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.