A Harvard professor’s deceptive take on income inequality and the 1%

In a show of misdirection worthy of a conjurer, though not a very good conjurer, Harvard economics professor N. Gregory Mankiw has again tried to depict the 1% as exceptional individuals making unique contributions to the economy or culture, rather than as mediocre CEOs and derivatives traders contributing precious little to society. His message is: Who could begrudge such people their just deserts?*

But he’s stacking the deck.

An earlier attempt by Mankiw to prettify income inequality came under attack, as we reported here, but he has only redoubled his campaign. In his latest column, appearing over the weekend in the New York Times, Mankiw offers, as emblematic representatives of the top 1% income-earning class, the actor Robert Downey Jr. and and the bestselling author E.L. James. Downey was paid $50 million to play Iron Man in the movie “The Avengers,” and James has collected $95 million for her series of sex novels.

Mankiw asserts that no one seems to object to such outsize paydays, only to the money earned by CEOs. “When people can see with their own eyes that a talented person made a great fortune fair and square,” Mankiw writes, “they tend not to resent it.” The only difference between Downey and James and the rest of the 1%, he suggests, is that their brilliant contributions are “less transparent to the public.” In other words, we should all stop crabbing about income inequality.

Let’s unpack this argument a bit, because Downey and James aren’t representative of the 1% in any way -- except perhaps in the size of their paychecks.

First, superstars in the arts (and sports too) are extremely rare. As Bradley Heim of Indiana University and two co-authors determined in a 2010 paper, people from the professions of the arts, media and sport accounted for 1.6% of all those in the top 1%. They collected less than one-half of 1% of all national income.

Who really are the 1%? More than 53% are executives, managers, financial professionals or lawyers. Of the 17% share of all national income that went to the top 1% (in 2005), nearly two-thirds went to those individuals. And that 17% share of all national income has nearly doubled since 1969. Those professionals are even more prevalent among the top 0.1%, accounting for more than two-thirds of the members of this rarefied group.

As Paul Krugman put it in a response to Mankiw: “Enough with the movie stars. ... They are a trivial part of the story.”

In any case, movie stars and their ilk are indispensable to their enterprises in ways that executives and managers are not. Hollywood probably could not have made “The Avengers” at all unless Downey had agreed to play his signature character, Iron Man; at least its box-office potential would have measurably thinned. What happens to the Los Angeles Lakers without Kobe Bryant? They go 16-31. (Of course, they went 2-4 with him this season, but that’s another story.)

When Mankiw extends his “great man” theory of the 1% to the business world, its flaws show. He continues to hold up Steve Jobs as a key example. “Just consider the role of Steve Jobs in the rise of Apple and its path-breaking products,” he writes.

But Jobs undermines Mankiw’s argument: First, Jobs plainly understood the role of his associates, in the corporate suite and throughout Apple, in developing those products, bringing them to market and selling them. Second, Jobs did not get paid as one of the 1%: His salary from Apple from 1998 to the end of his life in 2011 was $1 a year; in 2003 he canceled all his outstanding and unredeemed stock and option grants and never accepted any more. At his death he owned 5.5 million Apple shares, or less than 1% of its outstanding stock.

Indeed, a CEO’s pay often has nothing to do with his or her real role in the achievements of the company but rather reflects the plutocratic mind-set of the other CEOs who serve on the company’s board and its compensation committee.

What makes Mankiw’s window dressing so insidious is that income inequality is fundamentally a reflection of government policy choices, which have allowed the 1% to gobble up an increasing share of the national income. The key policy is tax policy, which has been ruthlessly tilted in favor of the rich.

That can be seen from the chart at the top of this post, which is drawn from the work of Emanuel Saez of UC Berkeley and Thomas Piketty. They show how federal taxes overall have become sharply less progressive since 1970, mostly through reductions in the estate tax and corporate taxes. During this period, the share of national income going to the top 1% and top 0.1% has soared.

Think about that the next time you hear a billionaire grouse about being persecuted. A few days ago, the whiner-in-chief of the wealthy, Silicon Valley venture investor Thomas Perkins, told a San Francisco audience that the the “extreme progressivity of the tax rate is a form of persecution of the wealthy” and added “it’s getting worse.”

The chart above identifies this statement for what it is: a lie. Shame on Perkins for uttering it, and shame on Mankiw for trying to confuse the issue so we don’t notice what’s really happening.

*Yes, it’s “just deserts,” not “just desserts”: The term is derived from the concept of something that’s “deserved,” not from the chocolaty thing served at the end of a meal.