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Mankiew:

"The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%."

First, I think that Mankiw is confusing "small businesses" with "businesses".

Second, even if "fully 48% of the net income of (...) went to households with incomes above $200,000 in 2007", these not mean that 48% of the businesses have incomes above $200,000 (imagine that we have 5 businesses - 1 has an income of 300,000 and 4 have incomes of 100,000; in these case, 43% of the income go to businesses with more than 200,000, but only 25% of the businesses have more than 200,000 of income.

One key takeaway from the Darden article (page 3): another example of how very successful companies thrive by having a large in-house IT staff and treating IT as a key competitive advantage and core business activity rather than a cost center to be outsourced. Wal-Mart is another company that famously took this route.

I never understood Net Neutrality until I read Eli Dourado's blog. Thanks for linking to it!

Eli writes:

Because we do not observe the ideal pricing structure, net neutrality regulations hamper firms’ ability to ease congestion by de-prioritizing what they believe is the lower-value traffic ([but], if optimal pricing exists, congestion is self-regulating). On the other hand, because some firms are coercive monopolies and face regulated pricing, net neutrality can improve welfare by taking away an inefficient monopoly rent.

What's your take on net-neutrality?

If Eli is right, net-neutrality seems to be a very good idea. It eliminates monopoly rents (and ISP's are very nearly monopolies in their markets), plus net-neutrality has no downside as long as we allow congestion pricing.

Eli describes congestion pricing as:

The efficient solution would be something like the following. Consumers would pay for Internet service in two parts. First, they would pay an access fee, which varies from consumer to consumer in proportion to how much they value the Internet. Second, they would pay for the data they consume on a metered basis, with peak rates being higher than off-peak rates to efficiently allocate traffic.

We allow monopolies like toll-roads to charge peak-rates at rush hour. But we don't allow them to cut special bulk-deals for just FexEx trucks, while leaving UPS trucks with, well, their wheels just spinning.

Same way, it is one thing to allow ISP to recoup peak data transfer costs by charging different metered-rates at different hours of the day (isn't that what your phone company does with free nights and weekends?). But it is quite another thing to allow monopoly-like ISPs to offer different deals for different users.

"According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007."

I agree with the first commenter above. The distribution of this income is almost certainly highly skewed on the upside. Does anyone have the numbers on the the distribution? It would be interesting to see the data. Mankiw knows the distribution is skewed and he also knows that many casual readers of the above sentence will make a false inference. Given this, it is hard to avoid the conclusion that Mankiw is attempting to deceive his readers.

Re Darden: "Ghetto kid makes good!" Stops at Williams College, Stanford Law, and First Boston probably helped, too.

But at its heart, it shows that the spark of creativity, combined with the heart of an entrepreneur and the brain of a world-class nerd, can go a long way in ANY business.

Very puzzling to me that anyone thinks Mankiw is being deceptive. He means exactly what he says, people!

Who cares what the % of affected businesses is? That's totally irrelevant because it is unrelated to job creation, which is the issue. Bigger businesses with more income have more jobs, so % of income affected is the right metric. He excludes large businesses by removing corporations from the data set. Perhaps there are a few large partnerships, but I doubt that skews the numbers much.

Cliff:

First of all, it isn't Mankiw that's being deceptive. Except for the first sentence citing their work, the entire post is a quote from Hasset and Viard.

Second, the data set does not exclude big businesses, but only C corporations. A law firm with a billion dollars in billing and thousands of employees is counted as a "small business". An S corporation with a dozen shareholders and millions in profits, ditto.

If we start talking about households with with a *minimum* net income of $200,000, and remember that S corporations and partnerships can have many owners, the relationship between "anything but a C corporation" and "small business" becomes doubtful.

In practical terms, the small businesses that contribute disproportionately to new jobs seem to be truly small, not businesses that fit an arbitrary but convenient definition of small. And they are mostly small because they are new businesses.

The category formed by the overlap between "not a C corporation" and "minimum household income of $200,000" seems like a poor match for that.

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