Friday, March 13, 2009

Conservatives have a lot of Galt

John Galt, that is.

As Stephen Colbert explains, wealthy Americans are turning to Ayn Rand's "Atlas Shrugged" in response to the Obama administration's recent taxation and spending plans:

Galt's character, disgusted by a government that heavily taxes the wealth producers in society only to waste their money on "moochers", calls for a general strike on behalf of the rich and talented.

Of course, it's tempting to draw comparisons to today. Barack "spread the wealth around" Obama is planning on increasing marginal tax rates on the wealthiest 2% in order to fund more generous social welfare programs and public goods.

But will this plan lead us to a Galtian world where the rich go on strike? In a word: no. Labor economists look at a measure known as the "labor supply elasticity of income", which is simply how much more people are willing to work if their income goes up (and conversely, how much less people are willing to work if their income goes down). The argument espoused by Michelle Malkin, Sean Hannity and other conservative pundits shown in the Colbert clip, is that this elasticity is high - if you increase taxes on the rich, they will decrease their labor by a lot, which will hurt us all. If high wage workers deprive the economy of their labor, then who will create wealth?

Empirically, this case is tenuous. For example, economist Robert Frank cites work by Fran Blau and Larry Kahn, who find that:
"the labor supply curve for men has been essentially vertical [which means a low elasticity] for many decades. The clear implication is that higher taxes on top earners, most of whom are men, will not significantly reduce work effort."
Similarly, Bruce Kaufman and Julie Hotchkiss, in their widely read text book The Economics of Labor Markets, survey the research and conclude that changes in tax rates during the 1980s did not cause large changes in labor supply, despite the theoretical evidence that it might.

Rand's novel is something of a libertarian version of The Communist Manifesto. The idea that high-wage workers will withdraw from society and form their own utopia is no less fanciful than the idea that low-wage workers will unite and create a socialist paradise.

Further, Atlas Shrugged may not be the best metaphor for our current situation. The popping of a $6-trillion housing bubble showed us that a great deal of wealth "created" by the John Galts on Wall Street was nothing more than an illusion. When financial assets were over-valued, so were the value of people who produce those products.

Ultimately, the lesson here should be one of humility. Consider what Will Wilkinson takes from the book:
"In the individual case, “going Galt” smacks of a kind self-aggrandizement in the same way that climate smuggery does. Because, really, your marginal contribution doesn’t matter that much...

By the way, Atlas buffs, the point of Atlas Shrugged is not that you are John Galt. The point is that you are not John Galt. The point is that you are, at your best, Eddie Willers. You’re smart, hardworking, productive, and true. But you’re no creative genius and you take innovation — John Galt — for granted. You don’t even know who he is! And this eventually leaves you weeping on abandoned train tracks."
Then again, if Michelle Malkin and Sean Hannity go on strike, you won't hear me complaining.

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