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June 19, 2005

Is Inequality a Concommitant of Rapid Growth?

Greg Mankiw writes to the New York Times:

To the Editor:

Your chart about the percentage of income earned by the top 0.1 percent of taxpayers was fascinating, but "Richest Are Leaving Even the Rich Far Behind" failed to draw the obvious conclusions from it.

The data show that the rich take a rising share of income when the economy is booming, such as during the 1920's and 1990's. Their share declines when the economy hits hard times, such as during the Great Depression and the most recent recession.

The rich took their smallest slice of the economic pie during the 1970's - a period when productivity growth was low and unemployment and inflation were rising.

Here's the lesson: If policy makers' primary goal is to reduce income inequality, they should put the economy through the wringer. But if they want economic prosperity for all, they should avoid focusing on the politics of envy.

N. Gregory Mankiw

Cambridge, Mass., June 5, 2005

The writer, a professor of economics at Harvard University, was chairman of President Bush's Council of Economic Advisers, 2003-2005.

Well, let's see. Let's take the state-of-the-art data on income inequality from Emmanuel Saez and Thomas Piketty (2003), "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics 118:1 (February, pp. 1-39) (http://emlab.berkeley.edu/users/saez/pikettyqje.pdf), and plot it against the previous ten years' growth in GDP per capita from eh.net (http://eh.net/hmit/gdp/gdp_question.php):

The rich do take a rising share during the 1920s and 1990s, but growth income per capita was no faster in the 1990s as a whole than in the 1980s and 1970s--it was only the last half of the 1990s that saw rapid growth. And the fastest-growth decades of all are the 1960s--with a low share of income inequality--and the 1940s (driven by recovery from the Depression and the high-pressure economy of World War II).

The correlation between economic growth--defined as ten-year growth in GDP per capita--and income inequality that Greg Mankiw asserts exists? I certainly cannot see it in the data.

But maybe I'm wearing the wrong-colored glasses :-).

Posted by DeLong at June 19, 2005 09:56 PM