Listen to Larry, Greg!

25 Jun, 2013 at 10:43 | Posted in Politics & Society | Comments Off on Listen to Larry, Greg!

Lawrence Summers listening to Greg Mankiw’s explications on the one percent?

Even though the interest may not be reciprocated,  it would obviously be a good idea for Greg Mankiw to listen to his Harvard colleague Lawrence Summers, instead of trivializing the problems created by increasing inequality! Summers has some interesting  thoughts on why income inequality is on the rise and what to do about it:

Why has the top 1 per cent of the population done so well relative to the rest? The answer probably lies substantially in changing technology and globalisation. When George Eastman revolutionised photography, he did very well and, because he needed a large number of Americans to carry out his vision, the city of Rochester had a thriving middle class for two generations. By contrast, when Steve Jobs revolutionised personal computing, he and the shareholders in Apple (who are spread all over the world) did very well but a much smaller benefit flowed to middle-class American workers both because production was outsourced and because the production of computers and software was not terribly labour intensive …

What then is the right response to rising inequality? There are too few good ideas in current political discourse and the development of better ones is crucial. Here are three.

First, government must be careful that it does not facilitate increases in inequality by rewarding the wealthy with special concessions. Where governments dispose of assets or allocate licences, there is a compelling case for more use of auctions to which all have access. Where government provides insurance implicitly or explicitly, premiums must be set as much as possible on a market basis rather than in consultation with the affected industry. A general posture for government of standing up for capitalism rather than particular well-connected capitalists would also serve to mitigate inequality.

Second, there is scope for pro-fairness, pro-growth tax reform. When there are more and more great fortunes being created and the government is in larger and larger deficit, it is hardly a time for the estate tax to be eviscerated. With smaller families and ever more bifurcation in the investment opportunities open to those with wealth, there is a real risk that the old notion of “shirtsleeves to shirtsleeves in three generations” will become obsolete, and those with wealth will endow dynasties.

Third, the public sector must insure that there is greater equity in areas of the most fundamental importance. It will always be the case in a market economy that some will have mansions, art and the ability to travel in lavish fashion. What is more troubling is that the ability of the children of middle-class families to attend college has been seriously compromised by increasing tuition fees and sharp cutbacks at public universities and colleges.

At the same time, in many parts of the country a gap has opened between the quality of the private school education offered to the children of the rich and the public school educations enjoyed by everyone else. Most alarming is the near doubling over the last generation in the gap between the life expectancy of the affluent and the ordinary.

Neither the politics of polarisation nor those of noblesse oblige will serve to protect the interests of the middle class in the post-industrial economy. We will have to find ways to do better.