Response to: What You Add Is What You Get
Today, we’re treated to a ridiculous new blog post from Paul Krugman.
This definitively shows, once again, our favorite Nobel Laureate in economics lacks what could be called a “basic understanding of economics.”
The purpose of the post is to ridicule high earners (like him, though that passes without irony). Here’s the scenario he concocts to “prove” the rich don’t really matter:
So, imagine a Romney supporter named John Q. Wheelerdealer, who works 3000 hours a year and makes $30 million. And let’s suppose that he really does contribute that much to the economy, that his marginal product per hour — the amount he adds to national income by working an extra hour — really is $10,000. …
Now suppose that President Obama has reduced Mr. Wheelerdealer to despair; not only does the president waste money by doing things like feeding children, he says mean things about some rich people, which is just like the Nazis invading Poland, or something. So Wheelerdealer decides to go Galt. Well, actually just one-third Galt, reducing his working time to just 2000 hours a year so he can spend more time with his wife and mistress.
According to marginal productivity theory, this does in fact shrink the economy: Wheelerdealer adds $10,000 worth of production for every hour he works, so his semi-withdrawal reduces GDP by $10 million. Bad!
But what is the impact on the incomes of Americans other than Wheelerdealer? GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John!
How does he get away with this???
First of all, if Wheelerdealer reduces his productivity by $10 million/year, “non-Wheelerdealer America” is deprived of that productivity. Krugman even admits that! (“his semi-withdrawal reduces GDP by $10 million.”) So it obviously has an effect on the incomes of “non-Wheelerdealer America.” They may pay him $10 million less, but only because they are deprived of a service or product they want.
Let’s imagine Wheelerdealer owns a shoe company. He employs 100 people. If he cuts HIS productivity by 1/3, he cuts the company’s productivity by 1/3. We get two results:
Income reduction for his staff.
Either 33 people get laid off, or 100 people see their wages cut 33%.
Price Increases in shoes.
Even if Wheelerdealer doesn’t raise his prices, now that there are fewer shoes (in aggregate), shoes will cost more. Having to pay more for shoes effectively reduces ”non-Wheelerdealer America’s” income.
Or let’s say he makes circuit boards. By reducing production, the cost of circuit boards will go up. This will make everything with a circuit board more expensive. If manufactures chose not to pass that price increase on to customers, they may have to look for cheaper alternatives - overseas - to keep their own costs in line. The replacement circuit boards may be cheaper quality. The general public either ends up with a price increase, or a quality decrease.
So, even if you aren’t directly employed by Wheelerdealer, (or one of his suppliers, distributors, etc.), you will be adversely affected by a decline in productivity and a decline in YOUR INCOME. True, it may be a very small decline for many, but they are incontrovertibly going to be affected by declining overall production.
This is basic, Intro to Economics!!!
Krugman is actually arguing that a decline in GDP won’t affect the average American’s income. Okay. Well, we often hear how the rich control 70-90% of the wealth. So, if GDP gets cut 70-90%, that won’t affect incomes/standard of living for “non-Wheelerdealer America?”
It’s my opinion it does. It’s also Economics’ opinion.
Krugman thinks the only negative is the decline in tax revenue!
OK, there’s a catch: Wheelerdealer pays taxes, and when he chooses to work less, he pays less taxes. So there is in fact a welfare loss to the rest of America, but it comes only through the fact that revenue falls.
There’s no welfare loss from lost taxes!!! Good god. Tax revenue spending is just forced government-directed spending of private capital. There’s no additive property to redistribution. If anything, the waste of bureaucrats managing taxes make taxes themselves result in a welfare loss (does’t anyone remember the so-called “dark ages” when peasants were AGAINST taxes?).
He adds:
Now, obviously the Romney fans have a very different view.
NO! Not “Romney fans” - people who understand basic microeconomics.
They seem to believe that John Q. Wheelerdealer somehow adds much more to the economy than even the lavish amount he gets paid; he’s an engine of growth!
Beyond ridiculous that Krugman feels comfortable using sarcasm at this point.
And the requisite, smug, self-serving conclusion:
So there’s a huge contradiction in the whole position of the self-regarding rich — a contradiction that I’m quite sure bothers them not at all. More champagne?
This part only makes sense when you remember Krugman is a member of the “self-regarding rich.”
Not that it would ever be offered, but I would turn down a Nobel Prize in Economics so long as this crackpot has one.
