by Calculated Risk on 6/07/2005 08:55:00 PM

Dr. DeLong directs us to a letter from Greg Mankiw (former chairman of President Bush's Council of Economic Advisers) to the New York Times. In the letter, Mankiw concluded:

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.

Dr. DeLong provides two graphs showing that Dr. Mankiw is wrong. There is extensive research on this subject to support Dr. DeLong's position that the relationship between growth and income inequality is inconclusive. At the extreme, there is no question that income and wealth inequality lead to slower growth (I'll let the reader think about this). But the US is far from that extreme.

So this is primarily a normative question: What kind of society do we want? Do we want a more egalitarian society where two people of equal talent, drive and risk tolerance can achieve similar economic success? Or do we want a more hereditary society? That is the primary question.

Another question is the appropriate public policy with regards to income inequality. At the least we should do nothing. In fact, shouldn't all Americans agree with this statement (from Tax Law Professor Geier)?

"...the government should not be intervening through the tax system to make the gap between the very rich and everyone else actually greater than it otherwise is (in the absence of tax)."

But, according to Professor Geier that is exactly what the current tax law does:

"The distribution of the tax burden worsens inequality because there is less income inequality before annual tax bills are paid than after they are paid."

To be charitable to Mankiw: Maybe we now know why Mankiw was a champion of Bush's tax policy - he erroneously thought income inequality leads to faster growth.

UPDATE: Via Dr. DeLong: WSJ.com - As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls EXCERPTS:

The promise that a child born in poverty isn't trapped there remains a staple of America's self-portrait....

Although Americans still think of their land as a place of exceptional opportunity... the evidence suggests otherwise....

'The U.S. and Britain appear to stand out as the least mobile societies among the rich countries studied,'