How much does government policy affect pre-tax income?

by on August 21, 2006 at 7:57 am in Economics | Permalink

SA few days ago Paul Krugman argued (Times Select, or here is a Mark Thoma summary) that it matters a great deal which political party rules in the United States.  Republicans tend to bring gilded ages, Democrats tend to bring greater income equality.  So much for the median voter theorem (is this less reason or more reason to trust politics?  And is this view supported by event studies of elections?  I doubt it.).

Andrew Samwick points to Krugman’s own earning power and wonders if W. deserves the credit.  Greg Mankiw piles on.  Even Brad DeLong disagrees with Krugman.   

Matt ("he really ought to be an economist") Yglesias sides with Krugman, noting that tax policy affects pre-tax earnings through induced effort (an unexpected yet appropriate dalliance with the supply side) and how the workplace is geared to produce maximum value.

Four additional points:

1. It is much easier for policy to liberate a "shackled top 1 percent" and boost their earnings than it is for policy to lift the huddled masses.  See Mark Thoma on Australia.  Measures of inequality capture the difference between these two groups, but for Krugman’s questions this is not a helpful aggregation.  It is easier to toy with the lot of small groups than with very large groups.

2. Bob Tollison used to tell me: "No one other than Michael Jordan ever got truly rich selling his labor."  If policy is going to liberate top earners, look to the growth in capital markets.

3. Krugman doesn’t have many data points.  The 20s have a string of Republicans.  Then there is Roosevelt/Truman.  He tosses out Eisenhower for being centrist.  Nixon was like a Democrat on social spending and regulation.  Krugman tosses out Clinton for governing like a right-winger.  Give this one to Andrew Gelman and let him bite.

I’m OK with these classifications of Eisenhower and Clinton.  The deeper point is that how a party or president governs is itself determined by underlying social, economic, and technological forces.  Which brings us back to the political party not mattering very much for pre-tax income distribution.

4. If we take the left-wing view that money doesn’t make people much happier, and hard work is an oppressive rat race, the change in the distribution of utility is much much less than the change in the distribution of income.  In fact it is easy to argue that the United States has become more egalitarian in terms of well-being.  Most people get penicillin, and in utility terms a $20,000 stereo isn’t much better than a $400 stereo.

Addendum: Here is more Brad DeLong summary and analysis.

SomeCallMeTim August 21, 2006 at 8:42 am

If we take the left-wing view that money doesn’t make people much happier

Is there any reason you’re characterizing that as a “left-wing” view, or is it just a felt truth? (Not meant to be snarky; real question.)

kevin August 21, 2006 at 9:27 am

Well Bob Tollison is pretty much always right, but Michael Jordan’s real
riches didn’t come from directly selling his labor. His BBall salary is/was
dwarfed by endorsements. And, while many $20,000 stereos are crap (one can
often create better sound for 1/10 the price)there is a HUGE difference
between a good stereo and a bad stereo, just as there is between
HD on a good plasma and your sister-in-laws 19 inch relic

(98%? Mr. Wilkenson has some serious perceptional problems).

Those who think money doesn’t buy happiness: SEND ME YOUR MONEY PLEASE!!!

Social welfare will soar like an eagle, I promise!!

Andrew Gelman August 21, 2006 at 10:09 am

Tyler,

I recommend taking a look at Larry Bartels’s paper on the topic; see here:
http://www.stat.columbia.edu/~cook/movabletype/archives/2006/04/larry_bartels_o.html
Larry made a pretty graph.

I agree that there are sample size issues here, but Larry is telling a coherent story, I think. See here for my further comments:
http://www.stat.columbia.edu/~cook/movabletype/archives/2006/04/more_on_larry_b.html

Will Wilkinson August 21, 2006 at 10:25 am

Through the post Tyler links to, I have learned that when people spend a lot of money on electronics, they become very defensive when you say they don’t do much for utility. But it’s OBVIOUS. At this very moment, I am listening to Built to Spill (from my $5/month Yahoo! subscription) on a $179 MP3 player, through crappy PC speakers in my office. The sound quality indeed pales compared to a high-end stereo. But I can hear the guitars, bass, drums, vocals and everything anyway! And the album kicks ass. I’m not listening to the sound quality, I’m listening to the MUSIC, which is phenomenal with so-so sound or with great sound. I stick buy my arbitrary numbers: my pleasure would be enhanced if I had several hundreds or thousands of dollars of better sound, but only by 2%.

William Goodwin August 21, 2006 at 10:49 am

Will, we’re not defensive. We just know from our own experience that you’re wrong — at least about the televisions. (I’m not much of an audiophile, and I too usually listen to my MP3s on a relatively cheap speaker system.) The difference between watching a well-made (in cinematographic terms) film or TV show on a 60″ widescreen TV and watching it on a normal 27″ screen is immense: the former experience is thirty or forty percent better. How could it not be? We’re talking about a visual medium: when you watch a movie, you’re not simply consuming the story or the characters, you’re consumin, in a fundamental sense, the way things look. And they look much better — in every sense — in HD than in SD. It’s like saying that the experience of seeing Cezanne’s Apples from a great distance, through a cloudy window, is the same as seeing it close up, in a well-lighted room. It’s not the same. It’s much worse, and you’re deluding yourself if you think otherwise.

Matthew Morse August 21, 2006 at 12:33 pm

I have precisely the opposite views on television and music of William Goodwin. I think the difference between a $200 television and a $2000 television isn’t worth getting excited about. On the other hand, I consider a $2000 stereo essential and a $200 stereo insulting.

It’s not that I think I’m right and he’s wrong. It’s that different people value different things, and self-image, and therefore happiness, are tied to the objects we value in complex ways.

Nick August 21, 2006 at 1:28 pm

I wonder if the nicer version of things makes people happy if they’re related to one of their passions in
life. It’s not that surprising that a nice stereo doesn’t make someone happier if they’re only interested
in music as a means of casual entertainment, but what about a music lover? To say that a person who has
a real passion for something is not made happier by nicer goods related to his passion(s) would be quite
surprising to me.

Will Wilkinson August 21, 2006 at 2:48 pm

I consider the fact that many people are extremely persistent in defending the claim that high definition widescreen televisions are vastly superior to a simple state-of-the-art-a-mere-ten-years-ago televison when it comes to watching the very same lavish, immensely entertaining dramatic production as definitive proof of the total triumph of market egalitarianism.

There is no denying that different people have different preferences and may be willing to pay a great deal for a very small qualitative difference in one domain and not in another. But this has no bearing to do with the fact that these are, in fact, very small qualitative differences.

Connoisseurs can come to experience small differences as large. That’s pretty much what it means to be a connoisseur–to have a specialized ability to detect almost otherwise undetectable differences in quality.

People who can listen to a mass-produced $5.99 Mozart CD on a $15 CD player are LISTENING TO MOZART. They are not getting a raw deal simply because there exist people who can REALLY HEAR AND ENJOY IMMENSELY the difference between a $5000 and $10,000 set of speakers.

Market egalitarianism is pretty obviously true when almost everyone has the option of becoming a connoisseur about the quality of some class of good or other.

JohnDewey August 21, 2006 at 3:46 pm

Will Wilkinson: “But this has no bearing to do with the fact that these are, in fact, very small qualitative differences.”

I’m still not understanding why you describe differences between these televisions as “very small qualitative differences”. Doesn’t the adjective “very small” depend on the value one assigns to each of the differences? A difference may be unimportant to you but extremely important to someone else.

Consider this example: as a hearing-impaired television viewer, it is important that I be able to clearly read the lips of newscasters and actors whenever possible. Closed captioning is generally available, but often lags the spoken word by just long enough to make comprehension difficult. A giant screen television enables me to more easily read speakers’ lips. Thus, for me, the larger-sized viewing screen is a huge qualitative difference. But that’s because of my particular set of values.

If you wish to ignore the value sets of individuals, then how can you determine the “quality” of a television? Would you attempt to quantify the quality? Viewing surface area is certainly an objective measurement. A 52 inch television has approximately four times the surface area of a 27 inch set, and represents much more than a “very small difference”.

I guess I want to understand how you can claim to know better than millions of consumers what constitutes a “very small qualitative difference”.

Kevin August 21, 2006 at 4:24 pm

Hey Will: thats awesome that you listen to BTS. I like them a lot too. I didn’t spend much money on my stereo, in fact I built it myself, amp, preamp and speakers (bought the TT and CD player though). I enjoy music in my car and from crappy headphones hooked to an ipod playing compressed mp3s. However, sitting at home in my living room in the sweet spot listening to stan getz or count basie or frank zappa or control machete is as close as I get to a religious experience and the difference betwen my levels of enjoyment is not small.

In terms of the argument, our opinions clearly differ, however, both are only opinions. I cannot pretend to know how you evaluate HD plasma vs. black and white, but you should not pretend that your opinion is an objective, generalizable statement about reality.

My post was (I hope clearly so) intended to be humorous. I’m sorry if I offended you.

Will Wilkinson August 21, 2006 at 4:52 pm

Kevin, I’m unoffendable. Clearly you’re a connoisseur, which is awesome. I’d love to listen to Zappa in your sweet spot.

What I’m asking is that people recognize (1) connoisseurship for what it is–the ability to appreciate differences in quality that the average person cannot and (2) that qualitative differences between what money can buy have become very small and are becoming smaller over time.

Kia vs. Toyota vs. Mercedes is a qualitative tie compared to walking vs. horse vs. coach-and-driver. The rest is a kind of narcissm of small differences.

The argument about experience vs. stuff is an argument about averages. If any particular individual gets joy out of the extra expense of their connoisseurship involving certain consumer goods, then good for them. Indeed, connoisseurship involves a kind of engagement with experience that often justifies the expense.

But my sense is that most people don’t spend a lot of money on cars or TVs because they are refined automotive enthusiasts or cinemaphiles, but because they’re interested in status-signaling. They’re not acquiring stuff for the exquisite experience it offers, but simply to because that is “what one does,” and one loathes to fall behind.

Will Wilkinson August 21, 2006 at 5:30 pm

“Sorry, Mr. Wilkinson, but I find this statement to be arrogant and offensive.”

What’s wrong with status-signaling?

JohnDewey August 21, 2006 at 6:04 pm

What offends me is what I perceive as your omniscient attitude. Somehow you “know” why people spend large sums on televisions. Over at Asymmetrical Information, you first irritated me with this statement:

“OK! Some of you are really proud of the TVs that you spent a huge amount of money on.”

It implies the same thing as your status signalling statement: that pride and status rather than value of experience are the motivations for these purchases. Earlier this afternoon I provided a very logical reason I will be purchasing a large screen television in the future. It had nothing to do with pride or status-signaling. How do you know that almost every other purchaser of large screen televisions does not have similar reasons for their purchases? How do you know what motivates people to spend their money?

Obviously, Mr. Wilkinson, I do not need your approval of my purchasing habits. I think I’m only bothered because I dislike what I see as unfounded speculation about the motives of others.

Oskar Shapley August 21, 2006 at 6:58 pm

Taking the_presidents as your independent variable is not enough. Presidents do not legislate the law. All they can do is veto it or spoil its execution. Which party writes the laws is equally important.

But to give an example, I’m being told that under Bush II searches for illegal immigrants have dropped close to zero from a relative high under Clinton. Result? Employees illegaly hire cheaper immigrants without fear of being caught and wages for un-skilled immigrants dropped by 8%. (as recorded by Krugman in an earlier column)

Chomsky described something similar under Regan in the OSHA: “”In the 1980s the Reagan administration essentially informed the business community that it was not going to prosecute violations of Occupational Safety and Health Administration (OSHA) regulations. As a result, the number of occupational and industrial accidents increased dramatically. Business Week reported that working days lost to injury almost doubled from 1983 to 1986, in part because “under Reagan and Bush” OSHA “was a hands off agency.” “”

Bob Dobalina August 21, 2006 at 8:42 pm

Will Wilkinson likes BTS, and thus is even cooler than I have dreamt.

JohnDewey August 22, 2006 at 7:00 am

Will Wilkinson: “It is far from unfounded speculation to note that people are strongly motivated by status, nor that their consumption habits often reflect this motivation. …I’m not making this stuff up.”

Well, I guess I was a little overboard with claiming “unfounded speculation”.

I’ve always been distrustful of motivational research, even that conducted by the world’s preeminent “authorities”. But my education is in finance not marketing or psychology. So perhaps it’s my ignorance that causes my doubt.

Please consider that many consumers make purchases for not just one but for a variety of reasons. Even those now proud to show off their newest gadgets may have initially made the purchase for an entirely different reason. I know one guy who bought a giant screen television so that he and his buddies could more enjoy NFL football games each weekend. Was status-signaling his main motivation? or did he genuinely believe that seeing near-lifesize football players in his den would enhance an already pleasurable weekend with friends? or was it both? Who can really know what was his chief motivation? And that was my point all along.

For what its worth, I believe the happiness of my NFL-watching friends increased after purchase of the large television. Who can say that Ray and his buddies would have been happier by traveling to Europe instead?

Oskar Shapley August 22, 2006 at 9:21 am

Correction: I was going to say “wages for un-skilled _Americans_ dropped by 8%.”

That’s not precise, here’s what the source says:

http://select.nytimes.com/2006/03/27/opinion/27krugman.html

“”” Because Mexican immigrants have much less education than the average U.S. worker, they increase the supply of less-skilled labor, driving down the wages of the worst-paid Americans. The most authoritative recent study of this effect, by George Borjas and Lawrence Katz of Harvard, estimates that U.S. high school dropouts would earn as much as 8 percent more if it weren’t for Mexican immigration. “””

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