October 12, 2010
Posted by Jay Livingston
“No man but a blogger ever wrote, except for money.”
What Dr. Johnson actually said was “blockhead,” but what’s the difference?

Is money the only motivation to produce? Greg Mankiw seems to think so. Mankiw was a top economics adviser in the Cheney-Bush administration. He probably thought that tax cuts for the rich were a good idea ten years ago, and he still thinks they’re a good idea

In a column in the Business section of last Sunday’s New York Times, Mankiw uses himself as an example to illustrate the disastrous effects of allowing the Bush tax cuts on the wealthy to expire, raising that rate the three points from 36% to 39%, and resurrecting the tax on large sums of inherited money.
Suppose that some editor offered me $1,000 to write an article.
Then Mankiw does a little magic – like the magician who starts holding one ball in his fingers out soon winds up with many.
30 years from now, when I pass on, my children would inherit about $10,000.
But then come the taxes.
Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With [the proposed Obama] taxes, it yields only $1,000
But ah, if we keep the Bush tax cuts for the rich . . .
Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working.
Other bloggers (Brad DeLong and Kevin Drum, for example) have criticized Mankiw’s math and economics. What I’m curious about is the assumption that rich people do what they do only or mainly because of the money.
Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.
Should Mankiw really be using himself as an example? If Mankiw’s work output is merely or mostly a response to economic incentives, why is he writing this column at all? The Times paid him considerably less than $1000. I would guess about a third less, but whatever it was, it’s pocket change compared to what he makes from his books, and it’s probably much less than he could have made had he spent the same amount of time consulting.

Yet he still wrote the article. And I bet he would have written it even if the Times hadn’t paid him a cent. I base my bet on past performances: on his blog, Mankiw averages about five posts per week, all of them unpaid. In the 1990s, the top tax rate was 40%, and in early 1980s 50%. Did Mankiw work less hard back then?  When the Bush tax cuts kicked in, did he rush to pick up more consulting gigs?

Is money the reason that rich people – movie stars, rock stars, fancy surgeons, rich economists – continue to work? And will that 3% increase in their marginal tax rates make them slack off? If the tax cuts expire, will the hedge fund guys leave the office at 4:30 in the afternoon because it’s just not worth it to trade a few more swaps and derivatives? They already have more money than they know what to do with, yet they work long hours to make more.

Last night, Brett Favre, age 41, threw the 500th touchdown pass of his career. If the Bush tax cuts on the rich had expired a year ago, would Favre have retired (I mean really retired) and not played this season?


trrish said...

I know! I had the same thoughts reading that the other day. There was no place to comment, but I wanted to say "Lucky for us, if you don't want the writing gig I bet there are a bunch of other great writers that would."

PCM said...

He made me so made. The bad math. The bad morals. The fact he probably believes what he writes. And the fact that he has had the ear of presidents who listen to him.

Todd Krohn said...

The Ol' Gunslinger(Favre) is probably wishing he had retired the way things are going this season.

On the 3%, I find that the only people who panic over the Bush tax cuts being rescinded permanently are those who think they're rich.

As one certifiably wealthy individual told me last weekend, the 3% they might have to additionally cough up "can be made back with one solid investment."