Larry Summers and Greg Mankiw on income inequality

Harvard economist Larry Summers writes that the United States should address inequality with tax reform, “closing loopholes that only the wealthy can enjoy”.

The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. …. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalised and budget deficits have at last been addressed.

President Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective. Presidents from Franklin Roosevelt to Harry Truman railed against the excesses of a privileged few in finance and business. Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns. Richard Nixon used the same weapon in 1973, announcing tax investigations “of the books of companies which raised their prices more than 1.5 per cent above the January ceiling”. All were reacting in their own way to a phenomenon that Bill Clinton has described best: “Although America’s rich got richer … the country did not … the stock market tripled but wages went down.” […]

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences.

Lawrence Summers, “America risks becoming a Downton Abbey economy“, Financial Times, 17 February 2014.

Not all economists share Professor Summers’ view. Greg Mankiw, the chair of Harvard’s economics department is one example. In a New York Times column, he defends increasing inequality of incomes, arguing that is needed for innovation and economic growth.

[T]hose working in finance face particularly risky incomes. Greater risk requires greater reward.

To be sure, some people find ways to get rich at others’ expense. Bernard Madoff most famously comes to mind. The solution here, however, is not to focus on the income distribution but to devise better regulation and oversight.

A reliable tax system is also important to ensure that the wealthy pay their fair share to support the public weal. That is generally the case. Our tax system is far from perfect and is arguably in dire need of reform, but examples of the tax-dodging wealthy are not at all the norm.

N. Gregory Mankiw, “Yes, the Wealthy Can Be Deserving“, New York Times, 16 February 2014.

Professor Mankiw is chairman of Havard’s economics department and former economic advisor to GW Bush and Mitt Romney. Four years ago, he argued against “spreading the wealth around“, favouring instead continued light taxation of the wealthy.

For information of readers like myself, who lack convenient access to British soaps, Downton Abbey is a popular television series on ITV (UK and Ireland) and PBS (United States). The show depicts the fictional lives of an aristocratic family and their servants in rural, post-Edwardian Yorkshire.

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