Why an economic study of cab drivers and incentive structures suggests that economists may be obsolete.
12:00 AM, Jun 27, 2003 • By DAVID BROOKS
TWO VERY INTERESTING economics pieces (yes, it is possible) in the New York Times yesterday. The first is a front page piece headlined Very Richest's Share of Income Grew Even Bigger, Data Show. The average income of the 400 richest taxpayers in the U.S. grew to $174 million, up from an annual $46 million in 1992. Meanwhile, in part because of cuts in the capital gain tax rate, the percentage of the income their paid in taxes declined, to about 22 percent from over 26 percent.
I can hear liberal tongues clucking. The rich are getting richer and they are bearing less and less of the burden.
I guess I'd ask them to consider another way of looking at the situation: This story could equally be read as a tremendous vindication of Republican policies. The cut in the capital gains rate encouraged some extremely rich people to more aggressively invest in new companies and ideas. Those investments paid off. New companies were founded, new jobs were created, new products went on the market and new needs were filled. Meanwhile these investors reaped much larger profits than they would have otherwise. Their incomes skyrocketed and as a result they paid much more into the federal treasury. Twenty-two percent of $174 million is a lot more than 26 percent of $46 million. So the least fortunate, who are sometimes the beneficiaries of government programs, benefit too.
This story is phenomenally good news! Maybe the message should be "Rich Pay Much More In Taxes, Provide Many More Social Goods."
Not being an economist I can't really say which slant is more valid. I only want to remind people that two radically different narratives can emerge from the same data. That's why we all have to question our assumptions from time to time.
NOT BEING AN ECONOMIST I often enjoy the Economic Scene columns in the business section. They often summarize huge amounts of economic research from journals the rest of us couldn't possibly fathom. Today, Alan Krueger summarizes the data on whether people really respond to opportunities to get rich. "Work hours are only weakly associated with pay," Krueger reports. One study found that on busy convention days, many cab drivers in New York actually worked fewer hours. They hit their target income and then they went home to enjoy it. But other, more experienced, drivers tended to work longer on good days, learning its best to make hay while the sun shines. Yet another study found that drivers work as long as they can until they get tired, regardless of income or the opportunities of the day.
Today's column left me feeling glad that I'm not an economist. Obviously people respond to incentives, but economists have feeble tools to explain human behavior. Think about when you find yourself working hard. Maybe you work hard because it is in your nature to do so, or maybe you are congenitally lazy. Sometimes you work it because there is money to be made. But more often you labor because you are engaged by your work, or you feel good at it, or you want to earn the respect of your co-workers, or you like to think of yourself as a hard worker. I suspect the work patterns for most of us in the information age are ridiculously disassociated with short term income and are much more likely to be associated with issues of character, spiritual goals, and native interests.
Moreover, why are economists studying cab drivers, whose jobs are hardly typical? They do not work with peers and thus do not confront peer pressures the way most other workers do. There are not huge fluctuations in tasks and challenges in a driver's life, the way there are in most lives. Cab drivers probably derive less innate spiritual satisfaction from their job than most people in the information age. Why don't economists study teachers or meeting planners or economics professors? Then they would find their tools explained very little.
Is it possible the information economy is making economists obsolete?
David Brooks is a senior editor at The Weekly Standard.