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Home Publications Blogs Beat the Press Greg Mankiw Hides the Role of Government in Redistributing Income Upward

Greg Mankiw Hides the Role of Government in Redistributing Income Upward

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Sunday, 15 April 2012 07:52

The fact that Greg Mankiw works for Governor Romney is very clear when he tells readers:

"Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

"These are two fundamentally different visions. The next election, and to some degree every election, is about which one voters find more compelling."

This is no doubt how Mitt Romney and other wealthy people would like the public to see the debate. However the reality is that the government has implemented a wide range of policies that have led to a massive upward redistribution of before tax income over the last three decades. These policies have affected every corner of the market economy.

Just to take a few biggies, the fact that drugs are expensive is entirely due to government-granted patent monopolies. We spend about $300 billion a year on drugs that would cost less than$30 billion a year in a free market. The difference of $270 billion a year is close to 5 times what is at stake in extending the Bush tax cuts to the richest 2 percent of the taxpayers. (There are alternative mechanisms for financing drug research.)

Second, the reason why the wages of autoworkers have been depressed by having to compete with low-paid autoworkers in China, but the wages of doctors have not been similarly depressed is the result of deliberate government policy. We designed our trade policy to put our autoworkers in direct competition with workers who get paid less than $1 an hour in the developing world. The predicted and actual effect of this policy is to lower the wages of large segments of the U.S. workforce.

We could have designed trade policy to make it as easy as possible for smart kids from China, India and elsewhere to study to U.S. standards and then practice medicine, law, and economics in the United States. This would put the same downward pressure on the wages of these professions as we have seen for manufacturing workers and non-college educated workers in general. This would lead to huge gains to consumers and the economy in the form of lower costs for health care, college education and other services provided by highly paid professionals. 

However trade did not go this route because doctors have much more power than autoworkers. The negative impact of international competition on distribution is aggravated by the over-valuation of the dollar which leads to the large trade deficit we are currently experiencing. The over-valuation of the dollar is another deliberate policy that had its origins in Robert Rubin's high dollar policy, with the muscle provided by the IMF in its bailout of East Asian countries from their financial crisis in 1997.

For one more example, the decision to bail out the Wall Street banks, while leaving them largely intact, meant that the top executives and traders at these institutions could continue to enjoy huge paychecks with the taxpayer acting as their insurer. This is a massive subsidy from ordinary people to some of the richest people in the country.

There are many other examples of the government engaging in policies that lead to upward redistribution of income. This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive (free download available -- death to copyright monopolies). It is very advantageous to the wealthy to act as though the current distribution of income is just the natural outcome of the market, but it happens not to be true. No one should buy this garbage unless you're being paid lots of money. 

Comments (23)Add Comment
Bezemer on redistributing income upwards
written by BT, April 15, 2012 9:32
At INET, Dirk Bezemer argues that government/central bank policy has promoted upward redistribution by favouring the flow of credit into asset markets instead of the real economy. The result is rising systemic leverage (private sector debt:GDP) and rising inequality.

http://www.youtube.com/watch?v=qvBuK8yQxbY
...
written by bmz, April 15, 2012 10:19
Excellent article. This is similar, but includes some additional observations: http://99percentmanifesto.blog...festo.html
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written by JSeydl, April 15, 2012 11:12
For one more example, the decision to bail out the Wall Street banks, while leaving them largely intact, meant that the top executives and traders at these institutions could continue to enjoy huge paychecks with the taxpayer acting as their insurer. This is a massive subsidy from ordinary people to some of the richest people in the country.


This is probably the biggest issue, in my opinion. Look, I've been working on Wall Street for the past two years, and during this period, I have become deeply radicalized. Economists on the street are more interested in discussing politics on cable TV than producing objective research on the economy. Bankers continue to stuff whatever profit they can into each deal, regardless of how the client is impacted. The list goes on and on.

But the thing that is most troubling is that all of these people would be jobless right now if there really were a "free market" for Wall Street jobs. Nearly all of them missed the housing bubble and bust, which was the largest asset bubble and bust the world has ever seen. They continue to be wrong about the direction of Treasury yields, arguing that budget deficits in the public sector are going to push up longer-term yields -- not happening at all. They're pushing this silly structural unemployment argument, when in reality we have a huge aggregate demand shortfall that should be obvious to anyone who follows the economy.

It's really quite remarkable. This would be like a forklift driver knocking into a shelf at a warehouse and destroying 30% of that warehouse's inventory. Then, after the forklift driver is bizarrely not fired for this blunder, the forklift driver continues to make mindless errors like placing packages on the wrong shelves, thereby screwing up orders consistently. If anyone thinks for a minute that this forklift driver should not have been canned and replaced a long time ago, you must have a different definition of "free market competition."

But then again, maybe that's the explanation: When people on Wall Street talk about "free market competition," perhaps what they really mean is free market competition for everyone else except us.
High medical costs contribute to city budget crises, job losses in SF Bay Area. No one sees the connection.
written by Rachel, April 15, 2012 1:03
That is, the politicians and big talkers (we're weak in the pundit line in the Bay Area) all assume that the high medical prices are the result of the market, a natural reward for quality. In fact, government toleration and enforcement of market barriers up and down the line is responsible for much of the overpricing. But no one has enough skill. information, or lack of bias to see this.

Even to discuss this problem would be to question the very high salaries of the people involved, often to question the security of friends and relatives. Another problem is that many big talkers' only source of information about health economics are the big gainers from this failed market. The talkers think this is only natural, don't notice a conflict of interest.

Moreover, the big hospital chains are heavily involved in the funding of the mass media, both for-profit and non-profit.

So who could possibly profit by noticing what is hurting the cities? None of the politicians or talkers, whether "progressive" or "conservative." It's just market forces at work, but not free markets.
misreading of mankiw
written by Andrew Clearfield, April 15, 2012 1:54
I agree with a lot of what you write here, but there's only one problem: it has absolutely nothing to do with Mankiw's argument - which is a shame, because there is so much wrong with what he says. In these two paragraphs, Mankiw simply writes that Republicans prefer federalism and Democrats prefer a stronger central government. He explains (with refreshing honesty) that Republicans prefer federalism because they're not worried about a "race to the bottom" between states. And why are they not worried about a race to the bottom? Because Republicans think that government should not be trying to equalize society via things like the minimum wage, child labor laws, and environmental laws, and so it doesn't matter if states lower their standards in these areas in order to attract business. There is nothing "hidden" about Mankiw's statement, but there is much wrong with it: mainly, it is morally repugnant.

Aside from the moral bankruptcy of his position, Mankiw also makes an empirical error. He writes that "competition between states to provide services" like roads and schools can be beneficial because taxpayers will move to the cities with the best school districts and roads thereby creating healthy competition among governments and improving net social welfare. This is a central premise of the federalist position but it has been repeatedly disproven: people simply don't "vote with their legs" as the saying goes. In other words, they don't move based on the quality of gov. services they receive even when it would be in their economic interest to do so.

and Democrats prefer a more centralized government
on drugs
written by tew, April 15, 2012 2:38
Yes, we're fools to pay too much for our medicines. The U.S. subsidizes the world's drug habit.

But this is a laughable statement: "We spend about $300 billion a year on drugs that would cost less than $30 billion a year in a free market."

It is so easy to disprove that statement. How? Well, assume all the drug companies were non-profits. Then cut the pay to executives, limiting compensation to $250k/yr max. Then eliminate the marketing budget. Make sure you include ALL companies and entities involved in drug development including the ones that currently only have R&D at this stage. Now... how much revenue would they need to cover their costs (to remain viable non-profits)??? Here's a hint: It's much more than $30MM/yr allocation from the U.S.
U.S. standards are excessive, captured by universities
written by LSTB, April 15, 2012 4:40
We could have designed trade policy to make it as easy as possible for smart kids from China, India and elsewhere to study to U.S. standards and then practice medicine, law, and economics in the United States … This would lead to huge gains to consumers and the economy in the form of lower costs for health care, college education and other services provided by highly paid professionals.


Or we could reduce U.S. standards to make it as easy as possible for smart kids from the United States to train for these positions. Most countries don't require their doctors to spend 10 otherwise productive years in postsecondary education, or their lawyers seven years, to obtain professional degrees. Nor do they require them to take on six-figures in nondischargeable student loan debt owed to federally protected banks or the Department of Education. Universities capture any increase in available loans in the form of excessive tuition increases, which they lavish on instructors' and administrators' one-percentian salaries, bonuses, summer research grants, and occasionally forgivable loans. Supply is also an issue: There are too few dental and medical schools in the U.S. and about double the number of law schools necessary.
Wow
written by David, April 15, 2012 5:34
and Democrats prefer a more centralized government


Really? I'm a Democrat and I don't prefer a centralized government or a large government. 5% of GDP is not that big really. What I do prefer is that someone keep the greedy folks in check so that the rest of us can enjoy a good life too; nobody wants to live in late 19th century Chicago, do they? Great amounts of money yields great amounts of power, and power corrupts; what does Mr. Clearwater propose we do about the moral and ethical laxity of the upper 1%?

LSTB: how many college instructors do you know? As in, eat dinner with? You are sorely mistaken about where costs flow to. Upper administration, not janitors, administrative assitants (aka secretaries) and instructors (yes there are highly paid professors but they are few, the average instructor is solidly middle class. Upper level administrators, now, that's a different animal. And sports. Do you know who the highest paid public employee in Texas is? Mack Brown, head coach of the UTexas football team. He currently pulls down $5 million. Supposedly that doesn't take away from the educational component of the school. Also, European countries begin training their professional elite much sooner than the US, and they do have to do residencies, and their full professors have a more rigorous certification than in the US system. As far as too few dental and medical schools, are you suggesting more schools with more faculty and administrators? That would mean more costs to the taxpayers, which seems inconsistent with the drift of your comments. I'm willing to foot that cost, if they all give up their salaries. But really, do you want your surgeon to have 4 years of school after high school? That's all? Are you serious? It's not like fixing your car. The advent of nurse practitioners is one way to attempt to drive down the cost of standard care for minor ailments. But having inept, poorly read doctors is not a solution the profession, nor the rest of us, can or should accept. I wonder where you got your misinformation from? A sly fox?
Stand Up
written by James, April 15, 2012 6:04
Once again, you proved today that anyone visiting this site SHOULD donate!

I heard, "Where you spend your money, there lies your value."
...
written by liberal, April 15, 2012 8:14
Andrew Clearfield wrote,
Aside from the moral bankruptcy of his position, Mankiw also makes an empirical error. He writes that "competition between states to provide services" like roads and schools can be beneficial because taxpayers will move to the cities with the best school districts and roads thereby creating healthy competition among governments and improving net social welfare. This is a central premise of the federalist position but it has been repeatedly disproven: people simply don't "vote with their legs" as the saying goes.


I don't know about that empirical finding---I'd be interested in hearing about such research---but AFAICT the gist of what you're saying is completely correct. If it wasn't correct, crazy (inefficient, etc) stuff you see in a particular state would cease if there were competition between states. But it doesn't.
...
written by liberal, April 15, 2012 8:24
tew wrote,
Now... how much revenue would they need to cover their costs (to remain viable non-profits)??? Here's a hint: It's much more than $30MM/yr allocation from the U.S.


The flaw in that argument is the implicit assumption that we'd need to fund the equivalent of all the pharma research going on.

However, that's clearly not so. Given how ineffective the majority (if not "vast" majority) of drugs are, the phenomenon of "me, too" drugs, etc etc, it's not necessary in order to get equivalent improvements in human health.
...
written by liberal, April 15, 2012 8:33
...adding, that the ineffectiveness is due to the desire to rent-seek.
Outsourcing Doctors?
written by Dan Nile, April 15, 2012 10:34
One in four US doctors in foreign born and they are given all sorts of visa preferences. The comparison with autoworkers isn't apt because medical care can't be outsourced overseas, but even then, the comparison isn't favorable because we have far more demand than supply of doctors in the US.

I don't disagree with the larger argument but the notion that doctors are protected from foreign competition due to special protectionism simply isn't the case. There are a lot better examples.
...
written by liberal, April 16, 2012 6:40
Dan Nile wrote,
I don't disagree with the larger argument but the notion that doctors are protected from foreign competition due to special protectionism simply isn't the case. There are a lot better examples.


Completely, utterly wrong. For example, foreign doctors who didn't do their residency here have to repeat an entire residency if they want to practice in the US.
Not to be too picky
written by Jay Schiavone, April 16, 2012 7:02
"No one should buy this garbage unless you're being paid lots of money."
Pretty much the same as saying, "No one should buy this garbage." If you're being paid lots of money that makes you a seller. It's only by dint of emotional disturbance that the people who sell this garbage might believe what they're saying. Thus it is delusion, rather than belief.
...
written by High Plains Lawyer, April 16, 2012 8:03
We don't need to import doctors from India or China. There are plenty of kids who would like to become doctors and have the smarts to do it. However, they cannot get into medical school. Perhaps medical schools should be more like our law schools, which have pumped out far more attorneys than our economy can absorb.

But then again, the whole law school problem really shows that there is no invisible hand, just as there is no flying spaghetti monster. Approximately 40% of new law school gradutates cannot find work as lawyers, and those who do are not paid particularly well for their six figure investment in a law school education. http://insidethelawschoolscam.blogspot.com/

Can we imagine central planners in the former Soviet Union producing twice as many lawyers as the economy could absorb?
WHAT IS ENOUGH?
written by CLARENCE SWINNEY, April 16, 2012 10:42
Top 10% own 73% Net Wealth and 83% Finanical Wealth plus take 50% of individual income.
70,000,000 workers get 13% of income.

In OECD we rank #2 as Lowest taxed---#2 as least tax on corporations and #4 on Inequality---

Since 1980, we borrowed 14000B instead of taxing wealth to pay our way

Tis a shame. Richest nation has 14,000B Total Income. Spend 3800B but tax only 2500B of 14,000B. Borrow 13000B.

Disgraceful
Overlooked
written by Matt, April 16, 2012 11:27
Let's not overlook the biggest upward-distribution scheme of them all: land rent. The government taxes production and spends the revenue on goods and services, which crystalizes as land values, as the landowners are able to charge for access to those goods and services. Seeing as how big corporations own the vast majority of land, value-wise (and residential land is commercial banks' biggest asset), this is tantamount to straight-up stealing from the poor and giving to the rich.

Few economists will mention it though.
Matt...
written by RL, April 16, 2012 4:55
Could you expand upon how government taxing of production and spending on goods and services crystallizes as land values? Is there good empirical data on this? For example, do countries that tax and spend at high rates see higher land values? On its face, it doesn't seem like government spending would differ from private sector spending with regard to land values. I don't know much about these sort of issues and have never heard that claim before. The whole geolibertarianism argument intrigues me, but other than Henry James's "Progress & Poverty," which I've read is rather out of date, I haven't read much on the idea.
...
written by Matt, April 16, 2012 5:11
RL: Google "Henry George Theorem." Joe Stiglitz theorized that there'd be a 1 to 1 ratio between public spending and land values, and there have been some studies which seem to show that this more or less holds true.

Aside from that, it's a well-known phenomenon that when public infrastructure such as roads or railways are built, land in the serviced areas increases greatly in value. If the land rents were taxed, these projects would be self-funding. Instead, the rents are just pocketed by the landowners. Land rents are, by an immense margin, the biggest subsidies for the rich.
Henry George
written by RL, April 16, 2012 5:41
Ah, yeah, I don't know why I said Henry James. Been reading a lot of stuff lately that mentions William James might be why. I'll do that Google search and see what I can find. Thanks.
...
written by liberal, April 16, 2012 7:44
matt wrote,
Let's not overlook the biggest upward-distribution scheme of them all: land rent.


Agreed. I try to mention it whenever rent collection comes up on this blog, but didn't this time.

RL wrote,
On its face, it doesn't seem like government spending would differ from private sector spending with regard to land values.


Of course, it depends. Many things contribute to land value, including the talented work of people long dead.

The one fact, however, is that the landowner in his role of landowner doesn't make any contribution to land value, which is why taxing it at high rates is fair.

As for references on Georgism and geolibertarianism, my favorite is "Are you a Real Libertarian, or a ROYAL Libertarian?". Another good one is "A Geolibertarian FAQ".
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Valuation of Land




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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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