Masters of the Universe, Superstars of Wall Street

Wednesday, 12 March 2014 09:26 By Paul Krugman, Krugman & Co. | Op-Ed
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(Image: SERGUEI; France / CartoonArts International / The New York Times Syndicate)(Image: SERGUEI; France / CartoonArts International / The New York Times Syndicate)The Harvard economist Greg Mankiw has written another defense of the 0.1 percent - and this one, a recent op-ed for The New York Times titled "Yes, the Wealthy Can Be Deserving," is kind of amazing.

Before I get to the amazing part, however, enough with the movie stars - Mr. Mankiw's first point. Yes, a handful do make a lot of money, but they are a trivial part of the story. The upper tiers of the income distribution in the United States are overwhelmingly occupied by executives of one kind or another - corporate, finance, real estate - and lawyers who are surely more corporate than Perry Mason. And even the biggest names in the media aren't real players.

Remember, the 40 top-paid hedge fund managers and traders made an average of more than $400 million each in 2012.

Which brings me to the amazing part of Mr. Mankiw's op-ed. He invokes the strong role of such incomes in American inequality to argue that such fortunes are deserved. "A similar case is the finance industry, where many hefty compensation packages can be found," he writes.

"There is no doubt that this sector plays a crucial economic role. Those who work in banking, venture capital and other financial firms are in charge of allocating the economy's investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task."

Has Mr. Mankiw been living in a cave since 2006?

We're now in the seventh year of a slump brought on by Wall Street excess; the wizardly job of "allocating the economy's investment resources" consisted, we now know, largely of funneling money into a real estate bubble while using fancy financial engineering to create the illusion of sound, safe investments. We also know that there are real concerns about whether hedge funds, in particular, actually destroy value for their investors.

One more thing: Mr. Mankiw argues that our tax system is fair because the top 0.1 percent of earners pays a higher share of income in federal taxes than the middle class does. This neglects the partial offset of this progressivity by regressive state and local taxes (the same amount for everyone, regardless of income).

But surely the main point is that to the extent that taxes on the 0.1 percent are high (they aren't really, in a historical context), that's largely because Mitt Romney lost the 2012 presidential election, so that President Obama's partial rollback of George W. Bush's tax cuts and the high-income surcharges that now partially finance health reform remained in place. It's kind of funny that he's claiming that our system is fair thanks to policies that he and his friends tried desperately to kill.

Anyway, the wolves of Wall Street are more Gordon Gekko than Iron Man; if they're the best argument conservatives have for the justice of extreme inequality, they're not doing too well.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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