Thomas Picketty’s arguments about massive inequality in the US and Europe has received some support from World Bank researchers, Christoph Lakner and Milanovic Branko, who argue that inequality in rich countries has worsened significantly since 1988; although poorer Asian countries have fared much better. From VOX:
A ‘quasi non-anonymous’ growth incidence curve in Figure 2… shows how the country/deciles that were poor, middle-class, rich, etc. in 1988 performed over the next 20 years…
People around the median almost doubled their real incomes. Not surprisingly, 9 out of 10 such ‘winners’ were from the ‘resurgent Asia’. For example, a person around the middle of the Chinese urban income distribution saw his or her 1988 real income multiplied by a factor of almost 3; someone in the middle of the Indonesian or Thai income distribution by a factor of 2, Indian by a factor of 1.4, etc.
It is perhaps less expected that people who gained the least were almost entirely from the ‘mature economies’ – OECD members that include also a number of former communist countries. But even when the latter are excluded, the overwhelming majority in that group of ‘losers’ are from the ‘old, conventional’ rich world. But not just anyone from the rich world. Rather, the ‘losers’ were predominantly the people who in their countries belong to the lower halves of national income distributions. Those around the median of the German income distribution have gained only 7% in real terms over 20 years; those in the US, 26%. Those in Japan lost out in real terms…
The striking association of large gains around the median of the global income distribution – received mostly by the Asian populations – and the stagnation of incomes among the poor or lower middle classes in rich countries, naturally opens the question of whether the two are associated…
While the real income of the US 2nd decile has increased by some 20% in a quarter century, the income of China’s 8th decile has been multiplied by a factor of 6.5. The absolute income gap, still significant five years ago, before the onset of the Great Recession, has narrowed substantially.
…if we take a simplistic, but effective, view that democracy is correlated with a large and vibrant middle class, its continued hollowing-out in the rich world would, combined with growth of incomes at the top, imply a movement away from democracy and towards forms of plutocracy.
Taking a global perspective, the findings in this paper do not constitute a “bad news” story. The rapid growth in Asia that has lifted billions out of poverty has been achieved, in part, at the expense of lower-to-middle income earners in the developed world. But in the process, global inequality has probably decreased, even if has increased significantly in richer nations, as argued by Picketty.
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The paper’s argument about the hollowing-out of the middle class in advanced economies, implying a movement away from democracy towards plutocracy, is also apt and is supported by a recent report from Oxfam. Oxfam found that the richest 1% increased their share of income in 24 out of 26 countries for which data was available between 1980 and 2012, with the wealthiest 1% in the US capturing 95% of post-financial crisis growth since 2009, whereas the bottom 90% became poorer (see below charts).
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Oxfam also supports the notion of plutocracy, as the increasing concentration of economic resources in the hands of fewer people presents a major threat to political and economic systems. In particular, according to Oxfam, people are becoming increasingly separated by economic and political power, leading to heightened social tensions and increasing the risk of societal breakdown. Laws are also increasingly favouring the rich, driven by a “power grab” by wealthy elites, who have co-opted the political process to rig the rules of the economic system in their favour.
As noted previously, inequality in rich nations is likely to worsen before it gets better, as improvements in technology and robotics places at risk a large number of skilled jobs, hollowing-out the middle class and increasing returns to owners of capital at the expense of labour.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
