Greg Mankiw: as duteous to the vices of plutocracy as badness would require
by New Deal democrat at Bonddad blog Re-posted with author’s permission.
Greg Mankiw: as duteous to the vices of plutocracy as badness would require
There is a drastic moral difference between those who write garbage analysis because they are mistaken, and those who write garbage analysis that is loathesome. Greg Mankiw embarrasses Harvard with an “analysis” of inherited wealth that not only showcases the execrable insistence of many economists to utterly dismiss historical evidence, and utterly dismiss evidence of actual human behavior from the other social sciences, but also is so facile that it fatally fails even by its own logic.
Vile and illocigal. What’s not to like?
Here’s Mankiw’s premise:
So what? What’s wrong with inherited wealth? From a policy perspective, … one might worry that inherited wealth makes things worse. Yet standard economic analysis suggests otherwise.
Mankiw starts with the truism that people love their children, but then blithely asserts, with not a scintilla of evidence, that
each person’s utility depends not only on what happens during his own lifetime but also on the circumstances he expects for his infinite stream of descendants, most of whom he will never meet.
Right now we already have a big problem for Mankiw’s analysis. DNA studies have suggested that after 1000 years, all Europeans are related to one another. All are descended from Charlemagne.
So, if ultimately everybody is your descendant, and if inherited wealth gives people a leg up on consumption, wouldn’t you make sure that everybody alive today inherited from you, the better to ensure that there was the maximum economic growth over the next 1000 years? That way, by the time everybody is your descendant, they will have the biggest economic pie possible to consume.
By the way, Mankiw’s argument certainly means that the wealthy will be using all their economic muscle to prevent global warming from visiting catastrophe on humanity, a/k/a their descendants 100’s and 1000 years from now. Oh, wait, they’re not.
Apparently “intergeneration altruism” doesn’t go out infinitely like Mankiw reasons. But there I go bringing empirical social science into the discussion. Macho macroeconomists like Mankiw don’t need no stinkin’ empirical facts.
In addition to “Intergenerational altruism,”
…. According to a recent study, if your income is at the 98th percentile of the income distribution … the best guess is that your children, when they are adults, … will enjoy higher income than average, but much closer to that of the typical earner. ….
Because of regression toward the mean, they expect their descendants to be less financially successful than they are. Hence, to smooth consumption across generations, they need to save some of their income so future generations can consume out of inherited wealth.
The poor, on the other hand, don’t leave inheritances because they are broke, they consume all of their bread crumbs now because they know their descendants will be able to eat cake:
[Contrarily, regression to the means means that for the bottom half of the income distribution, t]heir descendants will very likely rank higher than they do. Even those near the middle can expect their children and grandchildren to earn higher incomes as technological progress pushes productivity and incomes higher. Only for those with top incomes does the combination of intergenerational altruism, consumption smoothing and regression toward the mean lead to a significant role for inherited wealth.
Notice that intergenerational altruism has disappeared from the analysis of why the poor don’t leave inheritances, and both intergenerational altruism and regression toward the mean have disappeared from the analysis of middle class bequests. Mankiw’s argument is ultimately that of “intergenerational consumption smoothing uber alles.”
Which is really interesting, because the reason Mankiw gives for the desirability of such intergenerational smoothing is
People … exhibit “diminishing marginal utility”: The more you are already consuming, the less benefit you get from the next increase in consumption. Your utility increases if you move from a one- to a two-bathroom home. It rises less if you move from a four- to a five-bathroom home.
STOP RIGHT THERE. What Mankiw saying is that the further you go down the income scale, the greater the increased good from each dollar. (So much for not being able to do interpersonal comparisons of utility.) Right here we have a fatal problem for Mankiw’s argument. If a dollar increases more happiness the further you go down the income scale — which is plainly Mankiw’s assertion in the above quote — then utility is maximized by ensuring that estates are distributed to the poorest in society, not by ensuring as much as possible the wealth of the descendants of the rich.
Of course Mankiw doesn’t really mean that. Every economist worth their salt will tell you that you can’t compare the subjective happiness among two or more people. Well, whatever you need to do to arrive at the predetermined result, which is:
When a family saves for future generations, it provides resources to finance capital investments ….
Because … increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers. … Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards
And there you have it. The entire linchpin of Mankiw’s argument in favor of inherited wealth is that higher labor productivity leads to higher wages. Since I have no doubt that Mankiw is familiar with graphs like this:
It isn’t that he doesn’t know that for the last 40 years, his linchpin assertion has been shown to be empirically false. It’s that he doesn’t care. Which is a far more serious issue.
So, to sum up, Mankiw makes an argument that is contradicted by well established empirical psychology (g*d I would like to march economists like him down to their universities’ psychology departments and force them, Clockwork Orange-like, to memorize actual empirical facts about human behavior), is contradicted by history including the economic history of the last 40 years, and fails fatally on its own merits.
To the contrary, if we accept Mankiw’s own assertions about marginal utility and caring about ultimate descendants, then society ought to confiscate as much of estates as is possible consistent with a “Laffer curve” type analysis, i.e., we confiscate right up to the point where a wealthy person gets less pleasure from viewing their increasing financial statements than they are pained by the fact
that the wealth shown in those statements will be spread among society at large after their deaths.
Stop right there indeed, the equivocation is hurting my eyes.
Mankiw is talking about each person’s utility but you go one about some sort of collective utility (“then utility is maximized by ensuring that estates are distributed to the poorest in society).
Moreover, your assertion that Europeans ought not to regard their own children over other Europeans since all Europeans are descendant from Charlemagne is idiotic.
Is there not a middle ground where the great fortunes of Bill gates and similarly wealthy persons are taxed heavily on their passing, while most others are able to hand off the wealth accumulated over a lifetime of labor to their own children?
But NDD has a point.
The idea that an inheritance tax is beneficial because it raises the.utility of offspring who will invariably be less well off due to regression to the mean espoused by Mankiw is flawed.
First off by taking that wealth and diverting it to many poorer people in smaller amounts will have a greater overall utility boost. Since a bunch of poor people.getting a.grand each will be far better off than some millionaire person who receives another 10 million.
Secondly the idea that maintaining the concentration of wealth for the rich somehow benefits the economy as a whole.has been shown to be a joke.
Thirdly the idea that all Europeans are related.to Charlemagne illustrates quite impressively how all of humanity is related, how we are all family, and if your idea with inheritance is to benefit your family, then by spreading the wealth around you are.doing a far better job of that.
Do you seriously believe parents should not first and foremost work to provide for themselves and their own children but instead should work each day to provide for all of society?
Do you seriously believe parents do not first and foremost work to provide for themselves and their own children but instead work each day to provide for all of society?
Happiness comes from within. TAXING WEALTH should be strictly for the purpose of reducing the concentration of wealth to better balance an economic system.
Lets face facts, redistribution of wealth rarely benefits the poor. Governments have other directions for the large revenue that such TAXES generate. (Wars to pursue, cronies to favor, special interests pockets to line) ‘Tiz the nature of Man and his governance.
Jesus was quite right when he said “You will always have The Poor.”
None the less, I say, “TAX THE RICH!!!” Who knows WE just might get some bridges rebuilt and a few potholes filled out of the deal.
Just so it is clear, my point is to show that Mankiw’s argument fails on its own terms, and that his own arguments support a quite different conclusion. I was not actually adopting that conclusion as my own.
That his arguments are so easily shown to be internally contradictory means that he wasn’t attempting to be intellectually coherent. He was just pandering to his patrons in a particularly loathesome way.
Yeah, I read that yesterday and I was just gobsmacked.
Although everything you say is correct, most of what you attack him for is a distraction. The first 3/4’s of Mankiw’s column is just hand-waving and although it may be interesting to talk about (note how the comments above are drifting off to Charlemagne and parental love and other irrelevancies) it’s got nothing to do with his real point.
His only real point is that increased inequality is good because it leads to accumulation of capital which raises productivity thus leading to raised wages.
And it doesn’t matter at all to him that this is false as a matter of fact. This seems to be an occupaitional hazard for many economists: if they have a thought, then it must be true because they thought it, and how could the world outside their head be any different from the world inside their head?
Recent news reports indicate Bill and Hillary Clinton are using aggressive strategies to avoid estate taxes.
So where is the left side of the blogosphere?
Or are they, like the Kennedy’s, given a special opt out of the laws they espouse?
Thanks. Good takedown of Mankiw on one of his not-better days. Happens I just posted today on the same thing, would have linked to yours if I had read it earlier, but here is my version FYI: http://www.economonitor.com/dolanecon/2014/06/23/does-inherited-wealth-really-help-the-economy-a-reply-to-greg-mankiw/
The left side of the blogosphere is against our estate tax laws and levels that allow the Clintons or anyone else to evade the estate tax.
That ranks right up there with “if Buffett thinks taxes on the rich are too low why doesn’t he just pay higher taxes?”
I don’t disagree that parents shouldn’t look out for their kids first.
However, that’s not ample justification for not taxing inheritance.
First off the kids of the wealthy are better off on day one
They Go To Better Schools, Have Opportunities That Others Do not, And Will Likely Remain Rich.
And under any form of reasonable taxation, they’ll still inherit more than most people will see in their lives.
“Moreover, your assertion that Europeans ought not to regard their own children over other Europeans since all Europeans are descendant from Charlemagne is idiotic.”
In my reading, that was not his assertion (since confirmed by the author’s comment). As I read it, Mankiw was asserting as part of his apologia for inherited wealth accumulation that the natural evolutionary instinct to nuture one’s children extends indefinitely into future generations. The author’s response to this invoked Charlemagne to show that if Mankiw’s assertion were true, then it would be in a rich person’s best interest to spread her or her estate evenly over a local population, since in the long run, intermarriages among a local population will cause all the descendants of that population to be related.
Of course Mankiw’s assertion is not true, as he could have learned by talking to my friend Mario (or any global warming denialist). If there is any idiocy to be decried, it is Mankiw’s.
I prefer to a very different take on inheritance taxes.
All taxes distort economic decision making and a reasonable goal is to try to minimize those distortions.
An inheritance tax distorts economic decision but I would argue that they distort decision a lot less than income taxes.
Because of this I strongly suspect that raising inheritance and using the revenue to reduce income taxes would be a far superior policy because it would cause a smaller misallocations of resources,.
Hmmmm. I don’t know too much about Charlemagne’s descendants or “empirical psychology” but I do know about the estate tax. (An inheritance tax is a little bit different, think of taxing the heirs instead of the estate.) Under a Democrat controlled Senate and with a Democrat President the estate tax has been changed significantly. In 2012 the unified credit (let’s call it the lifetime estate tax exemption) was 3.5 million dollars per person or 7 million dollars per couple. The top rate was 45%. The lifetime gift tax exemption was $1,000,000. Thanks to Senate Democrats and the President the current lifetime estate or gift exemption is nearly $11,000,000 per couple. The top rate has been reduced to 40%. And the step-up in basis remains. So although Mr. Mankiw may have an erroneous argument it’s important to remember that he’s just a “thought promoter”. Those who are really duteous to the vices of plutocracy reside in the White House and work in the Senate.
“This seems to be an occupaitional hazard for many economists: if they have a thought, then it must be true because they thought it, and how could the world outside their head be any different from the world inside their head?” Bloix
Mostly correct, but missing a significant truth. “..then it must be true because they thought it (and they’re paid very handsomely to think in that manner and publish the bullshit that results from such thinking.)”
An estate tax should tax the estate and an income tax should be applied to the distribution of the remainder of the estate after the application of the estate tax. Inherited assets and property are income to the individuals who receive their portions of an estate. We all pay income taxes on such income. Inherited wealth is little different from the winnings from a lottery and no one argues that lottery winnings should not be taxed.
Don’t know much about the history and/or the politics of the estate tax the last couple of deades, do you?
In terms of economists, Dean Baker’s post on Mankiw’s latest abortion:
Greg Mankiw Says We Need Rich People Because They Won’t Spend Their Money
Monday, 23 June 2014 13:43
That’s basically the punch line in a column telling us Thomas Piketty is wrong to worry about rising inequality. After a long digression on motivations for saving among the very rich, Mankiw tells readers:
“When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.
“Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.”
To summarize, the story is that by saving rather than spending their money, rich people will make more capital available to firms to invest, thereby raising productivity and wages.
There are two important problems with this story. First, we are operating well below the economy’s potential level of output and are likely to remain below potential for many years into the future according to most projections. This is the story of “secular stagnation” that even folks like Larry Summers have embraced in recent years.
In a context of secular stagnation, more saving is harmful. If people save rather than consume there will be less demand in the economy and less employment. If we think that secular stagnation is likely to be a persistent problem, then the fact the rich save more of their money than everyone is bad news for the economy. It will slow growth and make us all poorer.
The other point is that moderate income and middle income people did actually use to save a larger share of their income. Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth. It tends to be the case that people save a larger share of their income when their income is rising rapidly. This means that we don’t need rich people to not spend. Moderate and middle income people will also save a substantial portion of their income during prosperous times.
Agreed, then all we need to decide is who is “rich” enough to be denied the ability to bequeath their wealth as they see fit.
Little John offers some helpful data, though I probably would disagree with his take on where to draw the line.
$11 million is no where near Bill Gates or Warren Buffet territory. What justification is there for confiscating or heavily taxing such a sum? Certainly allowing $11 million or less to pass down without a large chunk being taken in tax does not come close to creating a plutocracy.
Jack said: Inherited wealth is little different from the winnings from a lottery and no one argues that lottery winnings should not be taxed. –
But of course parents do plan, scrape, save, and invest for their children’s benefit. It is not a random act. That said I am not opposed to taxing inheritance, only to the claim that inheritances come about randomly like lottery winnings. That completely denies the efforts of the parents.
Or grandparents. Or great grandparents.
And I find it very strange that this conversation does not include the fact that the vast majority of wealth subject to the estate tax has never been taxed before.
EM- I’m in the life insurance industry so knowledge of the estate tax and all the issues around it are critical. Life insurance and irrevocable trusts are the basic tools of estate tax planning. I heard a funny story today about the days prior to the unlimited marital deduction. Nonetheless it really doesn’t matter what the tax is, the more wealth you have the more sophisticated the technique(s) used to mitigate the tax’s effect. I will tell you that in probably 30% of the cases I help brokers analyze, the client ultimately decides to just pay the tax out of a sense of patriotism/altruism/dislike of their heirs.
MichaelH- You are right. I guess in the world of the hyper wealthy $11 million isn’t much. The charitable foundation is the technique of the hyper wealthy. Retain control thru family members, move assets out of the estate and get an income tax deduction.
Correct me if I am wrong but I am under the impression that inheritors of estates that are subject to ‘estate tax’ also benefit from a reset base for capital gains. That is any asset which they inherit and then sell is only taxed on the gain from the time that they inherited it. Which if true simply makes the Estate Tax a delayed Capital Gains tax. Which if it didn’t exist would require ACTUAL intergenerational accounting tracking the original base value of that asset plus improvements so as to be subtracted from the sales price as the actual ‘gain’.
Once again I may be wrong about the current state of the law but I was under the impresson that simple repeal of ‘Estate Tax’ simply exposes the heirs to total tax on Capital Gains. Now of course you could structure a repeal of Estate Tax in a way that allow the heirs to STILL benefit from the Step Up, but among other things that makes a total mockery of the idea of ‘Double Taxation’ and ‘Already Taxed Once’. Because in the case of real estate and such things as fine art none of that gain may have ever have been taxed to start with.
Which I think is part of the Piketty Thesis. Sure the rich had their income taxed during their lifetime and so to the extent that that income went to actual purchase of things of lasting value taxing on the acquistion value of that object might be seen as double tax. But simply exempting all gains on that value forever simply is a matter of validating Capital for Capital’s Sake.
That is you can make a case that inherited family property that is kept in the family shouldn’t be taxed at all. But extending that to argue that the heirs in the fourth or fifth generaton should not be exposed to taxes on any gains that came in the first to third generation seems perverse.
On the other hand within the framework laid out in Paul Ryan’s various Roadmaps to Prosperity all gains of capital whether realized in the lifetime of the acquirer or passed down to heirs would be exempt from taxation generally. Which would just sweep abolition of Estate Tax along in its wake. But in the world we live in the Estate Tax is just a periodic Capital Gains tax levied against the estate and which gives the heirs the remaining value on a stepped up basis and so not subject to additional tax on immediate sale.
And yes I could have made this more clear. I’m tired.
Bruce-that’s correct. At death the heirs receive a step up in basis. However a gift does not receive that step up in basis. So although the lifetime gift tax exemption is high historically speaking, most large estates would rather assets pass to heirs after death.
Senator Kyl is a big estate tax repeal advocate and his “repeal” bills over the last decade included a clause that would keep the step up in basis even though the estate tax would be abolished. During the Bush administration, when the GOP controlled the Senate, Kyl’s bill fell four votes short of 60. During that fight our industry’s top lobbyist, a Clinton administration veteran, told me that if repeal passed it would be reversed under the next Democrat majority. He was adamant that any law needs some sort of durability or it would never survive. I remembered that wise advice when the PPACA was passed.
We already have a system, it’s called the estate tax, we just need to make it higher and ensure there are no loopholes for avoiding it.
I would think 50%+ on the 1 percenters would be a good level
Also Michael, for the recipient who did nothing to earn it but win the birth lottery, it is a lottery and should be taxed heavily