Book Reviews

Everyone’s Problem

The inequality crisis is truly global, and while fixes aren’t easy, neither are present trends inevitable.

Tagged GlobalizationInequalityJobsMiddle ClassThomas Piketty

Global Inequality: A New Approach For The Age Of Globalization by Branko Milanovic • Harvard University Press • 2016 • $20.95

Any economist interested in inequality knows CUNY professor Branko Milanovic as one of the most authoritative experts on the subject, particularly on global income inequality. This subject has gained great prominence in public debate in the United States and elsewhere in recent years, abetted by the Piketty phenomenon and subsequently by Bernie Sanders’s focus on the issue in his electrifying (although doomed) presidential campaign challenge to the status quo.

The success of Thomas Piketty’s Capital in the Twenty-First Century was surely due in part to one of the three related changes noted in Milanovic’s important new book: the stagnation of incomes among the middle classes of the developed world. The carefully collated data for the years 1988 to 2011 that form the evidence on which Global Inequality is based reveal that members of this group—not the richest 10 percent of the world population but the next tenth down—remain well off in global terms. But they have seen smaller (almost non-existent) income gains compared to any other group in the world, and they are described by Milanovic on Twitter as the “decile of discontent.”

Milanovic notes two other momentous changes: the rise of a “global middle class,” most of them urban dwellers in China and other Asian countries, although with some in Latin America and Africa; and the emergence of a global plutocracy, the infamous 1 percent. Global Inequality argues that these trends have causes and consequences related to the interplay of economics and politics. In contrast to Piketty’s explanation—the famous technical expression r > g, which in plain English means a return to capital greater than the economic growth rate—Milanovic’s argument is a richer and more plausible account of changes in inequality as the outcome of political and social dynamics.

This richness of analysis means Milanovic does not propose easy fixes for the disturbing degree of inequality, but neither does he see the present trends as inevitable. While observing that the twentieth century was the only time in history when inequality diminished as average incomes rose, he argues that political choices over taxation, education, and capital ownership could achieve the same again. The unspoken conclusion is that if politics does not distribute the gains of economic growth more fairly, the consequences could be dire.

Milanovic argues that, within their own borders, countries follow cycles of the narrowing and widening of income distribution. He has a term for this dynamic: “Kuznets waves,” named after the pioneer of this kind of analysis, the American economist Simon Kuznets. In his work in the 1950s, Kuznets suggested that distribution followed a hump-shaped pattern: Inequality increased as countries moved from poor to middle income, reflecting the early success stories of economic development, and decreased as they progressed to developed status, when progressive taxation started to fund education and social transfers for the masses. This was an empirically robust observation until the late 1980s, when inequality started increasing once again in rich countries like the United States.

Milanovic’s new Kuznets waves incorporate the same drivers of change in inequality, but he distinguishes between stagnant and growing economies, giving several historical examples. In stagnant economies—say, Europe before the Industrial Revolution or some poor countries now—inequality cycles up and down depending on the mortality of the population (and hence size of the labor force) and events such as wars or the discovery of resources. On average, life remains miserable.On the other hand, in economies that escape the poverty trap and have rising average incomes, higher inequality is made possible simply because there is more headroom, so incomes at the top can grow over time without causing starvation at the bottom. This occurred in economies like the United States and the UK in the nineteenth century and is occurring again today. New technologies reward small groups of skilled workers, reinforced by pro-rich policies enacted by governments, as those who benefit learn to leverage their economic power into political action.

New technologies reward small groups of skilled workers, reinforced by pro-rich policies enacted by governments.

But in the historical examples, two mechanisms have kicked in, tending to reduce inequality within growing economies. One is the original, “benign” Kuznets mechanism of tax-funded provision of public goods and redistribution, education that increases the supply of relevant skills, and political participation. Another is Piketty’s “malign” mechanism of war, which reduces inequality; it levels down by destroying property, harming more those who have the most assets to lose (he was referring only to the big European wars). In contrast to Piketty, Milanovic sees war as a potential consequence of great inequality, as part of the dynamic rather than an external lightning bolt. “Rising inequality indeed sets in motion forces, often of a destructive nature, that ultimately lead to its decrease but in the process destroy much else,” he writes. “A very high inequality eventually becomes unsustainable, but it does not go down by itself; rather, it generates processes, like wars or social revolutions, that lower it.”

What does the Kuznets wave mechanism imply for the present? After setting out the recent changes in the global inequality data, the book considers in turn the trends in inequality both within and between countries.

Prior to 1988 there had been a significant reversal in the determinants of an individual’s position in the global income distribution. In the early nineteenth century, this ranking depended on class: 80 percent of global inequality was explained by differences between rich and poor within countries. By the mid-twentieth century, 80 percent of the global income gap depended on income differences between countries. Milanovic attributes this switch to colonialism: Exploitation enabled the wages of workers in colonial powers to rise. The “country premium” on incomes probably peaked around 1970.

Yet class has been returning as an explanatory factor. Thanks to the catch-up by some Asian economies, especially China, inequality between countries has narrowed, while inequality within countries has widened since 1988.

Still, he writes: “The world where location has the most influence on one’s lifetime income is still the world we live in.” And the premium is huge. Compared to the poorest country, Congo, the premium for being American is 9,200 percent, for Brazilians 1,300 percent, and even for Yemenis it’s 300 percent. The premium for a good location is also greater the lower you go down the income distribution, so one of the poorest American citizens is even more than 9,200 percent better off than the poorest Congolese. 

No wonder international migration seems to be heading inexorably upward. The book considers the implications of migration at some length, noting, “The pent-up demand for migration is many times the actual rate.” Milanovic cites estimates that perhaps 10 percent of the world’s population would like to migrate to another country, compared to the 3 percent of the world’s population who have already migrated to date. He suggests that, as there is little chance of reducing the flow, rich recipient countries need to manage the consequences for their own citizens and budgets, for example by adopting discriminatory policies such as guest worker programs or reduced legal protections for immigrants.

The final chapters turn to the future of global inequality and some reflections on policy. Milanovic argues that even if emerging economies like China and Brazil see slower growth, they will continue to grow faster than the old West, and so their income catch-up will remain one of the contributors to global distributional trends. The overall global pattern will largely depend on what happens to inequality within the two biggest countries, China and the United States. Here, he is more cautious about forecasting. The original Kuznets pattern of wider access to education and opportunity would tend to reduce inequality within China, and on balance he suggests this will outweigh any effects of corruption or internal conflict and break-up.

Technological change and investment in automation will continue to increase the share of income going to owners of capital.

On the other hand, he portrays America as trapped in a “perfect storm” of rising inequality. Technological change and investment in automation will continue to increase the share of income going to owners of capital. The same people are likely to be also those most able to earn very high incomes. There is a pattern of the high-earning marrying the fellow high-earning, so inequality is further embedded between households. And—above all—the rich are continually reinforcing their political power and dismantling pro-poor policies such as progressive taxation and funding for public education and infrastructure. “It is hard to see where any forces might come from that could counter rising income inequality in the United States,” he concludes.

And the book concludes with a yet more pessimistic turn. Milanovic argues that capitalism (an economy based on the profit motive and privately owned capital) will survive, but democracy might not. Democracy is being hollowed out along with the middle class. Populism is the political vehicle for this process, the function of the “culture war” being to “mask the real shift of economic power toward the rich.” There is a section in the final chapter titled, “How can inequality in rich welfare states be reduced?,” but it covers just six pages; Milanovic’s heart is not really in providing a list of practical measures to reduce inequality and save democracy. Indeed, he quotes Machiavelli’s Discourses on Livy at the start of the chapter:

If you tender your advice with modesty and the opposition prevents its adoption and, owing to someone else’s advice being adopted, disaster follows, you will acquire very great glory. And although you cannot rejoice in the glory that comes from disaster which befalls your city or your prince, it at any rate counts for something.

It is clear he is inclined to predict disaster, suspecting the world is in for the malign mechanisms redressing inequality to kick in. “The short twentieth century is the only sustained period in history when rising mean incomes have been accompanied by decreasing income inequality,” he writes. That does not augur too well for the twenty-first century, given that it took the cataclysms of the Great Depression and World War II to create the conditions for post-war redistributive policies. At present there is little evidence of a political consensus for pro-equality policies, for all the surprising success of populists like Bernie Sanders.

But there is a paradox in Milanovic’s pessimism, for he is arguing that in countries such as the United States and the U.K., the benign forces that reduce inequality are in reverse to such an extent that the malign political reaction of violent conflict might kick in; yet he also asserts that the Asian countries will continue their catch-up, so global inequality will continue its historic reduction. Good news is bad news. To pile on the paradox, the economic globalization that has enabled Asia’s rise is also driving migration to such a scale that it threatens to push the United States and Europe in a more xenophobic direction.

The pessimism is tempting. Even though data for the United States and the U.K. suggest inequality of incomes in these two countries narrowed a bit after the financial crisis, the populism on the march on both sides of the Atlantic is certainly fed by rage against the elites. Great wealth looks like it has bought politics.

There are two significant caveats to Milanovic’s argument about the near-inexorable forces driving inequality upward.

One is the extent to which the malign trends are specifically American. Inequality certainly rose in most OECD countries after 1988, and it rose fastest in some of the more equal societies, such as Sweden. The forces of technology and globalization are global. However, politics is local. There are important differences among countries in their policy responses to inequality, and there will probably be different consequences. Some have fought harder than others to offset the divergence in market incomes with redistributive taxes and public spending or higher minimum wages.

Indeed, taking the global income distribution as a whole, most of the people in the decile of discontent, the 10 percent of the world population whose incomes have not risen for the past 20 years, are from the bottom half of the income distribution in the United States, Germany, and to some extent Japan. Because America is so large, most of these individuals are Americans. And fully half the people in the global top 1 percent are American (with most of the rest from Western Europe, Japan, and Australasia—not the Russian and Chinese plutocrats who so easily leap to mind).

Milanovic’s pessimism about the absence of any political correctives to inequality refers almost entirely to the United States. We Western Europeans have had a populist backlash too, but there are some signs that politicians are responding. The tough EU limits on bankers’ bonuses, a large increase in the U.K. minimum wage, and the cooperation of most European nations on limiting the ability of multinationals to dodge taxes and generally behave like buccaneers rather than corporate citizens all count as evidence for this. It might be too little, too late, and the EU often seems to be in self-destruct mode in the face of slow growth and mass immigration, but there is something running counter to the malign mechanism of Milanovic’s Kuznets wave.

The other caveat is that there may also be corrective economic forces to limit and ultimately reverse high income inequality. As Milanovic details, technological innovations are one of the drivers of growing inequality. Economists such as David Autor and co-authors Claudia Goldin and Lawrence Katz largely agree on the importance of digital technologies in raising the wage premium for the highly educated, in increasing the demand for low-skilled workers doing jobs the machines cannot, and in reducing employment and earnings in the kinds of routine jobs in the middle of the income distribution. The workers who held these jobs prior to the 1990s are the members of the decile of discontent.

No government has found a good way to help people who are technologically redundant.

Millions of people have been automated out of their jobs many times in the past, and their prospects are always grim. No government has found a good way to help people who are technologically redundant. On the contrary, unemployment and poverty become embedded in formerly prosperous places such as America’s Rust Belt or Britain’s northern towns and cities. Yet other jobs are created, and ultimately well-paying ones too. The mechanism is the provision of education and training to replace redundant skills—made obsolete by machines—with new skills that complement the machinery. This takes a long time—a generation probably.

But as a recent book, James Bessen’s Learning by Doing: The Real Connection Between Innovation, Wages, and Wealth, spells out in detail, this process has happened time and again with new technologies. He begins with the example of cotton in the Industrial Revolution. Skilled engineers who could install and maintain the new looms and spinning machines earned a high wage premium while the masses were immiserated. But over time the skills needed to work with the machinery were standardized and widely learned, along with time keeping and other disciplines of industrial work. Wages for the many then climbed. The same pattern has been observed with subsequent technological waves, and there is no reason not to expect it in the digital era.

A generation is a long time to wait, and perhaps too long to avert the malign political reaction to inequality. So I wish Milanovic were not so halfhearted about faster policy responses. He advocates wider access to good education, and also wider ownership of financial assets, but he oozes doubt about whether these are politically feasible (who will campaign for higher inheritance taxes?) or if they would make much difference. There are other possibilities, though. Anthony Atkinson’s recent book, Inequality: What Can Be Done?, has a long list of suggestions—15, in fact, though they are specifically for the UK— and a discussion of their practicality. The ideas include stronger enforcement of anti-trust policy to reduce monopoly power—and earnings—in key sectors like finance; an increase in the minimum wage (already announced by the Conservative Chancellor George Osborne); a lifetime tax on capital receipts; and more progressivity in income tax.

While any of these might seem impossible in the American political context, they are feasible-to-likely in Europe. Indeed, dysfunctional American politics pose the biggest hurdle across the Atlantic too, as some steps—for example, on multinational taxation or financial regulation and reward—require international agreement.

I have no wish to be a Pollyanna about future political and economic prospects. Milanovic is surely right to point to the unsustainability of income inequality at current levels, and—as the unsustainable is never sustained—to worry therefore about what mechanisms will reduce it in the next Kuznets wave.

The continuing, albeit slower, growth of China and other Asian countries means the West will continue in relative decline, the United States seemingly eager to be in the vanguard. Our middle class “decile of discontent” is paying the costs of adjusting to an economic structure based on the spread of digital technologies and automation. We should be thinking hard about how to assist the people affected (with citizen incomes, retraining, or guaranteed public jobs), about educating the next generation appropriately, and about ensuring the plutocrats are not allowed to float in their own sphere, utterly separate from their fellow citizens.

As Milanovic concludes, “The gains from globalization will not be evenly distributed.” Nor will incomes stay so unequally distributed; but how exactly the reversal happens is up to all of us to determine.

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