Defending the One Percent

June 20, 2013

Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it, says N. Gregory Mankiw, the Robert M. Beren Professor of Economics at Harvard University.

This development is one of the largest challenges facing the body politic. A few numbers illustrate the magnitude of the issue.

  • The share of income, excluding capital gains, earned by the top 1 percent rose from 7.7 percent in 1973 to 17.4 percent in 2010.
  • Even more striking is the share earned by the top 0.01 percent -- an elite group that, in 2010, had a membership requirement of annual income exceeding $5.9 million.
  • This group's share of total income rose from 0.5 percent in 1973 to 3.3 percent in 2010.

Equality of opportunity is often viewed as a social goal in itself, but economists recognize that the failure to achieve such equality would normally lead to inefficiency as well. If some individuals are precluded from pursuing certain paths in life, then they might be unable to contribute fully to growing the economic pie. If everyone is equal, then innovation is impossible.

In particular, parents and children share genes, a fact that would lead to intergenerational persistence in income even in a world of equal opportunities.

  • IQ, for example, has been widely studied, and it has a large degree of heritability. Smart parents are more likely to have smart children, and their greater intelligence will be reflected, on average, in higher incomes.
  • Of course, IQ is only one dimension of talent, but it is easy to believe that other dimensions, such as self-control, ability to focus and interpersonal skills, have a degree of genetic heritability as well.
  • This is not to say that we live in a world of genetic determinism. But it would be a mistake to go to the other extreme and presume no genetic transmission of economic outcomes.

Concern about income inequality, especially growth in incomes of the top 1 percent, cannot be founded primarily on concern about inefficiency and inequality of opportunity. If the growing incomes of the rich are to be a focus of public policy, it must be because income inequality is a problem in and of itself.

Source: N. Gregory Mankiw, "Defending the One Percent," Harvard University, June 8, 2013.


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