Matthew Yglesias has an interesting post about why Paul Ryan’s recent sipping of expensive wine actually can be related to a substantive policy issue. Yglesias’ argument is as follows (I critique the argument below the summary):
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1. Paul Ryan wants to enhance the welfare of the wealthy by giving them tax cuts at the expense of the least fortunate.
2. The wealthy do a lot of their spending on “supply-constrained commodities,” i.e. commodities such as expensive wine and beachfront property. When the wealthy get extra money in their pockets, they will continue to spend it on these commodities.
3. When the wealthy spend more money on supply-constrained commodities, they don’t actually get more of them (since they’re supply-constrained). Instead the main consequence is that these commodities get more expensive (Yglesias says, “If you move to Hollywood and become a rich movie star, you’ll suddenly be able to buy beachfront property in Malibu. But if movie stars as a whole get richer, this doesn’t change the fact that there’s only so much beach in Malibu. All that happens is it gets more expensive.”)
4. Tax cuts for the rich, while not expected to help the wealthy very much, will hurt the middle class as a result of the increased prices:
But the same token, if every rich Manhattanite gets a tax cut from Paul Ryan there will be some increased overall consumption by rich Manhattanites. But you may find that there’s surprisingly little. You’re going to see an awful lot of bidding up of the price of supply-constrained commodities. Suddenly, the same bottle of wine is selling for $425. The main real world consequence of this is going to be to make it more difficult for middle class families to engage in the occasional splurge purchase. Like most people, I every once in a while go out and do something expensive that someone richer than me might do frequently. If the rich people all get richer, then they’ll bid up the price of those rich guys activities and put them further out of the reach of the middle class.
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It seems to me that the flaw in Yglesias’ argument is that the “surprisingly little” modifier he uses to describe how much more consumption rich Manhattanites will get to engage in (due to tax cuts) must just as accurately describe how much less consumption (“occasional” to begin with) middle-class people will get to engage in1. Yglesias has chosen to restrict the discussion to “supply-constrained” commodities. Then he conveniently ignores the fact that that restriction guarantees the zero-sum nature of the tradeoff between the rich and the non-rich. And this is quite an important fact to ignore, given that the entire point of the post seems to be that the tradeoff is not zero-sum.
1I suppose it’s not up to me (nor to Yglesias) to decide how “surprising” each of these changes in consumption is, but the important point is that the actual magnitudes of these changes must be equal (and opposite).