Tuesday, March 18, 2014

Mankiw defending the one percent

(This is part of my article in the LSE's on line magazine Europp).
Despite growing concerns about income inequality, economist Gregory Mankiw has recently argued that inequalities are an unavoidable or even beneficial aspect of economic progress, and therefore the rich must fight to keep them. Robert Solow has replied to Mankiw, countering that the one per cent defend themselves well enough.
Mankiw’s core argument is that inequalities are necessary as incentives to encourage work and innovation, and that inequality is not dangerous for democracy because wealthy people are divided in their support for conservative and progressive causes. We should therefore go back to a “pre-Piketty” world, he suggests, where it is important to focus on eradicating poverty, but inappropriate to concentrate on the issue of inequality.
While it is true that a fully egalitarian society in terms of outcomes would be detrimental for wealth creation, it is hard to argue that the monetary incentives (for example in the financial industry) or returns on capital for the richest are truly necessary for value creation. Even the typical argument that entrepreneurs deserve to be extremely rich must be put into context, as many innovations (such as the Internet or the touch screen) were originally developed by government, as pointed out by Mariana Mazzucatto

In any case, the largest fortunes in the world do not exist for meritocratic reasons. Top incomes mostly come from executives in large companies, hedge funds, or from extremely wealthy heirs, as recently noted by Paul Krugman on his blog and Piketty in his book.
Mankiw’s other argument is that high inequality is not a danger to democracy. The political power of the wealthy should be considered neutral, since the wealthy support both conservative and progressive causes. However, the fact that they support non-conservative leaders or political parties does not imply that they support progressive or strongly egalitarian policies.
In fact, there are many instances of rich philanthropists focusing on poverty and child malnutrition, but not on income inequality. They may actually support progressive parties or politicians not because they believe in progressive causes, but in order to have influence over them and to pressure them not to adopt policies that might erode the position of the very wealthy. Such attempts to control the political process may not be successful in their own right. Nevertheless, as capital income continues to grow more than labour income (as explained by Piketty), it may lead to an increased risk of plutocracy. The rich will have even more resources to control public life, while their fortunes may escape national tax authorities (Piketty calculates world tax evasion at 10 per cent of global GDP). Democracy might not be reducing inequality because it is not working well enough. In the future, elites may have even more influence over the political process. They will promote causes that make them popular, but they will likely never call into question the mechanisms that allowed them to amass enormous fortunes. This may lead to the increasing privatisation of politics.

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