The grasshopper wins, and Greg Mankiw’s grandmother would be “shocked and appalled” all over again

February 19, 2013

(This article was originally published at Statistical Modeling, Causal Inference, and Social Science, and syndicated at StatsBlogs.)

Given Grandma Mankiw’s hypothetical distaste for Sonia Sotomayor’s spending habits (recall that Grandma “would have been shocked and appalled” by the judge’s lack of savings), I expect she (the grandmother) would be even more irritated by the success of Sotomayor’s recent book:

Now that Sotomayor has a ton of money coming in, in addition to a well-paying job and pension for life, that would almost seem to validate Sotomayor’s foolish, foolish decision to enjoy herself in middle age rather than sock hundreds of thousands of dollars into a retirement account she likely would never touch during her lifetime.

One interesting thing about this example is that Mankiw apparently holds within himself a descriptive and normative view of economics. Descriptively, he models people as “spenders” or “savers.” But, normatively, he seems to attribute higher values to the “savers.” (He also seems to be confused about the relation between saving to intertemporal preference (see my long paragraph here), at least in Sotomayor’s case, but that’s another story.)

This is fine—there’s no reason that Mankiw shouldn’t express his views. I personally don’t get it (except as a comment on his grandmother’s Great-Depression-induced attitudes) but the way Mankiw wrote his post, it really does seem that he sees it as a negative comment on the judge that she’s not saving her money for a tomorrow that will never come.

It’s not just econ

This tension is hardly unique to economics. Every social science has its descriptive and moral component. For example, my colleagues and I have descriptively studied partisan bias of electoral systems—but the very word “bias” implies a perspective that it’s a bad thing. When psychologists study schizophrenia, it is typically with the ultimate goal to prevent and treat it. When sociologists study networks, I think there is a general view that you don’t want to be the Unabomber, that it is better to establish enduring human connections with friends. And so on.

The moral component of social science seems different than the utilitarian component of physical science. For example, if a chemist might be working on some new polymer in pursuit of a social goal such as the design of an ultralight efficient car, but in that sort of example I see a clear separation between the scientific activity and its later use, a separation that seems much less sharp in social science.

Anyway . . . I’ve written a lot (for example, here) about different and somewhat contradictory perspectives inside microeconomics. But this latest discussion, about Sotomayor and Grandma Mankiw, made me think about this different set of contradictions within macro, related to the Keynes’s famous argument that saving rather than spending can be individually wise but bad for the larger economy, and counterarguments that the Keynesian prescription might work in the short term but have bad long-term consequences.

So, my comment about the overlapping descriptive and moral natures of social science is not a criticism. I think it’s necessary and appropriate.

Back to Sotomayor, Grandma Mankiw, and Greg’s 93% tax rate

Anyway, this all gives me some insight (or, at least I think it does) on Mankiw’s claim that he would work less once Obama came to power and cranked the marginal tax rate up to 93% (see updates here and here). As the commenters discussed, you can only get the tax rate up to 93% by making some assumptions about savings and compound interest and the inheritance tax.

How does this all fit together? Recall that, a few years ago, Mankiw wrote that it is wrong to tax a “justly acquired endowment” that is not “unfairly wrested from anyone else.”

So here’s the deal. From Mankiw’s perspective, saving is moral, spending is not so moral (and, recall that the criticism of Sotomayor is not that she’s spending beyond her means, but just that she’s spending what she’s already earned). Sure, Mankiw is putting this anti-spending perspective in the mouth of his grandmother, but the way he writes it, it appears to me that he’s expressing his own beliefs as well here. And he views taxes as a sort of fine or punishment. Put these two things together, and you can see how he would (a) support a tax on consumption (an activity of which he expresses disapproval) and (b) gets annoyed by income and inheritance tax. After all, from his perspective, high income represents a good thing so why tax it, and inheritance represents savings (unspent income), which is also good, so that shouldn’t be taxed either.

The idea that Sotomayor spent all her money, and is now rewarded for that behavior by a Supreme Court seat and “a seven-figure advance” and royalties from her new book—that’s gotta be really galling from the virtuous-ant-and-lazy-grasshoper perspective attributed to Grandma Mankiw. It’s the flip side of taxing the bequests of elderly rich people who virtuously saved their money and wisely invested it for decades in real estate and the stock market. It’s the world turned upside down.

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