Luck, Investment and the One Percent

Jon Chait criticizes Mankiw’s defense of the 1% for focusing on productivity as a reason why the rich earn more:

Mankiw’s essay is a sprawling mess, but it hinges on a few key premises. One is that market wealth reflects a person’s productivity. Higher taxes on the rich, he writes, would take from “the most productive members” of society and give to “society’s less productive citizens,” and he uses “productive” and rich” as synonyms throughout….

But there are lots and lots of ways that a person’s income does not measure his contribution to society. Many of us see them every day. We all know people in our field who earn too much, or too little, because of social connections, or race, or gender, or luck, or willingness to cut ethical corners of one variety or another.

But later in that same article and in a followup he argues that greater productivity is an important explanation for inequality:

Krugman noted (as did I) that more affluent parents spend far more than poor children do on “enrichment expenditures” — “books, computers, high-quality child care, summer camps, private schooling, and other things that promote the capabilities of their children.” (ital added)

Mankiw’s response is that this enrichment spending is all wasted.

…Really — high-quality child care, private schools, camps — it’s all just for fun?…There is, in fact, an enormous amount of research on this very question. And the findings overwhelmingly suggest that nonschool enrichment matters an enormous amount. A huge portion of the achievement gap between poor and nonpoor children is attributable to summer vacation.

The first claim is that the wealthy aren’t more productive than the less wealthy and the latter claim is that they are more productive but that this is unfair. The two claims are in tension (perhaps a synthesis is possible but none is offered). Note also that the two claims have quite different implications. In the former case the rich are lucky and you can tax them without generating large incentive problems. In the latter case the rich have benefited from investment and taxing the benefits is likely to reduce such investment.

Addendum: Mankiw, of course, takes the opposite end of the stick, productive people but unproductive summer camps. Mankiw, however, is not inconsistent as he offers another explanation for productivity, namely earlier developed talents and capabilities possibly even genetic in origin. I don’t want to discuss that issue in this post but here is one relevant earlier post with a bit more here for those interested .


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