There is, however, an even broader critique of the whole keep taxes low on jobcreatorsenginesoftheeconomy [sic] thing — it doesn’t make sense even when the rich really earn their money. I’ve tried to make this point before, with regard to optimal top tax rates, but without as much success as I’d like; so let’s try it again.
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. This is, by the way, standard textbook microeconomics: in a perfectly competitive economy, factors of production are supposedly paid precisely their marginal product.
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!
This, of course, a very incomplete picture of what tax hikes do to the economy. What’s important here is not the effort of Wheelerdealer—it’s the productivity of Wheelerdealer and others people working together.
Let’s stick with Krugman’s version of marginal productivity theory. When Wheelerdealer “goes Galt,” he not only withdraws his own productivity, he diminishes the productivity of those who work with him him. Ten workers—Wheelerdealer plus his 9 subordinate coworkers—who once produced $10,200 worth of widgets per hour now produce $200 per hour. (Remember, in Krugman’s example, we know that Wheelerdealer’s role added $10,000 of production.)
The remaining workers may still earn the same wage—but as a team they are producing far less than they would have with Wheelerdealer. Labor becomes less productive because we chased away Wheelerdealer. Spread across the economy, this result may not immediately impact the incomes of the non-Galt workers but it does diminish the quantity of goods and services available to them. Their cost of living is permanently higher relative to income thanks to driving Wheelerdealer Galt-ward. We would have diminished, in other words, the thing that matters most—the quality of the lives of people.
It may not be classy to refer to your social class as the engine of the economy. But that doesn’t mean the people at Romney’s fundraisers do not have a point about the dangers of driving the most productive members of society toward lower productivity.
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