Do Job Creators Matter?
Adam Ozimek at Modeled Behavior has a really great post on this question. It is a reply to Paul Krugman’s argument that, basically, high-income people get back in compensation their total value creation for the entire economy. For example, if Steve Jobs made a gazillion dollars, that means he created a gazillion dollars of value, but took it all back as his compensation; therefore had Steve Jobs never existed, nobody else in the world would have been any worse off. This is a simplification, but one of the great things about the post is that Ozimek carefully pins down the reasonable interpretation of Krugman’s actual assertion by going back to Krugman’s textbook writing.
Krugman argues that if we accept the premise that people get their marginal product of labor back as compensation, then why not set marginal tax rates to the level that maximizes government revenue: 70%?
Ozimek’s simple, great thought-experiment in the post:
Consider, for instance, that if we suddenly kicked out the top 10% of high IQ people (or 10% most productive people, or 10% most creative people, or whatever) in the U.S.. It strikes me as fairly likely that the total output of the remaining 90% would go down. Krugman seems to argue that this would not be the case. But even if you disagree with me in the short run, in the long-run the productivity increasing innovations these people would have made won’t show up, and the rest of us would have lower productivity as a result.
Now, instead of kicking out the top 10% of workers, just make them work less as a result of high income taxes. See my concern?
Lowered incentives of job creators and other innovators should be considered as one of the likely downsides to higher taxes.
Note that if you don’t think this is true, then what business do we have subsidizing higher education? If workers capture the entirety of their higher productivity, then I don’t see who gains by giving young people money to go to college rather than just cash.
I’d only add one observation.
Krugman ends his piece with this:
My point, then, is that this claim — and the lionization of high earners as people who make a vast contribution to society — is not, in fact, something that comes out of the free-market economic principles these people claim to believe in. Even if you believe that the top 1% or better yet the top 0.1% are actually earning the money they make, what they contribute is what they get, and they deserve no special solicitude. [Bold added]
What’s so funny about this is that Krugman is arguing that “these people” (i.e., people like me who think that a 70% marginal tax rate is not necessarily a good idea for America as whole) base our beliefs about political economy on his textbooks. He is pointing out a contradiction that exists only in his mind. I don’t accept his pseudo-scientific claims to knowledge about the impacts of doubling our maximum tax rate; my “free-market economic principles” are in fact based in part on my beliefs about the inherent uncertainty of such predictions.
(Cross-posted to The Corner)
Once again, thanks to Jim Manzi and Adam Ozimek, we marvel at the blindness of Paul Krugman. Over and over, he has been shown to be completely lost in his hatred for the 10% or 0.1% who are compensated way beyond what he thinks they are worth. Why does this guy have any credibility with anyone?
What he cannot accept is this simple fact: Life is not fair. Simply put, a small percentage of people are able, for whatever reasons, to do things that the rest of us cannot. That is a hard fact to swallow, but it is true. Until he accepts it, he will seethe in his hatred for the ubersuccessful.
He is obviously one of the 1% in his God-given abilities to think and write intelligently. Somehow he won a Nobel prize, right?
But there is something missing with Krugman, as with so many smart people. It’s called wisdom. He’s so damn smart there’s no room in that big head for wisdom. It doesn’t take a 1 percenter’s intelligence to understand the story of the Goose that Laid a Golden Egg. Yet he refuses to see its simple truth.
I would simply add that his kind of thinking about the ubersuccessful is aided and abetted by one political party, fomented by an unapologetic demagogue-in-chief, and has been on display in all its greenish ugliness in Zucotti Park.
— jd · Nov 24, 03:36 PM · #
“Simply put, a small percentage of people are able, for whatever reasons, to do things that the rest of us cannot.”
That has always been the case. It was true when the United States had much higher tax rates that today. It will be true if we have much higher tax rates in the future. However…
1. One of the basic arguments is how much wealth is now being accumulated by those who can “do things the rest of us cannot” and how much is being grabbed by people who haven’t done anything but rig the system in their favor.
2. The idea that society has to be oriented around the benefit of a “special few” is not capitalism. That’s more like some variant of feudalism.
Mike
— MBunge · Nov 25, 02:20 AM · #
He is pointing out a contradiction that exists only in his mind. I don’t accept his pseudo-scientific claims to knowledge about the impacts of doubling our maximum tax rate; my “free-market economic principles” are in fact based in part on my beliefs about the inherent uncertainty of such predictions.
Yeah, but I am not sure this makes any sense. Ignorance has become a go to meme for a number of commentators but ignorance does not mediate in favor of Laissez Faire. Ignorance mediates in favor of whatever has the highest immediate payoff.
I mean to do a whole post on this but we can use your example for starters. Suppose that you simply have no idea whatsoever what will happen to the economy if you raise tax rates on upper income earners to 70%.
Yet, you feel that you need to raise some money and that upper income earners have too much. Then under this level of ignorance you should definately go ahead a raise the tax.
Why?
Well, if you simply have no idea what will happen to the economy then your posterior estimation of the economy has to be identical to your prior. That is, you best guess has to be that nothing at all will happen to the economy.
Generally speaking – and this is the point I try to repeatedly make – ignorance mediates in favor of dovishness. It DOES NOT mediate in favor of prudence. It mediates against prudence. This is because prudence requires foreknowledge about the possible consequences of your actions.
This is precisely why we say that imprudent people are “acting like idiots” and not that imprudent people are “acting like geniuses who think they know it all”
— Karl Smith · Nov 25, 07:01 AM · #
Karl,
Thanks for the detailed comment.
My point at the end was not that “I’m right and Krugman is wrong about tax rates,” but that Krugman asserts that the premise for my beliefs about what tax rates should be is his view of textbook economics, while in fact, my premises are very different. Therefore, when he asserts that I (or, “those people”) pick and choose when to accept the implications of free markets, he is pointing out an inconsistency that isn’t there.
— Jim Manzi · Nov 25, 10:03 AM · #
M. (that’s Mike) Bunge:
Your opinions about the rich are misguided but they establish your bona fides with this guy and this? guy?
— jd · Nov 25, 03:19 PM · #
Thank you for sharing this article. I love it. Keep on writing this type of great stuff.
— seo company · Nov 25, 04:10 PM · #
“Your opinions about the rich are misguided”
Do you think our present, undeniable income inequality is produced by today’s rich being THAT much smarter/better/talented than people were 10 years ago? 20? 30? 40? Do you think income inequality in America is produced because our rich are THAT much smarter/better/talented than the rich in other advanced countries?
There’s a big difference between believing in capitalism and being a forelock-tugging serf who cringes every time his “betters” pass him by.
Mike
— MBunge · Nov 25, 04:22 PM · #
more such like this post)
— freelance research reports · Nov 25, 04:43 PM · #
Do you think our present, undeniable income inequality is produced by today’s rich being THAT much smarter/better/talented than people were 10 years ago? 20? 30? 40? Do you think income inequality in America is produced because our rich are THAT much smarter/better/talented than the rich in other advanced countries?
Your logic has overwhelmed me. I am now green with envy. They are evil cheaters who’ve taken my piece of the pie and yours and almost everyone else’s and made the rest of us miserable. I hate them, you hate them, we should all hate them and eat them.
But if they make over $500,000 a year, we should take their money and give it to the poor, who will spend it on good stuff. Then we eat them.
If you think $500,000 is too high, we can discuss it.
— jd · Nov 25, 06:59 PM · #
“Your logic has overwhelmed me.”
That’s obvious by your childish refusal to actually engage in conversation or debate. Apparently, whenever you encounter some bit of information or argument that doesn’t conform to your epistemically closed view of the world, you just shut your eyes, stick your fingers in your ears and yell “La, la, la! I can’t hear you!”
Income inequality has increased in America while not growing to a similar extent in other modern economies. Do you think that’s primarily because Americans who’ve been getting richer in the last couple of decades are not only smarter and more talented than their fellow Americans and smarter than other rich people around the world, today’s American rich are significantly smarter and more talented than previous generations of American achievers?
This is only a trick question if you know your own opinions are irrational crap.
Mike
— MBunge · Nov 25, 07:16 PM · #
Speaking of crap. Not necessarily irrational, but still crap:
1. One of the basic arguments is how much wealth is now being accumulated by those who can “do things the rest of us cannot” and how much is being grabbed by people who haven’t done anything but rig the system in their favor.
2. The idea that society has to be oriented around the benefit of a “special few” is not capitalism. That’s more like some variant of feudalism.
When you believe this crap, it’s impossible to “actually engage in conversation or debate.” It is simply envy for those who have more. I happen to believe that most people who are very wealthy in this country came by it honestly. You think that’s crap. I think most wealthy folks are too busy with their lives to “rig the game” against the rest of us. You think that’s crap as well.
I don’t like the income disparity. It breeds the kind of envy you have. It breeds the Occupy Wall Street ugliness. It gives demagogues like Barack Obama and his Party talking points. It could lead to civil war.
However, I don’t want to live in a country where the rich don’t get richer. I aspire to it. So do you, if you’re honest. Meh. Maybe not.
Besides, the facts about income inequality are debatable—for example, your point regarding rich Americans vs. the rich in the rest of the world. Check this out. From that one percenter Paul Krugman via Greg Mankiw.
— jd · Nov 25, 11:23 PM · #
Jim, you often make posts that I find subtle, highly intelligent, and very demanding. Whether I agree with you or not, I often come away with the sense that you have thought through the details and considered the issues carefully. I find this post an exception to that rule. You have left a hole in the reciprocal argument so big it makes me cringe. You quote Adam Ozimek as saying:
That sounds compelling, but it ignores the innovators who do not draw their primary motivation from money. Consider Richard M. Stallman, for example. Stallman and his colleagues developed the GNU suite of utilities used by Linux, the Gnu compiler and libraries, and founded the free software movement. The code he wrote underpins a huge set of utilities; I consider it likely that more statements written by Mr. Stallman execute every second in computers around the world than statements by any other programmer. Richard Stallman has written that he regards voluntary poverty as essential to his personal freedom. At a guess, tax rates will affect this innovator and contributor about as much as angry bees affect honey badger. Consider Sir Tim Berners-Lee, who invented the World WideWeb and continues to direct the World Wide Web Consortium, driving the development of further technologies for information sharing. He presumably makes a decent salary as an MIT professor, but I doubt his salary comes close to capturing the value of the contribution he has made, and I see no indication he wants it to do so. I could list a huge number of figures like this; the people who build the world we inhabit mostly did not get vastly wealthy from doing so. They can make a comfortable living, and I suspect most do, but they do not collect the salaries of Wall Street traders.
So you really have to ask the question: given the subset of all contributors sufficiently motivated by money that, if asked to pay a greater share in taxes, they would abandon their work or leave the country, what effect would a tax raise have on productivity, and how would that play out? I suspect that you would see a marked decline in efforts to concentrate wealth. The effect would clearly not stifle all innovations. It might or might not lead to a net decline in innovation and productivity. The question then arises: how do the risks of such a change compare with the risks of burgeoning government and personal debt accompanied by significant unemployment? I do not claim to have an answer, but it seems quite clear to me that the equation between money and effort in your quote Adam Ozimek simplifies the question so much that it does not serve as a useful guide to the actual uncertainties which, as you point out, your country now faces.
— John Spragge · Nov 26, 08:36 AM · #
John,
Thanks for the compliments and the detailed comment.
It’s certainly correct that many innovators are not entirely motivated by money; in fact, 100% are not entirely motivated by money. But Adam’s point only requires that we accept that some innovators are somewhat motivated by money.
Krugman’s argument was that, by “textbook economics,” even if we eliiminated all effort by innovators, this would not reduce incomes for everybody else, and therefore the conservative argument that if we increase tax rates and therefore reduce work effort by “job creators,” that will only make the individuals who work less worse off, not anybody else. He’s not contesting the point (in this post) that marginal tax rates have some impact on work effort, and all Ozimek is saying is that the plausible impact of tax rates on work effort should matter to the rest of us, not just to those individuals.
As a separate point, the effects of varying these tax rates on effort is not necessarily as obvious as advocates on either side claim. Their is a real conflict between income and substitution effects, and it’s not valid to assume that compliance is 100%, and is not affected by changes in the law. One example that I get into in my book is that the negative income tax experiments showed that reducing the effective tax rates on very low income people from 100% did not always spur greater work effort.
— Jim Manzi · Nov 26, 09:54 AM · #
Jim Manzi wrote:
One example that I get into in my book is that the negative income tax experiments showed that reducing the effective tax rates on very low income people from 100% did not always spur greater work effort.
That is a huge point. As a formerly “poor” person, and one who formerly envied the rich, I can tell you that my tax rates made no difference to me. I just accepted it as one more thing that was beyond my control. A few percentage points one way or another doesn’t make much difference if you feel and believe you will never have enough. It also makes you happy if the rich are punished by higher taxes, even if it harms the economy and makes no difference in your own life.
It is improbable that low income folks will ever be convinced that lower taxes help them in any way—probably an insurmountable problem for smaller government advocates.
Spragge:
There is something you’re missing as well: the “altruistic” people you mention in your comment are extremely rare—probably part of the 0.000001 percent. You would base policy on them?
And aren’t you assuming that they do their work altruistically? I could imagine them as geeks with pocket protectors, or mad scientists who love their work, or people who for whatever reason are not motivated by money—they could be motivated by many things without an altruistic bone in their body. Hell, they may be one of those people motivated by preed—greed for power. Again, the point is that they are extremely rare.
I could list a huge number of figures like this.
I doubt that. Though, to your credit, you named two.
— jd · Nov 26, 03:43 PM · #
Jim:
I know I’m being a pain in the ass with all my comments and I know the title is supposed to be provocative, but doesn’t it worry you that there are smart people who would say No to the question in the title of your post?
— jd · Nov 26, 07:17 PM · #
Jim: I think you have missed some of the point of Paul Krugman’s argument here. It makes logical sense to me that if a creative/innovative person motivated by the desire for wealth will go to any lengths, including reducing their personal productivity and income, to prevent the government from capturing the fruits of their work, then they will make the same effort to capture it in all other respects as well. It makes sense to assume that a creative person motivated mainly by wealth will extract the greatest possible economic rents from their work, and channel the benefits back to themselves to the greatest extent possible. In other words, to dispute Krugman you also have to argue that a substantial fraction of potential innovators and wealth creators will allow others to share in the benefits of their work but have a special opposition to government and taxation. I see no particular evidence for this proposition in most cases.
— John Spragge · Nov 26, 08:00 PM · #
“I know I’m being a pain in the ass with all my comments …”
I don’t think the volume of your comments are problematic. If there is anything you want to address, it might be the weakness of your positions, based as they are on a thoroughly unconvincing brew of ad hominem attacks, poor reading skills, dishonest argumentation (hint: don’t use quotes around a word like “altruistic” when the other person hasn’t actually used that term and indeed has not even referenced the concept of altruism in their post) and a general misapprehension of the way the world works.
— Gerald · Nov 26, 09:02 PM · #
HEY GERALD:
NOPE. IT’S DEFINITELY THE “VOLUME” OF MY COMMENTS!!
Are you someone who would answer no to the question in the title?
— jd · Nov 26, 11:12 PM · #
“I happen to believe that most people who are very wealthy in this country came by it honestly. You think that’s crap. I think most wealthy folks are too busy with their lives to “rig the game” against the rest of us. You think that’s crap as well.”
You still haven’t responded to the question. Why has income inequality gotten so bad in America. Why have those at the top gotten so much richer, not just than their fellow Americans but than those at the top in other countries and those at the top of previous generations of Americans?
And by the way, you might want to click through and actually LOOK at the website Krugman was talking about and not just take one example Mankiw cherry-picked.
Mike
— MBunge · Nov 27, 06:08 PM · #
“doesn’t it worry you that there are smart people who would say No to the question in the title of your post?”
What’s worrisome is people who think they’re smart but still swallow and regurgitate bilge like “job creators”. Calling economic actors “job creators” is like calling war a “building reconstruction opportunity creator” or calling car accidents “resale opportunity generators” or calling burglars “home security system salesmen”.
Again, the idea that society has to be oriented around this select few at the top isn’t anything out of capitalism.
Mike
Mike
— MBunge · Nov 27, 06:22 PM · #
Looks like M. (that’s Mike) Bunge is a definite NO to the question. Thanks for stepping up and telling us who you are.
— jd · Nov 27, 07:24 PM · #
Let’s establish a couple of baselines here, so we can get at the aspect of the issue that interests me, and which I believe interests Jim Manzi, the most. Let us first assume that taxes mean the money appropriated through the democratic process for objectives, which the public, speaking through their representatives, consider important. In other words, let us assume, at least for the purpose of this discussion, that some taxation serves a valuable function. Let us also assume that viable arguments about the morality, and the ideal levels, of progressive taxation exist. I propose to limit the question to this: should the presence of genuine innovators, people who create or bring to market new ideas and provide opportunities to others, affect the way the government makes tax policy? More crudely, does the possibility that we might encourage an entrepreneur or inventor give us a further incentive to cap the top marginal tax rates?
I would argue that evidence suggests that the possibility of encouraging and entrepreneur or inventor should not affect tax policy much, if at all. Jim, in his answer to my comment on the motivations of inventors, summarized Paul Krugman’s economic views of innovation and Adam Ozimek’s response thus:
It seems to me that as Paul Krugman pointed out, individuals who choose to recapture as much as they can of the value of their contribution will do so; Adam Ozimek suggests that the effects on their work should concern all of us, which suggests that some of the value of innovations inevitable escapes; and inventor or innovator cannot capture the whole value of their contribution. I disagree. I believe that recent trends suggest that efforts by inventors to capture the full value of their contributions in fact generate economic friction, which creates a drag on the economy as a whole that has the potential to exceed the full value of the inventor’s contribution. This comes about in various ways, but consider the most obvious: a substantial part of the process of capturing value will, for inventors and creators, involve rent seeking. But rent seeking creates friction in at least three ways: it creates opportunities for fraud, it creates conflict between rent seekers for specific rents, and it creates a culture of permissions which burdens innovation.
To put it shortly, do not believe that catering to those innovators who would completely shut down based solely on taxes serves a society dependent on innovation well.
— John Spragge · Nov 28, 03:17 AM · #
jd,
You rock, although technically, volume can refer to “A large amount. Often used in the plural.”
Mike,
Since Steve Sailer hasn’t shown up around here in awhile, I’d just like to point out that my answer to jd’s question would be yes and that I happen to think immigration policy will impact the number of job creators we have in this country. For example, a sensible immigration policy will attempt to select for/screen potentially high-IQ immigrants like this guy and fewer like this guy.
— Fake Herzog · Nov 28, 03:22 AM · #
I’m definitely someone who thinks “job creators matter”; the fallacy is assuming that it’s the wealthy who are the job creators.
They’re not; or, at least, not anymore. The jobs that will be created in the future will be created by people who are not yet rich. The rich are the creators of only yesterday’s jobs.
That said, I don’t see much similarity between Krugman’s post and Manzi’s characterization of it. Another missive from the alternate Conservoverse, I guess.
— Chet · Nov 28, 04:00 AM · #
jd,
Evidently you seem to take issue with the use of the term “ “volume”. It is a perfectly appropriate usage, chum. That being said, this is simply another prime example of your rhetorical failings. The only appropriate response is this:
{eye roll}
To answer your subsequent question, I reject the premise. Jobs are not created by any individual person or particular set of persons. They never have been. The very idea is antithetical to the manner in which capitalism is structured, to say nothing of th econcept of society which is a critical underpinning of a properly functioning capitalist system. Jobs are not created by CEO’s, or inventors, or business owners by themselves. They are created by the connection of a business owner and the people who buy his/her products, and thereafter joined by the people who the business owner hires to execute his business. Get it? Owners, customers and employees combine together to beget more jobs. Without ALL of those elements, jobs do not get created.
I have lots more for you, but I suspect I have already shorted out your circuits with the above.
— Gerald · Nov 28, 04:06 AM · #
Hey Gerald:
Thanks for the clarification on the question. To clarify even more: rejecting this particular premise is the same as saying no. Which, in my opinion—no matter how well you read or write or “apprehend” the complex set of stimuli around us you call the world—is dumb, really dumb. A rather high-level and progressive dumbness. And we’ve got two of you on the same comment thread.
But take courage my friend. There are at least three of you. And counting Krugman, four.
One more question for either you or M. (that’s Mike) Bunge. What are the chances that someone could find comments on this website where you call Barack Obama a job creator?
— jd · Nov 28, 02:50 PM · #
“rejecting this particular premise is the same as saying no.”
so, jd hasn’t grown up enough to know that defining the question so no one can disagree with you is NOT a sign of cleverness?
jd – “The sky is green!”
Everybody else – “Uh, the sky is blue.”
jd – “ Nuh uh! I’ve decided that color is now called green!”
Mike
— MBunge · Nov 28, 04:11 PM · #
“What are the chances that someone could find comments on this website where you call Barack Obama a job creator?”
What are the chances you never used the phrase “job creators” until your lords and masters clued you in that those were the new buzz words?
Mike
— MBunge · Nov 28, 04:13 PM · #
@jd:
Wow. You really do bring absolutely nothing to the table.
You should probably re-read the part where I mentioned the role (albeit far from the sole and exclusive role) that business owners play in job creation.
— Gerald · Dec 1, 01:52 PM · #