Immigration Reform Passes Senate 68-32
Noted for June 28, 2013

Noah Smith Eats Greg Mankiw's Just Desserts

Noah Smith:

Noahpinion: "I get what you get in ten years, in two days." - Chris Brown

Plenty of folks have turned out to attack Greg Mankiw's essay… focused on Mankiw's numbers and factual assertions. I thought I'd take a different approach… values…. The usual economist case for income redistribution is based on utilitarianism; the idea is that $1000 matters more to a poor person than to a rich person. Mankiw wants to ditch this idea in favor of a value system based on "just desserts"… "people should receive compensation congruent with their contributions"….

I think it's worthwhile to think through the implications of Mankiw's "just desserts" value system.

To do this, let's do a thought experiment…. Brad CEO. He's the CEO of a big company and makes $30 million a year…. Mike Clerk, who works at Wal-Mart… $12.40 an hour, or a bit over $25,000 a year…. In 10 years, Mike get $250,000. That is about what Brad gets in three days (not two; sorry, Chris Brown).

Now let's imagine that Mike wants to buy something big - say, a new Honda Civic… $18,000… an extraordinarily thrifty man… manages to put aside 25% of his income… to afford the Honda Civic… three years of full-time work.

So Mike works and works and works, for three years. Stocking the stockroom. Punching the cash register. Dealing with angry customers. Putting boxes up on shelves. Hour after hour. Day after day. Biking home to eat his low-quality vegetarian meals in his tiny studio apartment. At the end of those three years, Mike's hands are a little more wrinkled, his hair a little grayer, his back a little stiffer. Those three years represent about 4% of Mike's entire lifetime. But he finally does it. Three years after he decided he wanted one, there it is, in his parking lot: a beautiful brand-new Honda Civic.

Now let's go over and look at Brad. Suppose Brad randomly sees Mike's new Civic in a parking lot and decides that he wants the same car…. Brad will have to work a little less than 5 hours. That's slightly more than half of one working day. Go to a couple meetings, send some emails, and the Civic is his.

Now suppose Mike goes to Greg Mankiw and asks: "Dr. Mankiw, why is it right and just that it took me 4% of my entire lifespan to buy this car, with all my heroic efforts and harsh self-denial, when it took that Brad CEO guy less than a day? I put in every bit as much effort as he does, day after day. Why does he deserve to get things with so much less effort than I put in?"

Dr. Mankiw responds:

I am more persuaded by the thesis advanced by Claudia Goldin and Lawrence Katz (2008) in their book The Race between Education and Technology. Goldin and Katz argue that skillbiased technological change continually increases the demand for skilled labor. By itself, this force tends to increase the earnings gap between skilled and unskilled workers, thereby increasing inequality….

"OK," Mike says. "But why, then, is Brad CEO so much more productive than I am? Where does his $30 million productivity come from?"

Dr. Mankiw responds:

[T]he intergenerational transmission of income has many causes beyond unequal opportunity. In particular, parents and children share genes…. IQ… has a large degree of heritability…. IQ is only one dimension of talent, but it is easy to believe that other dimensions, such as self-control, ability to focus, and interpersonal skills, have a degree of genetic heritability as well.

"So let me get this straight," Mike says. "Brad deserves to be so much richer than me because of ability he was born with? People who are lucky enough to be born with high skills deserve to be able to get a Civic in half a day, while people who were born with fewer skills deserve to have to slave away for years if they want a Civic?"

Anyway, Dr. Mankiw's answer is not forthcoming, and Mike cannot leave a comment on Mankiw's blog, due to the no-comments policy. So our story continues.

Mike falls off of a ladder one day (he's in his late 40s by now, and less coordinated than he used to be). He's able to work, but only with greatly increased pain. In the old days, before Mankiw's "just desserts" theory gained widespread acceptance, Mike would have been able to collect Social Security disability; now, however, the government tells him that he does not deserve disability payments - they constitute an unfair transfer of income from the productive to the unproductive - and so he must continue to work. Additionally, Mike cannot go to physical therapy because he cannot afford health insurance, and Medicaid was canceled because Medicaid payments do not constitute the "just desserts" of the unproductive.

So Mike continues working for a short time, until his company is forced to downsize by changes in the global economy. Wal-Mart closes Mike's store and lays him off. In the old system he would collect unemployment insurance payments, but now the government tells him that unemployment payments are not his "just desserts".

Anyway, this tale is getting a bit maudlin, so I will abandon it in the middle; if you want stories about poor people that actually have endings, go read Charles Dickens. But hopefully by now I've made my point. It's easy to say that people deserve to get whatever they can manage to get in a "free" market. But when you start to actually think about the consequences of such a system, you realize that it probably doesn't fit very closely with most people's concept of the term "just desserts".

Like I said, moral values are just statements of opinion, and Greg Mankiw is certainly entitled to his own. But I somehow doubt that his opinion of "just desserts" will be able to win over a majority of Americans, even among the intellectual classes.