Greg Mankiw and the real Middle-Class

An article by N. Gregory Mankiw in the New York Times’ Sunday Business section (2012 Dec 30 paper) attempts to compare the current tax paid by the “top” 1% of the workers, that fraction who earn the most income (the rich, as he calls them) with what the “middle class” currently pays.  He used 2009 data, saying that no later data exist at the end of 2012, and deduced that the Bush-era tax structure was pretty progressive.

This post as been updated with an Appendix

Jump to  Comments , Conclusions Appendix-Progressive/Regressive Taxes

GregMankiw_img

Gregory Mankiw

Dr. Gregory Mankiw is the Robert M Beren Professor of Economics at Harvard University and Chair of the Econ Department.  He is author of several widely used college text books and a extreme conservative commentator in news media.

He was Chair of the President’s Council of Economic Advisers 2002-2005 as Bush developed the economic and political reasons for the Iraq invasion. As we all know, the economic justification was about as meaningful as those awful WMDs.   Most recently, Dr. Mankiw was Mitt Romney’s Economics adviser during the recent campaign, when Mitt developed his argument that he was a true Job Creator, because he did not close every company Bain acquired, and therefor must have been responsible for their success.  That argument is a great resume builder, Greg.   The Wikipedia site (link on his name, above) describes the 70 students that walked out of his intro Econ class (of about 750) because of alleged bias in his class topics.  Understand, he was praised for the unusual (for Harvard) thrust of the same course, too.

Excerpt  from Mankiw’s NYT Sunday Business article.

In 2009, the most recent year for which data are available, the richest 1 percent of Americans paid 28.9 percent of their income in federal taxes, according to the Congressional Budget Office. (That includes income taxes, both individual and corporate, and payroll taxes.) Members of the middle class, defined as the middle fifth of households, paid 11.1 percent of their income in taxes.

Some of this difference in tax rates is attributable to temporary tax changes passed in response to the recent recession. But not all.  In 2006, before the financial crisis, the top 1 percent paid 30 percent of their income in taxes, compared with 13.9 percent for the middle class.

He continues with the comment that the tax rates look progressive to him, not regressive.

Comments

The fraction paid by the huge middle class was about 1/3 of that paid by the few really rich guys.  Sounds not too bad, unless we sit and think about it.

One of the issues in analyzing this statement is that different ways of compiling the information generate different values.  For example, Family income differs from Household income and the Census bureau has a course-grained listing of both.  We would get different median incomes, even income brackets, depending on which table we look at.   Saez, and Piketty use tax records (as does Mankiw) that, as of Autumn 2012, were current through 2010.  Mankiw does not use the same data sets and his values will not agree exactly with any of the other reports.   This does not mean any of the data are wrong, just that data methods are different. Expect small differences.

IncomeRange_tbl

Table 1

Table 1 shows the numbers on various income groups.  Mankiw’s middle class (MMC ) is the 20% of all earners whose income straddles the 50-50 point (where half all workers make less than this and the rest make more).  This 50-50 point, called the median income, is very close to $50,000.  In statistics, the MMC is called the 3rd Quintile, and some of the different data sets place this between the upper $40 thousands through lower $70 thousands.  Since the median stays the same, the higher range indicates more families at the lower end than at the higher.

We can make a few comments just on this.

(A)  Mankiw’s example is NOT progressive.   People in the MMC make about $50k, those in the top 1% make an average of about $500k, 10 times more.  But those richies pay only 2.6 times more in taxes than the Mankiw’s “middle class.”

If it were flat, the tax ought to go up in step with the earned income.  A tax is regressive when the rich pay much less than the scaled values of the lower levels.

Sorry Greg, this does not sound like anything “progressive.”  But it might, if I thought closing down American manufacturing jobs and offshoring our factories were “progressive.”

(B) Who can afford to pay less taxes?   People earning near the $50k mark see life quite differently than those earning about 10 times more (the mean value for the Top 1%).  Few MMC people can afford a $100-$300/hr tax accountants to find tax loopholes or to set up accounts in Bimini as the Mankiw’s rich can and do.

Question for you who make over $352k:   Is your question ever “should I get my 5 year old chevy fixed or should I spend it on a day’s worth of an accountant’s time?”    I truly doubt it is yes.  (I also doubt whether the time is only a single day.)

The MMC folks might go to H&R Block.  In my one and only experience with these guys (when I was young and naive), I wound up teaching my H&R expert about Schedule G, because she was clueless; then I paid her fee.  That is what to expect in such places.  No one at the 1% level of income would go near such a place.

(C) Will the real Middle class please stand up?   To Tell The Truth broadcast from 1956 through 2002 and asked this question after a fun show where 3 people claimed to be the same person.  The real question here, though, is … just what do we mean when we talk about the “middle class,” its society and its economics?

The awesome thing is that I have not been able to get a good definition in any American discussion of inequality.  Not Krugman, nor Stiglitz, nor Faux; not at any reasonable blog.  I suspect this is because name carries emotional baggage – nearly everyone wants to think of themselves as middle class.

Middle Quintile:  Mankiw should be thanked for proposing the middle 20% as the middle class.   But a good definition should cover all social examples.  Try this one:  In the European feudal days around 1100 AD, one found

  • the ultra rich who ruled over nearly everything
  • the sickened, starving serfs who watched their babies die, and themselves die early.
  • the middle class bourgeoisie, the thin buffer of tradesmen and shopkeepers standing between the other two.

Mankiw’s proposal cannot work.  The  MMCs would have been part of the serfs.

Advertizing rule:  In the ’50s and ’60s, when I was young and learning the ropes, middle class seemed to be those who the TV ads aimed for, the folks who could afford to buy things advertized without going into impossible debt.

Using the advertising rule.   Certainly, everyone ought to be Middle Class (MC).  But, with the ad rule, and without assuming a killing debt:  the advertising MC family must be able to … buy their own home and 2 cars (every 2 years), afford to send their 3.5 children to college without pain, and along the way afford a 48″ LDC TV, the latest in cell phones, and the most recent tablet computers.

I suspect advertising MCs must be at least in the upper 5% of the earning population, nowadays.  Below this level, families struggle with killing debt that would en-serf them as individuals when the oligarchs call in the debt.  Below the 5% segment, people who try for these things can sink ever-deeper into debt.   Either the advertizing rule does not work, or the American rich and poor are more separated than we want to admit.

The take-home message is that middle class may not be a meaningful phrase anymore.

Final Comments

Mankiw’s argument   He tries to indicate that the tax trends of the past 30 years are what any reasonable person should say were fair and equitable.  We point out that comparative tax rates are much smaller than comparative earning rates.  And the difference is much more pronounced depending on how close to the survival level the income is.  If you support a family of (2+3.5 =) 5.5,  and make $38,000/yr (at the bottom of the middle 20%), your daily decisions on whether to spend even $200 on bills or on groceries could mean that you and your children might go without extras toward the end of a pay period.  If the income were $10k less, you all might be skipping meals.  If you earn at the bottom of the top 1% range,  $200 is pocket change. You could easily spend that on tax accountants or lawyers with one phone call.

click for our discussions on economic inequality

Middle Class has become an emotive meaningless phrase.  A reasonable definition must be valid for any social structure.  Mankiw uses his Middle Class to make the past 30 years of tax restructurings (especially those since 2001) sound reasonable. Class appears synonymous with personal worth and seems to be used only when manipulation is intended.  (Including, of course, LastTechAge’s use of ultras to group the 1-family-in-every-10,000 (0.01%) that earns the very most in America.)

So Mankiw’s business section article must be just another salvo in the class warfare that the upper earners have waged against the rest of us over the past 4 decades.  We are to realize that – really – becoming serfs is not so bad.

There are other comments to be made on his opinion blast … progressive taxes, excess entitlement programs, etc.   See the letters to the NY Sunday Business page, 2013 Jan06.

Mid20_gph

Fig 1: Fraction of total income earned by the 20% of the population who earn near median income. (light blue, top earning 10% of the population)

Inequality This is LastTechAge, after all, so we cannot close without discussing how Mankiw’s group has fared in the Zero Sum Game of inequality.

Fig 1 shows the iconic history of the upper 10% (pale blue background) – a fairly constant share of the pool of all earned income from WW-II through about 1981.  From 1981 through 2010, their share of the income pool grew by about 48%.

The dark blue line shows that the middle 20% of all earners lost about 19% of their share of the income pool between 1970-2010.  Click for larger graph.

We will not go further with Fig 1 data, here, but it does show that the median 20% of all American workers have not been treated equitably by those in power.

The current set trends we have discovered that correlate with S-P Inequality is in the file “Trends correlating with Saez Piketty Inequality.pdf” Click the button [PDF References] under the banner; it is filed under Economy.

……………………………….

Charles J. Armentrout, Ann Arbor
2013 Jan 07
Have a comment? Click on the title of this post, go to bottom, let us know.
Listed under   Economics    …thread    Economics > Inequality
Related posts: Click the INDEX button under the Banner picture

– – – – – – – – – – – – – – –

Appendix – Progressive and Regressive taxes

ProgReg_taxes_txtAdded due to discussions after initial posting . Progressive taxes raise the tax rate substantially as the taxable income increases from the poverty level, whereas regressive taxation applies little tax rate increases, or even reduces the rate to reward the self-styled Job Creators, those who earn at the top most levels.

Becoming Wonky   How to adjust tax rates with these definitions is left to the reader, as we say in physics courses (when teacher may not know how to do the tough stuff himself).  The following uses the numbers, not as values, but as trends.

We take ratios of the same type values (we divide them)  and get a value that indicates a trend, independent of the original magnitude.  This is due to our rule: big numbers do not convey much, discussed in  Lies of Large Numbers.

The real issue with Mankiw’s analysis is that he chose two groups to compare that sounded reasonable but, in actuality were far apart in impact that the income difference makes on their personal lives.

PvLin_txt Good/Bad thresholds exist   From our point of view too high a taxation is like too high a bathtub temperature. Water feels tepid to cool at about 70ºF (21ºC). Water at 80ºF (27ºC) would is warmer, but water at 104ºF (40ºC) is for hot tubs. There is nothing magical about the 70º threshold, but one feels cool, swimming at a lower temperature.

Income is similar.  Let us define freezing income as the poverty line (PL ), as in the box shown here (Currently, the U.S. minimum wage is about 62% of PL).

IncomePov_tbl

Table 2: distance from the Poverty Line for the start of selected income groups

Income Freezing Line:   Use $23,320 as the survival threshold and compare how hot an income is compared with the PL ‘s freezing cold value. Table 2 uses values from Table 1 in the text, Mankiw’s Middle Class (MMC ) starts at $38,000, the top 10% group starts at $108,000 and so on.

ClassDistances_tbl

Table 3: Class distances

From Table 3 , the 1%ers are 2.3 times farther from the PL freezing point than then 5%ers. This is similar to the fractional tax rate increase of 2.6 (= 28.9/11.1) that Mankiw thought fair and equitable.  Here is the key: The 1%ers are nearly 9 times farther from the PL than MMC-ers.

Fair and Equitable taxation – our main point .  Idiologues, both left and right, would agree that taxes should be fair and equitable.   How to use this thought, though, is subjective.  Here are my thoughts: The similar ratio between the top 1% and the top 5% is one of the reasons we said that perhaps the Middle Class should be identified with the top 5%, not the middle 20%.  Mankiw’s analysis is far out of balance with the distance to the kill point (the PL) that exists between the median earner and the rich 1%.

Advertisements

About LastTechAge

I am a physicist with years of work in fusion labs, industry labs, and teaching (physics and math). I have watched the tech scene, watched societal trends and am alarmed. My interest is to help us all improve or maintain that which we worked so hard to achieve.
This entry was posted in Economics and tagged , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s