Inequality increasing? BOLLOCKS! You heard me: 'Screw the 1%'

There's morality and then there's economics ...

Worstall @ Weekend You can't have failed to notice those massed ranks of people stamping their feet and going blue in the face as they shout about how inequality is rising and something, anything, really must be done to stop it. However, you may not have noticed those arguing the opposite, that inequality is falling, which is why we should carry on as we are.

The difficulty here is not that one side is wrong. It's that both sides are correct: inequality within countries is rising. However, inequality across the global population is actually falling.

That leaves us with a problem that economics simply cannot solve. It can often tell us that something is happening. Sometimes it can tell us why that thing is happening. But it can never tell us whether that thing should happen. In the technical jargon this is the difference between positive and normative: the "whether that thing should happen" is properly the province of moral philosophy, perhaps religion or ethics, but not of economics.

What makes this more difficult is that the very same thing that is causing the rise in inequality is causing its decline. We thus have to choose which type of inequality we wish to reduce before we can decide what we should be doing. And that choice is entirely a moral one: just not something that can be divined from a purely economic basis.

Given that people have, on an entirely valid basis, different moral precepts, this produces something of a problem for the decision-making process.

Think globally

The single thing that is producing these two opposing effects on inequality is globalisation – the opening up of swathes of the world to trade with other bits of it. We could think of this as being a public policy choice – we've been reducing the barriers to trade for decades now, import tariffs falling and all that – but that wouldn't really be true. It's actually a technological change that has been pushed along a bit by that political process. The technological change is that both transport and communication have become cheaper in recent decades. It's now easier and cheaper to coordinate production in different places and it's also easier to ship the resultant products around.

Many will know that import duties in the US were high and got higher after the Civil War there. That is why the united States is one of the poster children for the argument that economies develop well behind high tariffs. That inside those tariffs it had the largest free trade area makes it a difficult argument to sustain. But what makes it impossible to support as an explanation is that import costs were falling at this time.

For transport costs were falling faster than tariffs* were rising, and it is the combination of them both that provides the total barrier to imports. That happened 150 years ago: it's been happening for the past 50 as well. So greater globalisation would have been happening even if we had kept the tariff barriers of old: container ships and cheap phone calls would have made sure of that. I think it's fair enough to call this a technological change – even if that free trade mantra has helped it along as well.

So, it's not something deliberately foisted upon us and it is also something we'd have to take strong action on if we wished to reverse it. Like, you know, raising those trade tariffs to over the amount by which transport and communication/coordination costs have fallen.

Which brings us to our problem: do we actually want to do this? To work through that, we probably want to know who has benefited from what has been going on. Fortunately, that has been done for us.

OK, the rich ARE getting richer, but ...

Branko Milanovic is the go-to guy here. He used to be the World Bank expert on the point and is now at the Luxembourg Income Study. Quite the place for this very subject and so posh that they've just hired Paul Krugman as their public face. Milanovic's paper on the subject is here and here's the accompanying chart:

Milanovic writes:

The top 1 per cent has seen its real income rise by more than 60 per cent over those two decades. (All the amounts are expressed in 2005 international dollars.)

An even greater increase was realised by those parts of the global income distribution that lie around the median: almost 80 per cent real increase at the median itself, and some 70 per cent around it.

It is there, between the 50th and 60th percentile of global income distribution (which, in 2008, includes people with annual after-tax per capita incomes or consumption between 1,100 and 1,600 international dollars**) that we find some 270 million Chinese, 40 million Indians, 35 million Indonesians, and about 20 million people each from Brazil, Egypt and Mexico.

The surprise is also that those at the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40 per cent and up to 60 per cent. The only exception is the poorest 5 per cent of the population whose real incomes have increased by 16 per cent only ...

The biggest “non-winner” (other than the very poorest 5 per cent) of globalisation were those between the 80th and 90th percentile of the global income distribution whose real income gains were in single digits. These people, who can be called a global upper-middle class, include many from former Communist countries and Latin America, as well as citizens of rich countries with stagnant real incomes.

The really rich have made out like bandits. The not rich at all have also made out like bandits. And the people who haven't done any better but also haven't done any worse are exactly the people that we're all worrying about in our own already rich countries – that 80 and 90th percentile group.

And yes, £25,000 a year (actually, fractionally over that) gets you into the global top 1 per cent. By chance, that's also around UK median income (and not far off that of the US either). So, the people once less than around and about median incomes in the rich countries haven't done well out of this: stagnating incomes and all that. That is very much the problem that everyone is complaining about, isn't it?

That all the economic growth of the past few decades has just been going to the already rich?

Except, as we can see, that's only true if we look at it on a rich-country-only basis. Once we expand to look at the global situation it's quite different: the people who've been gaining from it all are those formerly dirt poor and now developing.

There's no surprise at this outcome either. Plug what we've done into the standard development and/or economic models and you'd predict this. Add a couple of billion people's worth of low skill and lowly paid labour into an economy and the extant low paid in that economy are going to be facing some fierce competition. High-skill labour will do very well, for high- and low-skill labour are complements.

Take people managing that low-skilled labour, or designing for it, or researching science for it, and those high-skill jobs become more valuable – because you're able to apply those valuable skills to more labour, obviously. Similarly, that new low-skill labour gets those valuable skills applied to it, so its value goes up (in more detail, the productivity of the labour force goes up, and so therefore so does their value).

But that original low-skill but relatively highly paid labour doesn't particularly benefit from this process due to that competition. To put it one way, that harm that comes to the working classes of the rich countries is down to the increase in inequality within those societies. As we've noted, the rich in those countries are doing very well out of the process. There, of course, is where our difficulty lies. This is on a political basis, because politics is still national. But it is also a moral difficulty. And it's entirely possible to take either side of this.

One could, entirely legitimately, argue that the effects of inequality within a society are so pernicious that we must prevent this happening. I wouldn't agree with you (partly because I think The Spirit Level was a load of hokum), but that's because I'm applying different moral precepts here, not because the facts or the economics are different.

I would be arguing that socking it to the "rich world" working classes, some 10 or 15 per cent of humanity, is worth it to raise the incomes of 70 or 80 per cent of humanity by that 40 to 80 per cent. The one per cent (that group that I and almost certainly most of you commentards belong to on a global basis) also do well, but I'd argue that – well, of course we're not going to let our own interests colour our moral views, are we?

I am of course being a utilitarian here. The greatest good of the greatest number and all that. If you're not a utilitarian you might well not agree with me: the point I'm hoping to get across is that whether or not you're a utilitarian has nothing at all to do with economics. Moral precepts aren't economics.

There is one little sting in the tail, though, for those who would insist that the rise in rich world inequality doesn't outweigh the good to the globally poor. That is that the entire argument for progressive taxation rests upon that same utilitarian argument. An extra £1,000 a year is worth more to, has more value for, someone on £10,000 a year than it does when it's the last £1,000 of the £100,000 a year a junior banker gets. So, we tax the banker to pay the hairdresser a tax credit and the world is made a better place. That's exactly the same moral argument as being OK with having the £10,000-a-year bod standing still for a few decades while the £1,000 a year one gets richer. If you're in favour of progressive taxation, then you should be just fine with the vast majority of newly created global wealth going to the global poor. What happens to the one per cent is of course trivia in the context of the lives of the seven billion people of the world. ®


*We can check this by looking at whether, say, wheat prices in London and Chicago converged or not. If they're getting closer together, then people must be arbitraging between the two markets, therefore trade must be getting easier, total barriers to it falling. In this case, they were.

** A hypothetical unit of currency used by economists that has the same purchasing power that the US dollar had in the States at a given point in time (usually either 1990 or 2000)

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