Inequality: The 1 percent needs better defenders | The Economist - 0 views
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inequality economics entrepreneur innovation creativity luck superstar
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Mr Mankiw begins with a thought experiment: "Imagine a society with perfect economic equality...Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J.K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies." Everyone wants to buy the entrepreneur's product, which results in a hugely unequal distribution of income. Should the government shift to a progressive tax system to reduce the inequality?Obviously Mr Mankiw discovers that the answer is "no", because that's the answer he has built his analogy to produce.
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Mr Mankiw's analogy sneaks in his conclusion by implying that greater inequality is the price we pay for more invention and creativity. But his own choices of hero-entrepreneurs make it clear that there's no evidence to support this claim.
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Of the three Mr Mankiw proposes, only Steve Jobs plausibly had an irreducible, unique effect on material culture and the structure of an industry. Mr Spielberg and Ms Rowling are acclaimed artists, but their startling wealth and prominence are entirely due to the increasing power of network effects in mass culture over the past several decades. Mr Spielberg happened to be directing his first movies just as Hollywood was beginning to stage coordinated marketing blitzes that created round-the-block lines for top-grossing films. Ms Rowling hit the bookshelves just as a similar superstar phenomenon was taking over publishing, with sales increasingly concentrated on individual mega-bestsellers rather than spread across a few dozen authors and titles. Mr Jobs is an unusual figure in that his ability to combine engineering, aesthetics, and a vision of how users might interact with the digital universe has created a kind of integrated multi-product entity that might not otherwise have existed; it's not clear that BlackBerry, Nokia or Samsung would have been up to the task. But even in Mr Jobs's case, much of the power that accrued to Apple was due to the gradual sorting of the consumer information-technology world into integrated ecosystems
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"The music industry is a microcosm of what is happening in the U.S. economy at large," Mr Krueger said. "We are increasingly becoming a ‘winner-take-all economy,’ a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented—and it is often hard to tell the difference—have been doing better and better, while the vast majority has struggled to keep up."
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why does Mr Mankiw pick three figures from the entertainment and computer industries, where everyone knows the "superstar" phenomenon is strongest? Because if he used examples from other industries, it would be even more difficult to convince the reader that the immense rewards being reaped by those at the top had anything to do with their unique contributions to the economy
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Perhaps those other guys wouldn't have been as good at their jobs; in that case, these firms would have lost market share to competitors. So what?
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The social purpose of high executive pay is to create incentives for hard work to maximise profit. But these guys are being paid double what their predecessors were making in the 1980s
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Are we seeing startlingly better corporate performance today than we were back then? Is there greater productive innovation in, say, medical technology or commercial real estate? Is our economy growing faster? Are general standards of living rising faster? No, no, no and no.
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Mr Mankiw's analogy stacks the deck by making it appear as though great creative entrepreneurs create the consumer demand which leads to inequality. This is not how things work.
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If the government were to, for example, return top marginal tax rates to the levels that prevailed in the 1990s or the 1970s in order to compensate for the superstar effect, there is no reason to believe that the top one percent would produce any less value for society than they do now. Mr Spielberg would likely have worked just as hard at 1970s tax rates as he does at 2013 tax rates; indeed, he did so when he made "Jaws". Similarly, Mr Jobs worked very hard on the Apple 2e in the 1970s and on the iMac in the 1990s, and Ms Rowling worked quite hard on the Harry Potter series even though tax rates in Britain are much higher than those in America.