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Saturday, February 27, 2010

Mankiw: Spreading the Wealth Around: Reflections Inspired by Joe the Plumber

N. Gregory Mankiw (Harvard University, Department of Economics) gives the Presidential Address today at Eastern Economic Association's 36th Annual Conference in Philadelphia on Spreading the Wealth Around: Reflections Inspired by Joe the Plumber:

One of my favorite recent moments in political theater was when “Joe the Plumber” posed a question to candidate Barack Obama during the presidential campaign of 2008. As you may recall, Joe was an aspiring small business owner, and he asked then-Senator Obama about his proposal to raise taxes on high-income households. The candidate responded, in part, “It's not that I want to punish your success. I just want to make sure that everybody who is behind you, that they've got a chance at success, too…. I think when you spread the wealth around, it’s good for everybody.”

The reason I like this particular moment is that it focused public attention on one of the defining differences among competing economic philosophies. Indeed, I don’t think it is an exaggeration to say that the single most important difference between the political left and the political right is over the questions of whether, and to what extent, “spreading the wealth around” is a proper function of government.

Looking ahead, I fully expect the issue to remain at the center of political debate. One reason is that the tax cuts signed into law by President Bush in 2001 and 2003 will expire next year unless Congress takes action to extend them.

Another, perhaps more important, reason is that the U.S. federal government is running a large budget deficit and faces an ominous fiscal gap looming on the horizon. ...

In the end, I don’t think the Just Deserts Theory necessarily calls for radical changes in policy toward taxes and income distribution. It does, however, suggest that we focus on a different set of questions when thinking about policy design. A utilitarian asks how quickly marginal utility falls as income rises and how much people respond to the disincentive effects of redistributive tax policy. A Just Deserts Theorist admits that questions regarding utility functions and incentive effects may enter into the analysis, but they are the wrong place to start. Rather, he begins by asking whether people’s compensation reflects the contributions they make to society and how much they benefit from government actions.

There may be no way to decide which of these approaches to tax policy is right. The issue is not one of positive economics, so data alone cannot settle the matter. My guess is that people will have different moral intuitions about which approach makes more sense. I suspect that if we had the opportunity to ask them, Barack Obama and Joe the Plumber would reach different conclusions about this fundamental question.

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Here we have the breadth of thought in the "competing" theories of taxation:

Utilitarian: We are taking your money to increase happiness. Money doesn't mean so much to you, but it will make many of our voting supporters so much happier.

Just Desserts: We are taking your money because you are a lucky bastard who probably just sat at a desk. What have you contributed to Society (meaning us)? This will even it out a bit. Without a modern, expensive government to protect you, the mob would be taking your money. This is much more pleasant and predictable.

Here is the real basis of Liberal Economics

Money falls from heaven for everyone to use. But, the immoral and sneaky rich gather more than their share. The government's purpose is to redistribute the money the way God intended. Or, if you wish, the way Gaia, or the Tooth Fairy, or whoever intended.

Taxes remove the excess income of the rich and give it to the voting poor, through a fair and organized bureaucracy. The rich oppose this action by selfishly and spitefully decreasing employment. Government responds by increasing grants and spending, to boost employment. The government runs a deficit while it discovers the "knack" for creating the jobs that the rich are hiding.


Posted by: Andrew_M_Garland | Feb 27, 2010 4:26:20 PM

Somebody needs to read what Thomas Jefferson said about government. What is happening today was not the founding fathers' plan but it was their greatest fear.

Posted by: Wendell | Feb 27, 2010 4:26:54 PM

Here's what bothers me about Obama's desire to "spread the wealth around". When I shop at my local grocery store, I am spreading the wealth around. What I earned I give to the grocery in exchange for goods. The grocery in turn pays the clerks, the truckers who brought the food, the farmers who grew it, and the firms that processed it. My wealth is being spread around to the productive members of society. What Obama means about "spreading the wealth" is taking it from me and the other productive members and giving it to those who didn't earn it.

Posted by: CBDenver | Feb 27, 2010 5:43:15 PM

It should be obvious that the least tax is the best. Our government today is much much too big; also it's too big in the wrong areas. Defense should be the largest part of the gov't budget. Gov't cannot create prosperity; only hinder it.

Posted by: Emily Nelson | Feb 27, 2010 5:56:08 PM

The theory is great, but what needs to be pushed is a practical example that everyone can relate to. Here is where Joe the Plumber should have gone. He should have continued with:

"If you take a smaller percentage of my earnings in taxes, I can buy another truck and hire another plumber. The government will get the taxes on a full income, not just a much smaller incremental percentage of my income. That way I get more money and the government gets to tax an additional full salary for the next 40 years. Mr. President, which would be better for the deficit, the unemployed plumber and me, the private citizen?"

But then, coming up with things that "I should have said .." is easy in retrospect.

It's clear the Liberals have learned the practical lessons of Liberal Economics exemplified by:

If you give a man a fish, you feed him for a day. If you force the community to give him a fish a day, he will vote for you forever.

Posted by: BBeck | Feb 27, 2010 7:07:23 PM

As a physician who saved two people from certain death yesterday, I must say I'd have a little more respect for this Just Deserts crowd if they actually brought in some big ass tax cuts for me and the cops and the firemen, paid for by higher taxes on Hollywood loudmouths and meathead ball players.

Posted by: John Skookum | Feb 27, 2010 9:23:03 PM

Many of Barack Obama's defenders (and even Obama himself) justified his proposed policies on the grounds that Joe the Plumber wouldn't be making $250,000 per year, so he'd benefit from Obama's proposed course of action.

Or, more succinctly, "We cheat the other guy and pass the benefits on to you!"

Posted by: Mike G in Corvallis | Feb 28, 2010 12:26:29 AM

I agree with Andrew's comment about this not being the intention of the founding fathers.

Posted by: Find a Lawyer | Feb 28, 2010 3:36:59 AM

All good points. Something else "evil" about Obama's premise that the higher-earners have to spread it around: First, govt already takes nearly 50% when 15% FICA, income, prop, sales etc are considered. Second, when people start making "good" money in the private sector, they're usually 40 years old or more, they have to pay for kids' college, and have to save for their OWN retirement, and they only have ~ 20 years to do it. And there's no guarantee that the high-paying job will last that long!! That's why it's almost evil to tax someone too much when they're in that situation. It's not like they're going to get some cushy govt pension at age 55 or 60! Geez, I detest these semi-socialists like Obama. The worst part, is they don't understand that taxes steal productive jobs from the private sector, and they certainly reduce our ability to have a comfortable retirement!

Posted by: steve bourg | Feb 28, 2010 4:34:42 AM

"There may be no way to decide which of these approaches to tax policy is right."

Nonsense. It's always wrong to force one citizen to support another against his will. Utilitarian arguments to the contrary seek to usher this truth offstage.

Posted by: Brett | Feb 28, 2010 5:41:10 AM

Spread the wealth, how about destroy the wealth? Obama has effectively spread poverty with devastating effectiveness. Where's the liberal sympathy for the working middle class who are suddenly no longer working, and have no hope of employment in sight? And, they're still unemployed because business is utterly paralyzed by the government's unpredictable meddling. Of course, with the businesses were trying to wait it out, the lack of activity sucked even more life out of the system.

The American public looks around and sees the only ones prospering are the corruptocrats and cronies.

Posted by: Diana | Feb 28, 2010 7:37:40 AM

Wow, what a pleasant surprise to see every single poster in agreement.

This is what happens when we are governed by people who spend their entire lives in government or academia (or feeding at the government trough as a social worker or community organizer). Barney Frank, a man who went straight from law school to public service, holds how much power over our financial system and its rules?

Posted by: Todd | Feb 28, 2010 2:29:54 PM

"Spreading the wealth around" as a function of government REALLY is the defining difference of the major political ideologies. On the other hand, when most people look at it today they see two parties spreading the wealth around...just pointing it to different groups, ie. the people vs the political donors. In neither case are we actually allowed to see how much goes each way so that we can have metrics to enable valid comparisons. We let both parties act as our teenage son with his first checkbook writing checks with no possibility of audit. Government itself must be made to document these expenditures so we can measure their affect which is why I believe that the IRS Form 1099-GOV should be issued for EVERY government grant of any kind, whether payments to individuals or tax abatements.

Posted by: SenatorMark4 | Mar 1, 2010 4:59:54 AM