Whenever the 1 percent needs someone to provide academic support for their extraordinary incomes, they always know just who to call: Greg Mankiw. In June 2013, the former top economist for President George W. Bush published a paper titled “Defending the One Percent” in which he tried (and failed) to convincingly defend the rising incomes of the richest 1 percent of Americans. On Saturday, he turned to the pages of the New York Times to argue that inherited wealth is good for the economy. But just like in 2013, his argument is unconvincing.
Inherited wealth has garnered greater attention since the release of Thomas Piketty’s Capital in the Twenty First Century. Mankiw begins his piece by linking to a half dozen critiques of Capital before stating, “The Piketty scenario is best viewed not as a solid prediction but as a provocative speculation.” But Piketty is not, in fact, making a prediction. His theory argues that there are “forces of divergence” in capitalism that can lead to extreme concentration of wealth if left unchecked. That’s not a prediction, it’s a theory. Mankiw conflates the two.
Mankiw spends the next 600 words explaining why it’s rational for parents to bequest wealth to their kids. The reasons he identifies make sense, but Mankiw is attacking a straw man here. No one is arguing that inheritance serves no purpose whatsoever. That’s why the estate tax exempts the first $5.34 million. But at some income levels, the reasons Mankiw offers lose their significance.
For instance, take consumption smoothing. Mankiw explains, “Consuming $50,000 of goods and services in each of two years is generally better than consuming $80,000 one year and $20,000 the next. People smooth consumption by saving in good times and drawing down assets when conditions are lean. … Hence, to smooth consumption across generations, they need to save some of their income so future generations can consume out of inherited wealth.” For most people this holds true, but for those at the far upper-end of the income distribution it falls apart. In 2012, the threshold for being in the top 0.01 percent required wealth of more than $100 million. Consumption smoothing doesn’t really apply to these households, because in both good and bad times, the have adequate financial resources to live as they please.
It’s not until the final three paragraphs that Mankiw explains his economic theory for why inherited wealth is good for the economy. Allowing parents to bequest wealth to their kids, he argues, incentivizes them to save. Those savings are then put to productive use. “Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less,” he writes. “And because increased capital raises labor productivity, workers enjoy higher wages.” This could be a legitimate argument if workers had actually been reaping the reward from increased labor productivity. But as a report from the Economic Policy Institute shows, workers have seen their compensation barely rise over the past 40 years, despite significant gains in productivity:
What’s strange is that Mankiw basically admitted that this is the case just two paragraphs earlier when he wrote, “Rising income inequality over the past several decades has meant meager growth in living standards for those near the bottom of the economic ladder.” If Mankiw understands that low-income Americans have had nearly stagnant incomes in the past few decades, then he knows that wage growth isn’t tracking productivity—and that undermines his theory for why inherited wealth is good for those at the bottom too.
But all of this misses a fundamental argument against substantial sums of inherited wealth: fairness. Kids from wealthy families already have numerous advantages over low-income children, including receiving a better education and having access to more social capital. Huge inheritances only exacerbate those advantages. A 2007 paper from the Bureau of Labor statistics found that the top 1 percent bequeath an average of more than $2.5 million to their kids. Demos’ Matt Bruenig created the following charts to show the extreme disparities in inheritances:
Not only are these huge disparities unfair, but they also reveal a double standard among conservative policymaking. Republicans often argue that giving people money—or health insurance—will disincentivize them from working and reduce economic growth. You heard that argument relentlessly when the Congressional Budget Office reported that Obamacare would lead to a reduction in 2.5 million full-time-equivalent jobs in 2024. “You're saying because of government policies, as the welfare state expands, the incentive to work declines, meaning [as you] grow the government, you shrink the economy,” Representative Paul Ryan said to CBO Director Doug Elmendorf at a House committee hearing on the report. “Fewer people [will be] working and the economy will be slower as a result.”
If Ryan is so concerned about Obamacare discouraging low-income Americans from working, he should have the same qualms about huge inheritances discouraging kids from wealthy families from working. But you never hear that argument from Republicans. Apparently, free money—whether from the government or your parents—only acts as a disincentive to work when poor people receive it.
Image via shutterstock.
Danny Vinik is a staff writer at The New Republic.