Krugman, Stiglitz, et al Flunk Econ 101

Six winners of the Nobel Prize in economics recently signed a statement in favor of California’s Proposition 40, the measure that would impose a one-time 5 percent tax on California billionaires. They are Daron Acemoglu, Abhijit Banerjee, Peter Diamond, Esther Duflo, Paul Krugman, and Joseph Stiglitz. Their statement showed little understanding of basic economics.

In one section, they write:

Over the 2019-2025 period, the total amount of California income tax paid by billionaires amounted to only 1.6% of their $1.4 trillion wealth gain, much less than what ordinary Californians pay on their paychecks.

There are two problems here. First, they don’t know that billionaires today, the ones who would be paying the tax, got a $1.4 trillion wealth gain. There’s huge mobility in and out of the group of billionaires, especially over a period as long as 6 years. Also, someone might have had a billion in 2019 and have a billion today. That person would be taxed this special 5 percent. What’s his wealth gain? Zero.

Second, it’s a phony comparison because the rest of us “ordinary Californians” don’t see our wealth gain on our paychecks. Our paychecks are for services rendered. Capital gains, whether realized or not, don’t appear. So someone might make $80,000 on his paycheck and have had, over six years, an unrealized capital gain on his house of $200,000. But these economists don’t take account of that. Are they aware that a few million Californians are sitting in houses on which they have had huge capital gains? Or are they just incredibly sloppy or even dishonest?

They also state:

This extreme wealth has translated into extraordinary power, in California just like in the United States more broadly. During the 2000 federal election cycle, billionaires accounted for about 1% of total donations; in 2024 this number had risen to 19%. The Washington Post, the Wall Street Journal, the Los Angeles Times, Instagram, Facebook, TikTok, X are all owned or controlled by prominent billionaires. Sergey Brin alone has already spent more than $100 million to defeat the California billionaire tax.

But there were many fewer billionaires in 2000, for two reasons. First, even inflation-adjusted, there are way more billionaires just as there are way more millionaires. Second, inflation alone has led to more billionaires. One billion in 2024 would be, in 2000 dollars, $549 million.

Moreover, are these economists aware of why Sergey Brin spent more than $100 million to defeat Proposition 40? It’s because it’s on the ballot. If they wanted him not to make political contributions, there was a way to do it: persuade their allies not to put Proposition 40 on the ballot. These economists don’t just flunk Econ 101; they also flunk Irony 101.

The Nobelists also state:

California’s 250 billionaires are collectively worth $2.3 trillion. Their wealth now amounts to the entire annual income of all California taxpayers — some 20 million of them.

But billionaires’ net worth is their wealth, the value of all their assets, and it’s a stock. The annual income of all California taxpayers is a flow. Economists are not worth their pay, a flow, and might even not be worth their wealth, a stock, if they fail to distinguish between stocks and flows.

In his speech at the Nobel banquet of 1974, Friedrich Hayek stated:

There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society – as the press tends to treat him till in the end he may himself be persuaded to believe.

I’m sure he would extend his generalization to women too, so Esther Duflo isn’t let off the hook.

Actually, though, the six economists’ statement is even worse than what Hayek feared. He worried that Nobelists would pontificate “on all problems of society.” But these Nobelists get even some basics of economics wrong.