The way you feel about income inequality may be shaped by how you feel about The Avengers, according to Gregory Mankiw, chair of the economics department at Harvard University.
Mankiw, who also served as the Chairman of the Council of Economic Advisers to President George W. Bush, spoke on “Income Inequality: Facts, Hypothesis and Policy Prescriptions” to a UGA crowd on March 26 at the Terry College’s Spring Economics Seminar.
“Academics have debated income inequality for some time, but it really captured the public’s attention a few years ago when then-candidate Barack Obama met with a man known as Joe the Plumber at a campaign event. Joe asked him why he was going to increase taxes,” Mankiw said, “Obama said ‘I think when you spread the wealth around, it’s good for everybody.’ And since then, academics and politicians and the public have devoted a great deal of time to this issue.”
The facts, Mankiw said, show that income inequality has steepened in the U.S.A. since about 1973, when incomes began to stagnate for everyone except top earners.
“There’s a famous quote from John F. Kennedy where he said ‘a rising tide lifts all ships,’ but in the 1970s that stopped being true,” Mankiw said. “We’ve been experiencing increasing inequality along with economic growth, and people at the bottom of the distribution have not really been experiencing the same advance that people in the middle and especially the people at the top have been experiencing.”
So how do we fix it?
“The first thing you might think about is to address the root causes of income inequality. Some things we’re unlikely to change – we’re unlikely to change the march of technological progress, which favors skilled workers over unskilled workers; we’re unlikely to, and shouldn’t, reverse globalization; and we’re unlikely to change assortative mating – you’re not going to have much success in telling successful doctors, lawyers and bankers that they have to marry poets,” Mankiw said. “The one thing we can change is the supply of skilled workers – by working on the educational system. … People have suggested pre-K programs that emphasize non-cognitive skills like how to sit still, pay attention to the teacher and get along with your peers. … Financing higher education is another way to do that. College is expensive and there are various ways that people have suggested changing that.”
“The other alternative is to treat the symptoms – saying that this is creating inequality in incomes, so let’s try to equalize incomes. And we do that primarily through taxes. But the thing about tax rates is that they are small compared to the pre-tax incomes,” he said. “Remember, the top 1 percent has doubled their total share of the economic pie since the 1970s. So regardless of whether you think the Reagan tax policy or the Obama tax policy is better, what is absolutely unequivocal is that the difference between those policies is small compared to the differences in pre-tax incomes.”
Or maybe, Mankiw suggested, America’s struggle for a perfect public policy is only partially about income inequality. The real problem, he said, may not be that incomes are diverging, but the ways in which it’s happening.
“If you are creating your wealth in a legitimate way, if you’re Robert Downey Jr. playing Iron Man and everybody is happy to pay to watch your movie, then we shouldn’t worry about him having that kind of money. But if you’re Bernie Madoff and you stole your money from other people, then of course that’s a problem,” Mankiw said. “The problem isn’t the inequality; it’s that you stole the money.
“So here’s the question I’ll leave you with: Which one is the typical rich person more similar to – are they more like Robert Downey Jr. or more like Bernie Madoff?”