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Saturday, November 17, 2007

What is This Supposed to Tell Us?

I must be missing something, becasue I don't get the point of this. This is Greg Mankiw:

Inequality Everywhere You Look, by Greg Mankiw:


Econ prof Mark Perry examines the incomes of professional football players and reports

the pattern of income distribution in the NFL is strikingly similar to the income inequality of the general population, and is actually slightly greater in the NFL....perhaps this pattern of income distribution is a natural and expected outcome of any extremely competitive environment where talent is scare, valuable and highly paid, whether it's the NFL or the overall economy.

So, is Greg saying that most workers are like the unionized workers in the NFL who enjoy considerable market power (check out the minimum salary, the retirement package, and the health and other benefits), and that unionized workers who are paid minimum compensation levels and work for and divide up a fixed percentage of gross revenues, i.e. work under a salary cap, are "natural and expected"?

And don't you think the presence of a salary cap (in conjunction with the minimum salaries by experience and the union) has an influence on the distribution? The table only shows "the 4 teams with the highest overall payrolls" - I assume that is a typo and should be five, not four - but what does it look like for other teams? Are they more equal than the U.S. economy? With a fixed number of players and more salary to disperse, it's very likely the teams with the highest caps would show the most inequality, so are the teams at the lower end more equal than the U.S. as a whole? If you believe the highly paid players in the NFL represent and tell us something about the economy as a whole (I obviously have my doubts), why present just five teams instead of the average across all teams? Does the NFL distribution also track the U.S. distribution at other common break points, e.g. 90-10 and 99-1, rather than at just 75-25, or is it just this one point that they are approximately equal (when the sample is limited to these teams)?.

What is this supposed to tell us?

[One other note. At the end of the post by Mark Perry, he says:

Consider that Baltimore Ravens' Steve McNair's 2006 salary of $12 million was 106 times the salary of the lowest paid Raven, Ikechuku Ndukwe, who made only $113,325. Isn't that comparison about as meaningless as the comparison between a CEO's salary and the salary of the lowest paid member of the organization?

The minimum salary that year for someone with Ndukwe's experience was $275,000. If you take (7/17) times the minimum, guess what you get? It's $113,325. That is, this compares a player who was active less than half the season (seven of the seventeen games) to a player who was on the team for the full season. Meaningless or not, let's get it right. The actual McNair-to-rookie minimum ratio is only 43.6 to 1 which shows more equality that what the typical CEO earns relative to the lowest paid members of the organization. Also, we could think about what really defines the "organization" in terms of what we are trying to measure - it may be more than just the players.]

Here's another view:

A Naturalistic Fallacy Revival", Economic Investigations: In his recent post, Inequality Everywhere You Look, Prof. Mankiw, quotes (approvingly, I suppose) Mark Perry and his data on inequality in sports teams income…

[…] perhaps this pattern of income distribution is a natural and expected outcome of any extremely competitive environment where talent is scare, valuable and highly paid, whether it’s the NFL or the overall economy.

Something being “natural” is no argument in favor of its continuous existence. Malaria and hepatitis and diabetes are all very natural and we have no problem fighting them. No one in their right mind will argue that we should let children die because fever is natural. Come on, people! We even have a label for that, the naturalistic fallacy.

I hope we’re not losing The Mankiw to the Dark Side! The Dark Side is the set of people who’s say anything to advance their political cause, come what may. (Left and Right, it’s all the same.) — Actually, I’m sure we’re not losing Mankiw to that, I’m just being overly dramatic because he’s usually above such tactics. Still, to quote that particular phrase…

Mankiw wrote in his critique of RBC that “The Keynesian school believes that understanding economic fluctuations requires […] also appreciating the possibility of market failure on a grand scale.” But what would the naturalistic fallacy imply here?

There’s “market failure on a grand scale” but it’s OK, because it’s natural in “any extremely competitive environment where talent is scare, valuable and highly paid”.

Hypothetically speaking, if it’s OK to fight the cyclical pathologies of the US business cycle because of our moral concerns, even though these pathologies are “natural”, why shouldn’t the same logic be applied to income inequality?

P.S. To avoid any misunderstanding, from casual readers, I’m not defending redistributionism. I think inequality is irrelevant (other than equal treatment before the law, regardless of sex, race, wealth or income). I’m more libertarian than the hypothetical love-child of Jefferson and Ayn Rand, but while I love liberty a lot, I don’t love it enough to tolerate the naturalistic fallacy and similar tactics.

    Posted by on Saturday, November 17, 2007 at 11:25 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (22)


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