Inequality rules

In: Daniel In The News

8 Dec 2013

This article for the Financial Times was published in Friday’s FT Wealth.

Every generation has thinkers who support the right to accumulate great wealth. Such figures are reviled by egalitarians for defending the indefensible: upholding privilege and hierarchy while the common man or woman suffers impoverishment. Conservatives typically respond that social inequality can benefit society as a whole.

Greg Mankiw, chair of economics at Harvard University, is perhaps the most high-profile contemporary intellectual to uphold economic inequality. His recent article, “Defending the one percent”, prompted predictable howls of outrage. It was published in an academic journal, the Journal of Economic Perspectives, but a draft version was made available in advance online.

The article was quickly condemned as “shameless”, as making “many outrageous claims” and “an embarrassing piece of ignorant tripe”. The last description was retracted a day later on the grounds that it was too generous to Mankiw. Criticisms from economists used less vituperative language, but some were equally cutting.

To be sure, Mankiw is not just a professor. He was the chairman of the president’s Council of Economic Advisers under George W Bush, and was an economic adviser to Mitt Romney when he was the Republican candidate for president.

The professor also has form as a defender of inequality. A 2010 paper, “Spreading the wealth around: reflections inspired by Joe the Plumber”, touches on some of the more recent themes. In November 2011, some students walked out of his “Ec 10” introduction to economics course at Harvard, in a show of support for Occupy Wall Street.

In an open letter to Mankiw, they claimed the course espoused a “view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today”.

Mankiw is philosophical about the hostility to his latest article. “Some people get easily annoyed,” he says. He is also keen to point out that some economists approved of it. His one concession to the critics is that the title was “perhaps unnecessarily provocative”.

He accepts the rich have become richer since the 1980s. “In the past 30 years, the 1% has really taken off,” he says. The main point of contention is over whether widening inequality has come about by unfair means.

Mankiw starts his paper by asking readers to imagine a perfectly equal world. Then an entrepreneur comes along with an innovative new product. Under such circumstances it would be reasonable to allow those who wanted the product to pay a significant sum. Everyone involved could benefit from these transactions, even though that would lead to widening inequality.

Those who criticise this as unrealistic miss the point, says Mankiw, who describes it as a “hypothetical thought experiment” illustrating the point that a more unequal society can be more prosperous than an egalitarian one.

However, The Economist, a publication that has a broadly free market outlook, described the paper as extremely unconvincing based largely on the opening example. Its main point was that the conclusion was slipped into the premise. It is not necessarily true that entrepreneurs must be paid more than they were in the past. In reality, they would probably work their magic if they received considerably less than they do now.

Mankiw does not tackle this question directly but does discuss why inequality has widened. He broadly accepts the view that mainly it is technology that has increased the rewards for those at the top. For example, the advent of global cinema has allowed actors to enjoy fame in a way that would have been impossible in the past.

Robert Downey Jr’s a great actor, but if he was born 300 years ago, he couldn’t have made $50m from being in a film”, he says. “It’s not just talent – it’s talent combined with technological forces.”

Mankiw contrasts this with “someone who makes $50m because they are a government official and are skimming off the top from public coffers”.

This leads on to a rebuttal of the claim that what economists call “rent seeking” – acquiring wealth through manipulating political connections or corruption – must be responsible for widening inequality. “In the US most people get rich by doing things that other people are willing to pay lots of money for,” he says.

In contrast, he accepts that corrupt oligarchies exist in places. There, the rich can get richer because they have politically powerful friends and are given monopolies over resources.

Mankiw argues that the fact that people’s earnings in the US are often correlated with those of their parents does not prove the system is rigged. In his view, it is clear that smarter parents are more likely to have smarter children and in turn this can lead to higher incomes. “We know there is a genetic basis to lots of personal attributes,” he says.

To illustrate his point he cites a study of adopted Korean children who were randomly distributed in different households. It found that, except for the very poor, the social background in which they were raised did not affect their income as adults.

Mankiw does not claim genes wholly determine an individual’s prospects. He acknowledges that structural forces play a role but says it would be wrong to argue there is no genetic influence on economic outcomes.

For earlier generations of conservatives, the most striking element of Mankiw’s argument would probably be his dependence on positive economics. Although there are some philosophical elements in his paper a key premise is that, as far as possible, facts and values should be kept separate. The role of the economists is to analyse the facts as dispassionately as possible.

Mankiw’s disagreement with redistribution’s supporters is rooted more in his assessment of these facts than in fundamental principles. He says it is untrue that rent seeking is prevalent in the contemporary US or that taxation is heavily regressive. However, if these things were true, he says he would feel ire towards the rich too.

“If we lived in those alternative universes I think I would share a lot of the conclusions that the left comes to,” he says. “I’d change my mind if new evidence came to light.”

This final point suggests the gap between Mankiw and his critics is not as great as the vitriol suggests. There is no sign of the traditional conservative premise that deference and hierarchy are virtues in themselves. On the contrary, he agrees that equality of opportunity is a worthwhile goal and that “deep poverty probably does have adverse effects”.

Nevertheless, he holds fast to his argument that the US is a fair society. In the jargon of the economist, “people’s compensation is commensurate with their contribution”.