Defending the 1 percent

In Defending the One Percent, Gregory Mankiw begins with difficult to imagine experiment where a perfect economic equality exist and one day the utopia is disturbed by a genius entrepreneur with an idea of a new product. Because of the magnificent idea everyone would like to buy the product in a voluntary exchange, which results in an extreme unequal distribution of income. Since there are no policies that follow the Pareto criterion, the question is if the government should shift to a progressive tax system to reduce inequality. He proceeds by presenting his argument of why he believes that is not the best option. In general Mankiw argues that the top one percent have high marginal productivity, in other words they receive as much as their high contribution to output relative to the rest. He also argues that economic opportunity and education is perfectly equal between the middle class and the top one.

Mankiw accepts that the income share of the top one percent exhibits a U-shape pattern: falling from the 1950s to the 1970s, and rising from the 1970’s to the present. According to Atkinson, Piketty & Saez, changes in the top income shares during the twentieth century are related to politics and changes in macroeconomic and financial environments, and most important related to the taxation structure. Their results are based on their tax data collected and processed for twenty two countries. Mankiw argues the growth of top one percent income shares and “the earning differentials between skilled and unskilled follow a similar U-shaped pattern” The evidence Mankiw presents rests on the work done by Claudia Goldin and Lawrence Kats (2008) book, The Race Between Education and Technology. In their book they conclude that technological change continually increases the demand for skilled labor, therefore, “inequality is not about politics and rent-seeking but rather about supply and demand”. It would be interesting to know the statistics about skilled and unskilled