Inherited Wealth and Societal Benefits

Contrary to popular belief, inherited wealth can be very good for the economy as a whole, as Greg Mankiw points out:

From a policy perspective, we need to consider not only the direct effects on the family but also the indirect effects on the broader economy. Rising income inequality over the past several decades has meant meager growth in living standards for those near the bottom of the economic ladder, and one might worry that inherited wealth makes things worse. Yet standard economic analysis suggests otherwise.

When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.

Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.

The bottom line is that inherited wealth is not an economic threat. Those who have earned extraordinary incomes naturally want to share their good fortune with their descendants. Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards.

Of course, it ought to go without saying that you won’t catch Paul Krugman or Thomas Piketty admitting any of this; Mankiw’s facts are much too inconvenient for either of the two to deal with or to incorporate in their own worldviews.