Q&A: N. Gregory Mankiw ’80, former chairman of Council of Economic Advisers

After an alumni panel on inequality and economic opportunity on Friday, The Daily Princetonian spoke to panelist and Harvard economics professor N. Gregory Mankiw '80, who is also a former chairman of the Council of Economic Advisers.

The Daily Princetonian: You do say — like Goldin and Katz [in their book "The Race between Education and Technology"] — that skill-based technological change, while a good thing, is a major driver of inequality. You also said something along the lines that technology that would make the skilled less useful and the unskilled more useful would be great.

N. Gregory Mankiw ’80: Exactly. Technology tends to be skill-biased. It tends to enhance the demand for skilled workers to use the technology and tends to replace the unskilled workers who are no longer relevant because the technology is doing things they would do. It would be great if some inventor would invent technology that had the opposite effect — it could increase equality [and] enhance the opportunities for the unskilled. The problem is we don’t have any leverage to make that happen. Inventors invent things they think would be useful, and they’re not thinking about, ‘Oh, what’s this technology going to do to this person versus that person?’ They just try to invent stuff. I don’t think we have the policy levers to induce inventors to invent one kind of thing or another kind of thing. I was being somewhat facetious but trying to also make the point that technology is important, but we have sadly limited control over what kind of technology is invented.

DP: So that would be good for inequality, but would it be good for GDP?

NGM: I think technological advance of all sorts is good for GDP. Technological advance gives us more opportunity to produce more stuff.

DP: Talking more about technology, in your essay “Defending the One Percent,” you write: “The last thing we need is for the next Steve Jobs to forgo Silicon Valley in order to join the high-frequency traders on Wall Street.” With regards to high-frequency trading, do you have any thoughts on how to prevent these kinds of arms-race technological developments, and how to prevent Steve Jobs from joining the Flash Boys?

NGM: Well I think financial regulation is the first place to go with the answer to that. I’m not an expert on high-frequency trading, but to the extent that Michael Lewis [’82] is correct in “Flash Boys,” then what these high-frequency traders are doing is basically an illegal form of front running, and it should be regulated … If he’s right, then it suggests that the regulatory system is flawed in a way that is inducing too many smart people to do something that is not socially useful. Similarly, I think too many people probably invest money in high-priced active managers. I sit on some investment committees, and I always tell them to put money in an index fund with low costs rather than paying 100 basis points for a mutual fund manager, or 220 for a hedge fund manager … It's a lot of money to try to beat the market, which is usually not successful.

DP: In the panel, [Edward] Golding [GS '82] emphasized mobility, and you emphasized distribution of income — shares for the top one percent and so on. Which do you think is better to focus on?

NGM: I think both are important to keep in mind. People forget that when they’re talking about mobility, they’re not only people at the bottom going up but people at the top going down because mobility is by its nature symmetric. The way I would think about [it is that] the most important thing to focus on is make sure that people at the bottom of the economic ladder have as many opportunities to climb up as we can give them. Sometimes it's phrased as mobility, but I think it’s probably better to phrase it as trying to enhance economic opportunities.

DP: You've criticized [Thomas] Piketty’s recent work about starting up a wealth tax, saying that once you add up consumption, procreation and taxes, that dilutes his whole hypothesis, and this just leads to steady-state inequality. My question here — and this kind of came up in the panel too — why does or doesn’t steady-state inequality, in and of itself, matter?

NGM: My view is equality of opportunity is far more important than equality of outcomes. There are always going to be Steve Jobs and Bill Gates, who invent stuff and make the world a better place, and if they get rich in the process, I don’t have a problem with that. On the other hand, if there’s a poor kid in inner-city Baltimore who can’t get a decent education, then I think we’re failing him, fundamentally. And that has nothing to do with inequality per se, [although] it results in inequality. It has to do with, here’s a person whose potential is being wasted. So I think focusing on trying to provide everyone with the opportunity to reach their best is the most important goal.