Gregory Mankiw’s essay, ‘Defending the one percent’, is a forceful response to Professor Joseph Stiglitz’s thesis against concentration of fortunes within the top one percent of the Americans. Professor Mankiw has raised certain points which we may not agree with but are interesting nonetheless.

Is economic inequality inefficient per se in economic terms? Mankiw says that our views on inequality are generally normative and our response to inequality depends on the political thought and philosophy we believe in. According to him, inequality is not welfare. Perhaps, no policy prescription exists for redistribution of resources, which can guarantee that everyone including those at the top one percent gain as a result of such redistribution or at least none becomes worse off.

The concern of equality of opportunity, Professor Mankiw further argues, has been overemphasised by economists who see inequality as economically inefficient. But how can we measure the equality of opportunity?

The professor is critical of the metric of intergenerational transmission of income discussed by Professor Stiglitz in his book ‘The Price of Inequality’. According to Stiglitz, the equality of opportunity is a myth in the US. He writes, “If America were really a land of opportunity – the life chances of success – of, say, winding up in the top 10% – of someone born to a poor or less educated family were same as those of someone born to a rich, well-educated ,and well-connected family.”

While criticising Stiglitz’s conclusion that the US is falling short of providing equal opportunity to its citizens, Professor Mankiw brings in an old argument to defend his argument –- genetic determinism or the nature-versus-nurture debate which has perhaps been long settled as evidence tilts in favour of nurture. Contrary to this, Mankiw cites some studies that say that family environment explains only a small variation in economic outcomes compared with genetic inheritance and other environmental factors.

Undoubtedly, Mankiw’s essay is a good addition to the debate on the one percent but acute inequalities are indefensible not only on ethical and moral grounds but also on purely economic grounds. Is inequality not a barrier to economic development? Does it not retard economic growth? True that it is difficult to make a case for a society of perfect income and social equality. But at the same time it is also difficult to defend the one percent.

As argued by Amartya Sen, human development is all about expansion of freedoms and choices. Inequalities reduce choices and restrict freedoms. Progress cannot be sustainable if high inequality persists.

Without delving much into the fact that inequality has negative implications for the growth and development of a country, another point regarding the factors responsible for unprecedented rise of fortunes of the top one percent merits some discussion.

The argument runs that advancement in technology enhanced the need for skilled labour. Skill-biased technological improvements created wage differentials and resulted in huge gaps between the earnings of the top one percent and the rest of the workers in developed countries.

But if technology and globalisation are the major determinants of inequality, then all countries that are technologically advanced should have similar historical experience. But this is certainly not the case. For example, in Scandinavian countries the share of the top one percent is disproportionately low compared with the US and the UK. Why do these countries show different patterns of income inequality? Clearly policy differences play a key role in determining such transformations.

The literature emphasises the declining progressivity of taxation as one of the major factors for the sharpening of inequality. According to a paper, ‘The top 1% in international and historical perspective’, the top one percent pre-tax share of income in the US increased by 10 points whereas reduction in the income-tax rate was 47 points. In case of certain other countries, where inequality is not that sharp, the tax cut was not that high.

The paper further argues that there is apparently no correlation between cuts in top tax rates and growth rates in per capita income since countries like the US and UK have not grown significantly faster compared with those that did not – a riddle for supply-side economists.

The second source of increased share of the top one percent is due to the hefty pays of the CEOs and skilled professionals especially in the financial sector. Such salaries have worked through two channels. First, high salaries for skilled labour with a decrease in tax rates at the top increased the share of the top. Second, unskilled and low-skilled employees had very low salaries compared to the skilled labour, thus increasing the inequality gaps between the top one percent and the rest of the 99 percent.

The third factor relates to the intergenerational transfer of wealth. Empirics suggest that countries with greater levels of inequality also tend to be those where a greater fraction of advantage or disadvantage is passed on between parents and their children. This relationship is known in literature as ‘The Great Gatsby Curve’.

Professor Alan Krueger who explored this relationship has determined that in countries like Finland, Norway, and Denmark the relationship between parental income status and the adult earnings of children is the weakest. On the other hand in highly unequal societies like the US and UK, roughly 50 percent of advantage or disadvantage is passed on.

The debate on the one percent is relevant not only in the case of developed countries but here in Pakistan as well. Are we not a society where economic and social benefit is passed on to the next generation? Can we boast of even a few entrepreneurs like Steve Jobs and Bill Gates who made fortunes merely by dint of their hard work and entrepreneurship?

Is the observation of the late Dr Mahbubul Haq regarding concentration of wealth in the 22 families in Pakistan not relevant now? Is it due to the genetic code that these advantages are passed on to new generations? Dear Professor Mankiw, certainly not! And if economics is science as you advocate (and rightly so), then your argument should hold for Pakistan as well.

In our case, inequality is deepening with each passing day not due to genetic inheritance, but rather due to structural rigidities and worsening of macroeconomic variables. The middle class, which helped with stability, is eroding. In our case inequality has deepened mainly due to three factors.

First, no sincere effort at redistribution of resources like land was ever made to disperse power in society. Lack of meaningful and wide-ranging redistribution of land meant perpetuation of the power of the landed gentry and passing on of advantages to their scions. The second culprit for ever-increasing inequality is our taxation system which is regressive in nature. Those who should pay are out of the tax net. And above all is the high potential of rent-seeking in the society. If we really wish to establish a stable society, we need to concentrate on land reforms, overhauling of the system of taxation, and reducing opportunities of rent-seeking.

The writer is a graduate of Columbia University.
Email: jamilnasir1969@gmail.com

http://e.thenews.com.pk/11-8-2013/page6.asp