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Go Home Strange Brew

THE PLANK APRIL 3, 2007

Strange Brew

BY TNR STAFF

Harvard economist (and former chair of Bush's Council of Economic Advisors) Greg Mankiw is by all accounts a very smart man, but like bloggers high and low, he is not above resorting to the labor-saving device of posting emails he's received. Take, for example, this political parable, which was sent to him by a student in his introductory economics class:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Leave aside the marvelously sophomoric (in the literal sense) metaphor-tax policy as beer consumption!-and the obvious problem that quite a few government services are less elective than chugging brewskies. It's telling that at the crucial pivot of the story Mankiw's undergraduate correspondent has to abandon any real-life parallel altogether and have the nine less-well-off men "beat up" the wealthiest, something not even the most aggressive advocate of progressive taxation is likely to countenance. (He/she later tries to muddy the distinction with "attack.") I guess if the nine bibitory ingrates had confined themselves to verbal criticism, it might have somewhat undercut the nobility of the hero's patriotic decision to take his beer mug and move abroad.

Bonus Mankiw tweak: Take a look at his Wikipedia page and see whether you think it looks like he wrote most of it himself. ("His blog receives more than 1.7 million hits per year.")

--Christopher Orr

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16 comments

what's the goal?

- teplukhin

April 3, 2007 at 12:16pm

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Is it even a surprise anymore when those on the right come up with these ridiculous little stories with no relation to reality? Besides, why doesn't anyone ever acknowledge the possibility that gov't expenditures are not doled on an equal per capita basis, and that the affluent may actually use more government services (and thus drive greater gov't cost)? For example, wealthy enclaves typically require (and receive) greater police coverage. Just in terms of business efficiency (and the rewards thereof), the public highway and road systems, subsidized rail systems, and the government regulated and maintained securities and commercial infrastructure of the US all disproportionately benefit the wealthy (yes, there are benefits to the entire economy, but the greatest benefits are to the affluent). Diplomatic and security activities are heavily focused on securing US commercial interests, which again deliver greatest benefits to the affluent. Not to mention rampant corporate welfare (both in terms of direct subsidies and tax abatements) at all levels, which also disproportionately benefits the affluent, who, as shareholders, pay reduced taxes on capital gains. So, maybe progressive tax policies aren't so much redistributive as they are cost-reflective. True "soak the rich" policies are counter-productive and harmful to everyone, but no more so than regressive policies which allow the affluent to reap benefits without recognition or recompense of the governmental and societal subsidies which make those benefits possible.

- aharris61

April 3, 2007 at 12:35pm

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I thought this post looked familiar. Mankiw has the good sense to link to the article at snopes.com addressing the authorship of this parable. snopes.com, in turn, mentions that it was printed in William Buckley's article of April 21, 2001. The snopes article also links to a criticism of Buckley's article published June 22, 2001 written by ... Jonathan Chait for The New Republic.

- Stuart Katz

April 3, 2007 at 12:55pm

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Frankly, I learned a lot of economics using analogies, so I applaud the student for effort, but if this were a class in public economics and taxation policy, I'd flunk the student. Why? The analogy is based on a private consumption good that is publicly provided. That is not how government or taxation work. If the example had been that they go drinking and they chip in for a ride back to the frat house then maybe it would make a little more sense. Even that is not a great example, because the whole activity is private and optional. If instead of a bar it was a mandatory fraternity event (same thing?) then perhaps you have an instructive story. If the frat wants to be inclusive, then it has to subsidize the poor kids and perhaps very progressively so. If you get a rate reduction from the driver, then you might have some issues about who gets the refund or whether it should just go into a scholarship, but I agree iwth the blog poster that the fist-fighting would probably not ensue. So I'd like to see how Mankiw responded to this student. Hopefully with a strong rebuke.

- stgla

April 3, 2007 at 1:09pm

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Thanks for pointing that out. Not sure which is odder, that conservatives keep recycling this story (Buckley one year, Mankiw the next), or that TNRites keep making fun of it.

- chrisorr

April 3, 2007 at 1:14pm

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I don't want to know this smug little kid. Comment: The beer thing is a bad analogy because the obvious commonsensical alternative is that everyone would pay the same amount for a beer. But *that's* not even the flat tax system that they would prefer. Under a flat tax, each patron would pay a percentage of their income for the beer, but the same percentage. The analogy fails, because it suggests that we should abolish all income and sales tax and simply allow everyone to purchase the government services they use at a set price for each service. But nobody is in favor of that. So this seems frivolous.

- jhildner

April 3, 2007 at 1:21pm

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"And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction." Uhm No. According to the analogy, the rich men was not the one that benefited the most (that be the guys who get beer free). The problem is that the author acknowledge the difference between price and value (a dollar is worth more to a poor person than a rich one) and therefore everybody pays a different price and then drops it to make an idiotic criticism of socialism . That's the problem with conservative arguments. It's full of fallacy and half truths.

- Yminale

April 3, 2007 at 3:09pm

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for the simple minded. Somewhere, Menken is chuckling

- raycon

April 3, 2007 at 4:51pm

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I found this with a quick google search of "Conservative Father Liberal Daughter" on the following website http://www.veiled-chameleon.com/weblog/archives/00 0017.html under the heading "Conservative v. Liberal." Enjoy. A Harvard undergrad returns home on break. The conversation at the welcome home dinner inevitably turns to her schooling. "I've become an enlightened liberal," the English lit student declares proudly. The conversation then turns to her study habits, free time and the like. Daughter: "Free time? What free time? I barely have time to eat. I'm working like a dog --- but I'm making dean's list!" Father: "And how is your best friend Michelle doing?" Daughter: "She works, but has different parties, I, uh mean, priorities. Her GPA is hitting rock bottom. She's pretty smart, but she was warned that if she doesn't clean up her act, then she'll be booted." Father: "Now, you wouldn't want that. Why don't you go to the dean's office and offer to transfer some of your GPA to Michelle so you both can be equal?" Daughter: "Why in the world would I do that!? I work hard. I push myself. I do what I must without any excuses. Michelle is capable. If she wanted to succeed like me, she would." Father: "Are you sure that your English lit courses don't include a class in poli-sci? You've managed to succinctly articulate the differences between conservatives and liberals."

- seanwright

April 3, 2007 at 6:16pm

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of course, the father could also have simply said why don't you help tutor Michelle or at least have a long talk with her, which is what a friend would do, instead of recommending she do something unethical, which is the first thing conservatives think to do. Of course, nowhere is it mentioned the people who are not very smart or capable, and who only set foot into Harvard to clean the rooms.

- blackton

April 3, 2007 at 6:41pm

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I should have searched a little longer because there is an even better version of that story that ends with the daughter saying "I'll never vote Democrat again." I like to call that story "What if the parable of the prodigal son had ended happily?"

- seanwright

April 3, 2007 at 8:48pm

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Why are these conservative parables so silly? Again, one key flaw in the Michelle story is that student credit, unlike money or consumer goods or even time, is not a negotiable currency, but essentially an administrative notation of progress through a system. In some weird context (e.g. a totally corrupt school) it could become a currency, but that's hardly the norm we go by. It's only in fatalistic conservative fantasies that liberals want to average out every quality or possession over the community. Usually, what liberals want to do is increase plenitude so life is more than a zero-sum game.

- ironyroad

April 3, 2007 at 8:52pm

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I'm sure Michele would glady help transfer her GPA points (if that was possible) if her friend was going through rough times (bad breakup, illness, financial problems). See that's the difference between real liberals and conservative views of liberals. Real liberals believe in equal oppurtunity and that bad luck shouldn't be held against someone. Conservative that liberals want equal results which is false. Even in communism, Marx believed that labor shold be the only source of wealth (and not capital or financial ownership) therefore Michele had the right to be outraged by her father's suggestion.

- Yminale

April 3, 2007 at 10:53pm

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This little story's moral is that tax cuts should be proportional to taxes paid, i.e. the more tax you pay, the more should your tax cut be. The point the conservatives fail to mention hwr is that when Bush cut taxes, the cuts were *not* in fact proportional to the amount of taxes you paid. In fact, IIRC, the richest whatever % of the population, which accounted for 20% of all taxes paid, got 40% of the entire tax cut, twice the 20% that this little story is pretending was the case.

- nancyirving

April 4, 2007 at 3:35am

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nailed it. The problem with the parable is that the numbers are all wrong - not that somebody got beaten up, or that beer is not a good analogue for the breadth of government expecditure/services. Another hole in this story is the assumption that all the players have benefited equally - they each have one beer so it seems they have shared equally in the benefits, right? But some have low incomes and others have high incomes - this is the reason they divided up the bill as they did at the beginning. Isn't it fair to assume that those who enjoy the highest incomes receive other social benefits beyond the one beer they share with their less fortunate mates? In my experience, those who accumulate wealth in this country do so through a series of events that would not be possible without a vast, preexisting, economic, educational, logistical, legal, and social infrastructure. In short, a significant portion of our individual income and wealth is attributable to things we hold in common and share as citizens of this great nation. Finally, the parable ignores the democratic principles at risk when income and wealth become concentrated, and the middle class is pushed into a growing "have not" section of society. Had the parable noted that, over time, the number of bar patrons who could not afford to pay for beer had increased, perhaps we could have reflected a bit of reality. The parable does not worry much about whether increasing income inequality is a threat to the democratic principles of our society, perhaps because the parable is told by the wealthy elite for a wealthy elite. The parable is simply innaccurate, deceptive, and insulting. Neil

- purcellneil

April 4, 2007 at 8:44am

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Yea, he was a fan of socialism all right

- looniremich

April 5, 2007 at 12:06am

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