Utility, Taxes, Equality, and Poverty

Head of the Harvard economics department, former chair of the Council of Economic Advisors for George W. Bush, Romney campaign economic advisor, and author of the most popular undergraduate economics textbook recently caused quite a stir in the economics blogosphere with his "Defending the One Percent". In his article, Mankiw lays out the usual utilitarian case economists make for redistribution, casts some doubt on these utilitarian principles, and finally suggests that instead of looking at redistribution from a utilitarian perspective we should focus on a "just desserts" approach that assesses fairness more broadly when taxing and spending.

What do we mean by a "utilitarian" argument for redistribution. Well, (and I'm sure a philosophy professor would be horrified by the brief description I'm about to give), utilitarianism holds that when anyone does something, they gain a certain amount of goodness or utility (think pleasure, but more broadly) from that action. What is right, then, is whatever maximizes utility for everyone. Anyone who has taken economics is familiar with the concept of the law of diminishing marginal utility, the idea that the more of something you consume the less utility you get from each additional unit of consumption. Quick note, marginal means to do one more of something. This principle provides the underpinning for microeconomics and all those demand curves you're always hearing about. When we apply diminishing marginal utility to wealth, we conclude that a thousand dollars provides a lot less utility to a millionaire than it does to a family living in poverty. Thus, the right thing to do from a utilitarian perspective is to take some money from that millionaire and give it to the family living in poverty, thus increasing total utility.

Greg Mankiw, evil economist 

Of course, as Mankiw and many economists before him have pointed out, we cannot just perfectly transfer wealth because of something else economists love talking about: incentives. If I tell someone that I will take 40% of every marginal dollar they earn, they're going to earn fewer dollars than if they got to keep the full fruits of their labor. The result is that there's less wealth to spread around, less work gets done, and we have a poorer nation. The famous economist Arthur Okun came up with the idea of a "leaky bucket" to describe redistribution because moving wealth with taxes loses some money along the way just as moving water with a leaky bucket loses some water. Thus, economists believe that there is a tradeoff between equity and efficiency. Theoretically, there's some ideal point that maximizes utility through taxation.

Anyone who has looked much into economics and redistribution is familiar with these arguments. Mankiw's somewhat novel contribution is to call the whole utilitarian framework, and some of its commonly assumed conclusions, into question. He makes three notes:

1) We can't actually measure differences in utility between individuals, so it's impossible to know if we're actually redistributing income from those who get less utility to those who get more.
2) Really, to maximize utility, we should be taxing based on some attribute that is heavily correlated with income, like height, race, or gender instead of income itself. Because these are fixed characteristics, there will be no disincentive effects and yet we'll still get money from the rich to the poor! Obviously, this is a solution no one would be happy with.
3) Utilitarianism says that if it weren't for incentive effects, perfect equality would maximize utility. Most of us don't think though that everyone should have the same wealth regardless of how hard they work, we feel that hard work should be rewarded, incentive effects aside.

Mankiw argues that because utilitarianism leads us to some conclusions we're uncomfortable with, maybe we shouldn't use it so quickly to support progressive taxation. When envisioning his just society, Mankiw writes,

The role of government arises as the economy departs from this classical benchmark. Pigovian taxes and subsidies are necessary to correct externalities, and progressive income taxes can be justified to finance public goods based on the benefits principle. Transfer payments to the poor have a role as well, because fighting poverty can be viewed as a public good (Thurow 1971). 

Many commentators have critiqued Mankiw's piece, but I agree with Mat Nolan when he writes that most of these responses didn't really engage with the substance of Mankiw's argument about utilitarianism. I think Mankiw gives utilitarianism short shrift. I'm uncomfortable with dismissing a conceptual framework just because it leads to some surprising conclusions. Furthermore, you can dismiss height taxes without abandoning utilitarianism just by noting that an arbitrary height tax would lead to riots in the streets, and that surely wouldn't be maximizing utility. Furthermore, as Yglesias writes, you can't get very far in economics without leaning on utility to some extent. The notions of public goods, taxing pollution and other externalities, and the efficiency of the competitive equilibrium are all based on the premise of maximizing utility. Maybe we can't use utilitarianism to figure out every little thing, but it is a pretty useful framework for figuring out how to produce and consume society's resources in an efficient manner, and I think that includes wealth redistribution.

I do think that Mankiw's argument implies that we should be less certain of the good of wealth redistribution than many on the left are. Sometimes, the reason for the gap between a given rich and poor person is that the rich person gets more utility from consumption and so chose to pursue longer work hours and more education. Redistribution in this case may be moving money from someone who values money more to someone who values it less (think of the college student becomes a doctor to get rich and the other who goes into art because they don't really care about money). Obviously, this isn't always or maybe even often the case, but it is there and should remind us that redistribution runs into more problems than just disincentive effects.

Furthermore, I think that we are far too concerned with equality in the United States. Once you're making twenty thousand dollars a year, you are wealthy by global standards. I think the difference in the marginal value of a dollar between a wealthy person and a lower middle class person in the US is so low that we the efficiency-equity tradeoff may stop being worth it much sooner than most progressives think. On the other hand, this only makes the case for global aid even stronger. Obviously, aid can be ineffective because of all the difficulties of creating major international programs and operating in very poor areas. So, it does make sense that governments do more to help their own where the taxpayers will feel less disgruntled about giving up their money and it will be (somewhat) easier to establish effective programs. Nonetheless, we should spend more on foreign aid than we do now and we should spend more time figuring out what works in development.

One of the most disturbing implications of utilitarianism is that we should help these people even though they can't vote!

Finally, we should focus more on real poverty in the United States instead of "defending the middle class". Instead of endless debates about the gap between the 1% and everyone else, our precious middle class social security benefits and unions, our mortgage interest tax credit, and the gini coefficient, we should think about the people who really fall between the cracks in society. Rather than waste resources shifting money around between the global rich in America, we should spend more to help those who cannot help themselves due to serious mental health issues and crippling poverty. As even Mankiw admits in his essay, poor children in America are likely not receiving the education and development they deserve or need to become productive members of society, so we should work on making sure our investments in families and education are up to par. I think Scott Sumner hit the nail on the head when he wrote,

I recently heard a progressive criticize Obama.  He started his comments by saying something like “If progressivism stands for anything, it stands for helping the middle class.”  What?!?!  Those sentiments are truly disgusting, repulsive.  The focus should be on hunger in America.  I hate to sound like an aging baby boomer, but at least in the 1960s the middle class was perceived by progressives as the enemy, unwilling to share their money and perks with poor black people.  That’s not entirely accurate either, but at least it’s not morally repulsive.

The precious middle class

I think utilitarianism is a valid defense of progressive taxation, but it is a weaker and different kind of defense than most on the left believe. Also, Mankiw's piece is well worth reading, it includes all kinds of interesting tidbits about how economists think of equality. I plan on reading Stiglitz's The Price of Inequality to see if he can convince me to care more about inequality than I do now.