineyard owner paying all the workers the same daily wage despite the fact that some worked all day and others only an hour certainly contradicted the early workers sense of 'fair' and it does mine as well.  In our market economy, the concept of 'fair' isnt even considered; its a replacement cost concept:  if I dont work for you, what will it cost you to find another worker to produce the same output.  And as an employee, I go through the same thought process:  if I leave this job, what will another employer or career pay.  Fair never really enters the process.

Jim-

While I agree with much of your last remarks some of it seems tenuous.  The time and effort required to defend the notion work "effort" is disutility will likely show no such defense can reasonably be made.  Is a person who is paid well for sleeping a laudable goal?   When the value of one's work involves extensive personal perception and a huge number of possiblities well beyond an individual's control, any attempt to place a tightly argued box around it is doomed to fail.  Doesn't mean we should not try.

No economist can successfully argue to the value of an economic model while utterly ignoring reality.  Capitalism in practice is not the same as capitalism as an economic model.  When proponents of a free market will in the same discussion express concern for a lack of certainity in that same market one is literally forced to wonder why it is they so clearly assume the rest of us will not notice their remarkable inconsistency.  Have they utterly redefined the word "free"?

As a  case in point.  I assume you are aware of the tragic results of the 1% literally robbing the ciitizens of Zambia of what can reasonably be considered their birthright.   A few individuals became billiionaires and a few more became millionaires.  What was their productivity exactly?

As for any reasonable argument that capitalism as practiced is consistent with the teaching of Christianity, well, success in that arena will require a significant degree of rationalization.  A long winded way of saying it can't be done.

 

MightBe - I am not sure I understand your point about the disutility of work effort, but it does seem to me to be intuitive that work effort is a disutility.  I don't think I'm unusual in preferring to work less to earn the same amount of (or more) money, hence the seemingly absurd tuitions we're willing to pay to get a college education.

I bow to no one in my ignorance of all things Zambian, but I assume that "well-developed", "fair" and "ruled by law" are not terms that one would normally apply to the Zambian economy.  I don't consider Warren Buffett or Bill Gates or Steve Jobs (or even, to use Chait's not-very-thought-through example, Paris Hilton) to be warlords, kleptocrats or thugs.  I don't think of sub-Saharan Africa when I name places where a prudently regulated and mature free market economy operates.  

"what is a fair wage?"

Ann - Mankiw seems to have a "just deserts" theory of fair wages, which, from what I can tell from this article, is really just a defense of supply-and-demand theory: a fair wage = a just wage = a market-clearing wage.  

One of the problems is that terms like "fair", "just" (as in "justice") and "deserts" (as in "deserving") are all terms that, in common usage, have moral content.  But in describing a market-clearing wage (i.e. the wage at which the demand and the supply for labor intersect - the wage that generates job offers), economics seems to bracket morality, and just tells us what the wage is. (I suppose a more complete explanation is that there may be moral views embedded in supply and demand, as labor suppliers (workers) and labor demanders (employers) both factor moral considerations into their supply and demand.  For the worker, this is utility; morality can be a component of the worker's utility.)

Practical Catholic morality needs to understand and respect economics.  If the labor market for tow truck drivers is fair and efficient, then the wage is what it is.  Inasmuch as the wage is market-determined, then pointing to ideals of Catholic social theory doesn't address the root cause of the problem.  In effect, Catholic social teaching is reduced to just one more utopian scheme built on an incorrect understanding of human behavior.

The socially conscious Catholic who seeks to improve the wages of tow truck drivers needs to understand economics well enough to be able to identify which *economic* levers can effectively raise drivers' wages.  Perhaps organizing the drivers is one answer, or part of one answer, at least in the short run.

 

Jim P. ==

I agree.  So what IS a just wage?  How do you know one when you find one?  The only hint of an answer that i can find is:  an UNjust wage is often very easy to spot.  Ten cents an  hour in this economy is obviously unjust.  I'd say that most of us would say that "It's unjust because you can't survive on that rate".  But is survival the factor that should be considered?  I think not.  We also seem to agree that if an employee contributes to greater productivity beyond what is needed for him/her to survive, then that employee should be paid more than survival rate.  So there is a correlation between productivity and fair wage.  But how can we get down to particulars?

Again, we can sometimes make negative judgments about productivity and unfair wages -- it is not fair when productivity is increased and the employer takes all the profits.  (That is what has been happening in the U.S. for some time now.  Middle class wages are not even keeping pace with inflation while owners' profits are soaring.) 

Jim Pauwels and Ann, I find your talk about what a just wage is for some occupation, e.g., tow truck drivers, to be far too limited. Is not the justice issue in a society funddamentally a question of whether every person, has the resources needed to have adequate food, shelter, clothing, decent medical care, educational opportunities to lead a normal complete life in that society? If so, in a modern soiety such as ours is, the wage for a particular job has all too often proven to be inadequate for a number of the citizens. To supply the insufficiency they need some version of a safety net. The function of civil government is to insure through its policies and practices that this safety net is sufficiently robust that no member of the society is left without basics. Obviously, there will be need, in practice, to regularly adjust  these policies and practices to fit changing resources and needs. So talk about "just wages" ignore issues of fair taxation, sensible subsidies, rationing if necessary, etc.

In short, a system of distribution of resources that is genuinely just is one in which the dictum "From each according to his or her abliity to each according to his or her needs is always the objective" is what one aims for. Whatever resources may be left over after satisfying this dictum can be safely distributed without too much concern about committing gross unfairness. But before one decides that there is great abundance, one does have to consider sustainability.

Note that what I say does not ignore the economic considerations of the society's economic resources. But it wholly rejects the atomistic tendency to talk as though we can measure some individual's or occupation's just claim for remuneration with no regard for whatever is transpiring elsewhere in the society's population. Sooner or later the measure of a society's justness is a politicl-moral matter, not basically an economic one. One need not agree with the details of John Rawls's work, but it's on the right track in its rejection of exclusive reliance on consideration of economic utillity. Such reliance almost inevitably begets victims.

Questions of justice should always be central to those who work in morals – which is to say, all of us at various times.  The discussions of Mr. Pauwels and Ms. Oliver touch on important points.   But we should be careful about too enthusiastically latching onto the rubric of “utility” as the proper basis, or even of treating “utility functions” as they are used in formal economics as exhaustive of the content of utilitarianism.  Utility functions in the simplistic sense used by Mankiw are part of the effort to disguise the qualitative analysis of economics – especially as it touches on deeper matters such as justice – as if it were one of the exact sciences.   That is, it is being used to confound preferences and values, and it is predicated on ranking quantitative analysis above qualitative.    It is such simplistic pseudo-analysis that permits corporations to accept exploding fuel tanks in autos unless/until the utility function turns negative because of adverse liability costs.

As an example of the subtlety of thinking that can go into a formal utilitarian analysis – but cannot be grasped by “utility functions” as any quantitative economist would use them – I would point to the work of Peter Singer.  I appreciate he is not admired (to say the least) in Catholic discussions of morality, but his applications of utilitarianism to say animal rights shows the level of sophistication that utilitarianism can encompass, and they highlights the severe limitations of the simplistic use of “utility” in most if not all economic analysis, certainly including Mankiw’s instant case.

What was George Carlin’s line, “Whenever the other side has you talking their language, they’ve got you.  That, to me, is what it’s about in a nutshell and it’s almost that simple.”

Mark

Bernard --

Do I understand you correctly?  Are you saying that in calculating a just wage that the costs of the necessities of life (whatever they amount to) must be the minimum wage that any employer must offer?  I would agree with that.  But the problem is that some employers don't make enough profit to pay such wages to all employees.  Capitalist theory would say that the choice is between justice to the employees and the survival of the business, but in such a case the just wages would bankrupt the business!

What to do?  I'd say that the business should fail, but the employees should get assistance from the government until they can get other jobs.  And that is the way it's supposed to work now, except that there aren't enough jobs for all those out of work and workmen's compensation ends eventually.

I don't agree with the dictum "From each according to his ability, to each according to his needs".  Too simple except in times of famine or other catastrophe.  Unless there is added reward for added input and productivity a healthy economy just does come to pass and everyone is affected adversely.

The problem is, however, how to measure those added inputs which are not themselves quantitative.  In other words, the problem of just wages is a problem of trying to add apples and oranges (quantitative and non-quantitative factors).  The logicians tell us it can't be done.  But the moralists say we must try.  What to do?

Mark L. --

I don't understand all your economic terms, but you seem to be saying that the problem is in trying to measure qualitative factors using quantitative measures.  Is that right?  As I just mentioned to Bernard above, the logicians say this can't possibly be done.  You cannot add incommensurables. e.g., you can't add apples and oranges (though you can add pieces of fruit).   Very discouraging, but the ethicists tell us that we have to try.  

So just how do we even begin to measure more and less of qualitative entities?  Do we do it purely on the basis of how much we are attracted to or repulsed by the entities?  Keynes did try to define "just wage" but gave up. I wonder what he did say about it.  Might  be a start. 

The NYT's The Stone offers some blunt criticisms of the contemporary "Gospel According to Me".  Simon Critchley and Jamieson Webster are the authors.

http://opinionator.blogs.nytimes.com/2013/06/29/the-gospel-according-to-...

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About the Author

David Cloutier is associate professor of theology at Mount St. Mary’s University and editor of catholicmoraltheology.com. He is the author of Love, Reason, and God's Story: An Introduction to Catholic Sexual Ethics (2008) and is working on a book on the moral problem of luxury in contemporary economic ethics.