Paul Krugman: Is Vast Inequality Necessary?

Time to put the Gini back in the bottle:

Is Vast Inequality Necessary?, by Paul Krugman, Commentary, NY Times: How rich do we need the rich to be?

That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.

Now, recent experience has not been kind to the conservative position. … Is there, however, a longer-term case in favor of vast inequality? …

I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.

First, we could have huge inequality because individuals vary hugely in their productivity..

Second, we could have huge inequality based largely on luck…, those who hit the jackpot … just happen to be in the right place at the right time.

Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.

As I said, the real economy contains elements of all three stories. …

But the real question, in any case, is whether we can redistribute some of the income currently going to the elite few to other purposes without crippling economic progress.

Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.

And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.

In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking…

So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.