Economics and politics - comment and analysis

How inequality is evolving and why

Plutocrats govern nations

Currently, the three richest Americans – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the American population (ca. 160 million) (see here). 2017 was a good year for the world’s wealthiest: they became $1 trillion richer (see here). This is more than four times the amount they made in 2016. In the UK, the wealth of the richest 1.000 individuals has doubled in six years (see here). A global wealth report by Credit Suisse found that the richest people on earth have seen their control of global wealth reach 50.1 percent in 2017 (see here). In the US, the big winner is Amazon’s CEO Bezos. How does he do it?

 

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Figure 1: Real income growth per adult and income groups (Source: World Bank, 2017).

In several states, Amazon receives tens of millions of dollars of tax incentives for building warehouses, data centers and other projects. In 2017, Amazon also made the list of the state’s employers with the most workers and family members who qualify for food stamps (see here). Amazon is what coal has been to Virginia: it keeps people poor and sick (see here), but what can policy-makers do about it? If Ohio doesn’t seduce Amazon with corporate welfare, another state will. In 2015, Ohio awarded Amazon tax incentives worth an estimated $17 million. In return, the company promised to hire 2.000 workers. And it did, except that the wages of some are so low that they cannot make ends meet. So they depend on food stamps (the threshold is about $12.60 an hour for someone working 40 hours a week) (see here). Amazon is not the worst. Top 1 employer of public assistance recipients, Walmart, proudly announced that it will raise its starting wage rate to $11 and that it will expand maternity benefits. That is very nice, except that these full-time employees will still end up way below the poverty line and that society will have to compensate for Walmart’s unwillingness to pay decent wages.

Not only is this morally repulsive, it also makes no economic sense. If inequality is high, privilege cements across generations and intergenerational mobility dies off. A lot of people will never fulfil their full potential and let society profit from their talents. Unequal societies are not economically efficient (see here). As Adam Smith said, capital is power. The wealth of a nation can be either publicly owned (for example, the value of schools, hospitals, public infrastructure, research, innovation, etc.) or privately owned (the value of private assets). Since 1980, very large transfers of public to private wealth have occurred in nearly all countries (see here). National policies reshaping ownership have been a major factor contributing to the rise of inequality. In 1970, net private wealth in most nations was worth about 200 to 350% of national income; today it is worth between 400 and 700%. Public wealth (public assets minus public debt) has declined significantly and turned negative in the United States and United Kingdom. This limits of course government ability to regulate the economy, redistribute income, and mitigate rising inequality (see here).

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Figure 2: Share of public wealth in national wealth in rich countries (Source: 2018 World Inequality Report).

Global Inequality 

The mainstream often argues that, although inequality is growing regionally (as in the US and in Europe), it is declining globally, so there is convergence. Noah Smith, for example, writes that “the population living in extreme poverty has fallen very substantially in the last 200 years across the world. The global population in extreme poverty went from 80% in 1820 to 10% in the latest estimates” (see here). As Roberts explains, in 2013, the World Bank reported that 1.2bn people lived on less than $1.25 a day. When the World Bank raised its official poverty line to $1.90 a day, poverty reduced by more than 100 million overnight. Make $1.90 a day and you are no longer poor, although, for example, in India, children living on this threshold have a 60% chance of being malnourished and their mortality rate is three times higher than the global average. In 2006, Peter Edward of Newcastle University devised an ethical poverty line. Edward calculated that, in order to achieve normal human life expectancy, people need 2.7 to 3.9 times the existing poverty line – it should come to about $7.40 a day (see here and here). About 4.2 billion people live below that level today – up 1 billion over the past 35 years (see here). Edward found that there were 1.139bn people getting less than $1.25 a day in 1993. This fell to 1.093bn in 2001, a reduction of 85 million. But China’s reduction over that period was 108 million, so, in fact, all the reduction in the poverty numbers was due to China (see here and here on China). The weakest growth was in Africa, the poorest region, where household wealth rose just 0.9%. Taking in into account population changes, African wealth per adult fell by 1.9% (see here).

There is no convergence. David Woodward points out that even during the most equitable period of the past few decades, only 5% of new income from annual global growth went to the poorest 60% of humanity (see here). At this rate of “trickle-down,” it would take more than 100 years to get everyone above $1.25 per day and 207 years to get everyone above $5 per day. And in order to get there, we will have to grow the global economy to ca. 175 times its present size (see here). A global minimum, proposed by Branco Milanovic of $ 5.500 per year, would require even far more than this (see here). Add climate change on top of this. According to Woodward’s calculations, poverty eradication, even at $1.25-a-day, and especially at a poverty line which better reflects the satisfaction of basic needs, can be reconciled with global carbon constraints only by a major increase in the share of the poorest in global economic growth (see here).

Milanovic agrees: global inequality has gone up. While Europe is doing better than the EU, many Europeans do not receive a real living wage, even despite the fact that many are in full-time employment. Milanovic shows that the top 10% of earners in Europe as a whole held 37% of the total national income in 2016. Sweden, still hailed as an exemplar of social democracy, shows a significant increase in inequality. It used to be significantly below the EU average, but has now converged towards inequality in other countries (see here).

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Figure 3: Evolution of Gini coefficient in several countries  (Source: OECD, 2017).

Poverty levels should not be confused with income inequality or wealth. Roberts writes that the evidence of rising inequality of wealth is well recorded (see here). But Milanovic doubts this, because the very top incomes are not being adequately captured. These people are few in numbers and they don’t participate in surveys or they reveal incomes that are lower than actual incomes or they hide wealth in tax havens. All estimates show what can be expected: that wealth inequality is worse than income inequality (see here).

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Figure 4: Income and wealth inequality (Source: OECD, 2016).

According to the 2018 World Inequality Report, since 1980, the richest 0.1% of the world’s population increased its collective wealth by as much as the poorest 50%. The 7 million richest humans (i.e. the top 0.1%) on the planet captured 13% of all economic growth over the past four decades — about as much as the poorest half of the world population (about 3.8 billion people). The top 1% lay claim to 27% of global wealth growth. With the exception of China, the global middle class has seen little and in some countries virtually no real income growth over the past four decades. The global middle class — a category that includes virtually every non-rich person in the United States and Western Europe – has essentially been locked out of economic growth since 1980 (see here).

What can be done?

The World Inequality Report ends with three policy recommendations: nations should raise taxes on the rich, they should collaborate with one another by setting up a global financial registry, transparently listing ownership of all financial assets and they should redistribute, improve access to education, health care and promote stable employment. It is not clear which factor is most responsible for rising inequality: is it neoliberalism, globalization, free trade, regional macroeconomic dysfunction (German wage moderation), automation, financialisation? Contrary to mainstream theories, free trade and free movement of capital has not led to gains for all. Trade and capital imbalances do not tend towards equilibrium and balance over time.  As Roberts explains, countries run huge trade deficits and surpluses for long periods and workers lose jobs to competition from abroad without getting new ones from more competitive sectors (see here). The bottom line – and the fundamental problem – seems to be clear: inequality rose because the labour movement lost out. Today’s lacking investment means that technology does not substitute for labour – the normal trajectory in capitalism, instead cheap labour substitutes for technology. As a result, productivity stalls. After decades of right-wing policies, stripping away protections for workers, the flexibilisation of labour markets, destroying ‘government rigidities’ and waging wars against trade unions, it turns out that these neoclassical recipes have decreased  productivity. They make investment in new technologies less rewarding. In an analysis of 20 countries over 44 years, Kleinknecht estimates that 1% lower wage increase reduces, in the medium term, the growth of value added per labour hour by 0.3 – 0.5 percent (see here). Neoclassical policies led to a more labour-intensive and, hence, less innovative growth path. The unsurprising result is political anger. As misery grows, so does the extreme right.