In which, following on yesterday’s post, Ricardo Fuentes and I decide to carry on chatting about the new Milanovic paper on inequality
Duncan: Great intro to the Milanovic paper, Ricardo, but there’s plenty more juice to be had, I think. First let’s take a closer look at the graph you put up of change in global real income 1988-2008 (below). As well as the spike of the top 1% (and do we know whether the financial crisis has moderated or amplified the spike?), the bit that jumps out at me is the stagnation of incomes above the 75th percentile. For that portion of the world’s population in the top quarter of the income bracket, but below the super-rich 1%, the last 20 years have been pretty terrible.
Milanovic calls this the ‘global upper-middle class’ and says it includes many in the former Communist countries and Latin America. But my guess would be that it mostly corresponds to the non-elite working population in the formerly rich countries – reflecting the kinds of income stagnation we have seen in the US and (to a lesser extent) Europe. Is that right, or might this also be hitting the upper income levels of middle classes in emerging economies?
Ricardo: I think you are right, the middle class in Western democracies have suffered stagnation in their standards of living – when they’ve been lucky. There is plenty of evidence of that happening in terms of wages but also in terms of perceptions. When you ask middle class Americans about their future, they don’t seem optimistic. It would be interesting to identify the percentiles in Milanovic’s graphs with per capita income and try to figure where they live.
Duncan: The politics of that seem at first sight a bit grim. Taking a crudely reductionist line that people support the status quo if it delivers them faster than average rising incomes, and oppose it if it doesn’t , you would expect a pro-globalization alliance between the super rich and the 10-70th centiles (= emerging economies and their governments?), opposed by the non-elite rich country populations in between. Is this the graph that underlies rising European/North American hostility to immigration, northern trade liberalization etc? If they could establish any kind of political connection, their natural allies would be the people at the bottom of the pile – the bottom decile. Maybe that’s what (some) INGOs are doing?!
Ricardo: I’m not sure this kind of alliance would naturally happen because the source of income gains is likely to be different. I don’t have strong evidence on this (my best read is this report from the OECD) but the guess, being overly simplistic, is that the improvements we see in the bottom of the global distribution are related to increases in wages for workers in emerging economies (the jobs that have been outsourced). The gains in the super rich most likely come from returns to assets and benefits from the financial system. Again, I’m mostly guessing. This is something we could look more into.
Duncan: The Milanovic paper also dug up some startling findings in other parts of the inequality debate. How about this:
‘Perhaps for the first time since the Industrial Revolution, there may be a decline in global inequality. Between 2002 and 2008, global Gini decreased by 1.4 points. We must not rush to conclude that what we see in the most recent years represents a real or irreversible decline, or a new trend, since we do not know if the decline of global inequality will continue in the next decades. It is so far just a tiny drop, a kink in the trend, but is indeed a hopeful sign.’
That’s dynamite. As I understand the paper, this is driven by the rise of India and China, despite their soaring internal inequality. I don’t have the maths, but you do – is it possible for the global income distribution to get more equal, even if all its major players are becoming less equal internally? And if so, is that a temporary statistical blip til global inequality once again starts to rise?
Ricardo: This apparent contradiction is very plausible – in fact, it was at the heart of an old and influential paper by Xavier Sala-I-Martin. The Economist summarized it better than I could here. According to Sala-I-Martin, the global distribution of income inequality declined between 1980 and 1998 but this conversation can quickly become very technical if we contrast the results. For me, the global Gini is a moot point because, for all we wish, we are still not a global community. Aspirations, tastes , institutional rules and the sense of community is still determined by the nation-state. Except for the global one percent. That’s partly why I think the most important part of Milanovic’s paper is the spike at the top of the distribution.
Duncan: The other really nice piece of his paper, although I’ve seen it written about elsewhere, was his ‘migration v Marx’ chart (above). Decomposing the sources of inequality, he finds that in 1870, the class position within countries determined 2/3 of global inequality; whereas now it is down to a third. Instead, it is geography – which county you live – that explains 2/3 of global inequality. That also has profound political implications, as Milanovic recognizes:
‘If the world’s actual situation is such that the greatest disparities are due to the income gaps between nations, then proletarian solidarity does not make much sense. Indeed income levels of poor individuals in poor countries are much lower than income levels of poor people in rich countries. Those who are considered nationally poor in the United States or the European Union have incomes which are many times greater than the incomes of the poor people in poor countries and moreover often greater than the incomes of the middle class in poor countries. And if that gap is so wide, then one cannot expect any kind of coalition between these income-heterogeneous groups of nationally poor people, or at least not any coalition based on the similarity of their material positions and near-identity of their economic interests.’
Unless global inequality falls, and some new convergence of interests occurs, of course. But even if you accept his reversal of the last few years, that still seems an awfully long way off.
Finally on migration, I really liked his question: ‘can we treat location, and thus citizenship, as a rent or a premium (or obversely, as a penalty)?’ He points out the double standards of disapproving of inherited wealth, and yet accepting it when that wealth springs from the geographical accident of birth:
‘In one case, we frown upon the transmission of family-acquired wealth to offspring if two different individuals belong to the same nation. In the other case, we take it as normal that there is a transmission of collectively acquired wealth over generations within the same nation, and if two individuals belong to two different nations, we do not even think, much less question, such acquired differences in wealth, income and global social position.‘
He doesn’t try and draw out the political implications of this – perhaps just as well!
Ricardo: And I won’t try either. Let me just say this: inclusive migration policies could do a lot for the lives of poor people. But that’s something we should discuss some other time.