How can something so sweet be so wrong (more professors)

Querida V,

If you know me (and you do), you know I don’t know what to think about Greg Mankiw’s blog. I keep saying he’s so smart (I mean I guess he is, right? RIGHT?) but I’m kind of vexed because of things like this from last week (last week, right? what day is this?):

The key insight of Keynesian economics is that the problem during recessions is inadequate aggregate demand. Taken to the extreme, which some Keynesians do, it says that aggregate demand is the only thing you need to worry about during downturns. Changes in aggregate supply (due to, say, high marginal tax rates or adverse incentives associated unemployment insurance) don’t matter, they argue, because employment is being constrained by the low level of aggregate demand.

University of Chicago economist Casey Mulligan offers a challenge to that view. Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased). That is no surprise: It is normal supply and demand in action. But if aggregate demand were the main constraint on employment, this increase in supply should not translate into higher employment during deep recessions such as this one. But it does!

Most economists, Keynesians and otherwise, ignore this summer change in employment because we focus on seasonally adjusted data.
But as Casey points out, the raw unadjusted data may have something important to teach us.

[emphasis mine, of course]

And then I am deeply troubled because I mean… even l can kind of see right through that, yknow? Non-certified NOT-AN-ECONOMIST Rusty Schwartz knows that “most economists… focus on seasonally adjusted data” for a reason! And that reason is that supply and demand both fluctuate, um… seasonally… and, like… together.

Oy, how do I mean? I mean that of course the labor supply increases in the summer but so does aggregate demand, right? Those teenagers are working at things like cream stands and water parks and goat rodeos. And then there’s no demand for those things (and thus no demand for the teenage labor) when the teenagers are back in school (and there’s no more teenage labor supply). The supply and demand both fall. RIGHT?

So this was creating a crisis of confidence for my Internet Economist worldview. Because, for instance, Tyler Cowen links approvingly (I guess?) to the Mankiw post and he’s not in the business of being flat-out wrong about things (although I guess he’s not flat-out wrong here either, but just says “Casey & Greg say this…” and I like to imagine kinda looks at the camera like he’s on The Office)… but anyway, crisis averted because real live licensed smart people on the Internet made pretty quick work of it, which is nice:

Recession or expansion, the demand for labor increases in the summer and winter, following the patterns of demand. In the summer, some of this demand is satisfied by a seasonal rise in teenage labor supply. This isn’t exactly brain surgery.

Mulligan and Mankiw have not found any smoking gun that refutes Keynesianism. They do unwittingly reveal that they don’t really understand how to use nonseasonally adjusted data. But, more importantly, they reveals a remarkable ignorance of – and, presumably, lack of appreciation – for the ebb and flow of economic life in America. It is almost like not understanding basic elements of your own culture.

Needless to say, this made me feel ok about myself. And reminded me of another Mankiw post that made me go a little nuts inside a couple months ago. Now the teen labor supply thing isn’t all on him (he was tricked by Casey Mulligan maybe? but still…), but this, OH THIS (here’s the whole thing):

How to Lie Without Statistics

Today’s Parade Magazine (with a circulation of 32 million) includes its “Annual Salary Survey.” What this means is that the magazine presents about a hundred photos of various people with their names, occupations, and annual earnings.

At first, you might think this is a good way to give readers a sense of the distribution of income in society. And it would be, if the sample were at all representative. But it isn’t. Parade decides to oversample celebrities. That is understandable–after all, readers are more interested in hearing about famous actors and sport stars than about a plumber in Dubuque. But one result of this choice is that the sample is far from representative, making the whole affair misleading as a piece of journalism.

By my count, about 14 percent of the people in Parade’s sample earn more than $1 million a year. In the real world, the actual percentage is about 0.2 percent. So, in a truly representative sample of a hundred people, you would most likely have zero, or perhaps one, person with a million dollar income. Finding two would be highly unlikely. 14 would be nearly impossible.

Does this matter? I think it might. There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.

Whoa. I mean, first of all: can you believe he calls the thing HOW TO LIE WITHOUT STATISTICS and then tries a super-amateurish sleight-of-hand and tries to convince us that tax revenues have to do with the number of millionaires rather than the sizes of their millions. I don’t have to explain what’s wrong with that, do I? Well, no, I don’t because someone did it already:

If we are interested in thinking about the potential taxes the rich can pay, Mankiw’s 0.2 percent is incredibly misleading. The issue here isn’t how many people are rich, but rather how many dollars are earned by the rich. In the spread, each picture is shown as if each person were equally able to pay more taxes. But that surely isn’t true. If Parade were trying to give a sense of the capacity of each person to pay taxes, they would show much, much larger photos of the rich, and proportionately smaller photos of the rest of us. Relative to Facebook CEO Mark Zuckerberg, the photos of most of us would barely register a couple of pixels. For obvious reasons, they didn’t choose to do this. But this inadvertently feeds an all-too-common misperception that because there aren’t a lot of rich people, they don’t earn a large share of total income. They do.

What proportion of income is earned by the rich? Let’s turn to Emmanuel Saez’s compilation of income tax statistics. The latest data are for 2007, and for simplicity’s sake we’ll examine the broadest measure of income. The richest 0.5 percent of families all earned more than $632,000, and received 19.3 percent of all income. Or alternatively, we can focus on the richest 0.1 percent of families—who all earned more than $2 million, and collectively earned an average income of $7.1 million. This sliver of the community—the folks Greg worries about—received 12.3 percent of all income.

The lesson? Families earning more than $1 million probably do represent close to 14 percent of total income, and maybe more. By arguing that only 0.2 percent of families are this rich, Mankiw risks distracting his readers from the fact that increasing the taxes paid by the rich can be a big part of the solution to our fiscal woes.

So that was easy, but I want to add something (to this to prove I’m smart or whatever, right?). The part of Mankiw’s analysis that Just Drives Me Nuts is the story he tells about the particular perception problem created by the overrepresentation of millionaires in the Parade salary survey. He seems to think this leads people to believe that “there are enough rich people” that we can solve our problems by taxing them. But I thought to myself: who on earth sees those celebrities and thinks that? See, there’s a much much simpler story you can tell about what people think when they see all those millionaires: they think they have a pretty good chance of becoming a millionaire themselves. This is kind of a well-documented phenomenon. Unfortunately for Mankiw, the simpler story would mean that the trouble with Parade is that it would make people less eager to tax the rich than they ought to be. And I don’t think that’s the conclusion he wants to come to.

On the other hand, I may be having delusions about how convincing my story is.

self-satisfied,
R

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Comments

  • Violet G. Beekeeper  On 18 August, 2010 at 1:40 PM

    Wow yeah that read like Thoughts on The Economy by a Martian who had just given Earth: What’s Up With That? Magazine a brief skimming.

    Also, it’s worth pointing out – or is it? that the increased demand for the services in which out-of-school kids are employed is fueled in large part by… out of school kids (see eg, counselors and campers). It’s like a little bitty economy biosphere.

    Anyway my summer jobs included working at a daycare, selling freezedried mice and painting doorframes at a ridiculous dot com startup wearing shirts made of bandanas. That’s misleading, there was only ever one bandana involved. Whatever it was the 90s, at least it wasn’t parachute pants.

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