Gregory Mankiw, chair of Harvard’s Department of Economics, talks to Brown Political Review’s Omar Ben Halim. Mankiw previously chaired the Council of Economic Advisors under President George W. Bush and advised Mitt Romney’s 2012 presidential campaign.
Brown Political Review: Americans tend to think highly of entrepreneurs, but less of financiers whose income derives from predicting the market. Is there a mismatch between the value each brings to society and the compensation they receive?
Gregory Mankiw: The issue is to what extent someone’s compensation is not commensurate with their economic contribution. And the answer can be yes or no, for either a salaried employee or a person whose wealth is based on ownership of a business. So you have to look more at the details of the situation. I don’t think the key distinction is necessarily in the specific form of compensation.
BPR: Do you see any problem with the current income distribution in the U.S. compared to historic levels?
Mankiw: Inequality is very high when compared historically, particularly high compared to the 1970s, which was the low point in inequality. There is a large literature on what the main causes are. The main explanation I’ve seen is in a book by two of my Harvard colleagues, Claudia Golden and Larry Katz, called The Race Between Education and Technology. They point to the slowing of growth in educational attainment as key. So if we want to think about inequality, then what’s going on with the educational system is the most important thing.
BPR: Do you believe that the classic American Dream is still perceived as a realistic, attainable goal for most working-class Americans?
Mankiw: I’m not sure exactly how to quantify that. I think there’s still a fair amount of income mobility, though it’s a little less than a generation ago. But that’s not shocking to me given that when the economic ladder becomes longer and the rungs become further apart, it’s harder for people to climb up. But I think there is still a fair amount of income mobility. If you look at the list of the richest people in the country, or read a book like The Millionaire Next Door, you realize there are lots of people who end up successful who didn’t start off from wealthy families. So yes, I think there is a fair amount of income mobility, but it’s really not perfect from generation to generation.
BPR: What is the intellectual standing of austerity at the moment? After the Reinhart-Rogoff incident, what would you say to those such as Paul Krugman who are using it as a pro-Keynesian, anti-austerity counterpoint?
We need a plan that moves us toward a sustainable budget, one that will be gradually phased in. Mankiw: What we need is a long-run plan, and I don’t think short-term austerity is necessary in the United States. We need a plan that moves us toward a sustainable budget, one that will be gradually phased in. Some countries don’t have the luxury of waiting, because it’s hard for them to establish credibility without doing something in the short-run. But the United States is not in that camp. If we did something credible like slowly raising the retirement age or phasing in a better tax system, one with a broader base and lower rates, that would move toward fiscal balance in the long run without having big, adverse short run effects.