Global Inequality: A New Approach for the Age of Globalization. Branko Milanovic. 2016.
In this book, inequality is characterized globally, between nations, and within nations. Inequality is often quantitated by the Gini Scale, which assigns a score of 0 for complete equality (everyone’s income is the same) and 1 for complete inequality (one person has all of a country’s income). The scale is often expressed as a percent, so a score of 0.4 becomes 40.
The source of most inequality is that between countries, not that within countries. (See fig. 1.5) The global Gini of 70 is significantly greater than Ginis within individual countries, which range from the high 20s in Scandinavia and central Europe to the mid-60s in Columbia and South Africa. More than 2/3 of income difference is explained by one variable—the country of residence. Compared to the Congo, income is greater by a factor of 93 in the U.S., 71 in Sweden, 13 in Brazil, and 3 in Yemen. Hence, there is essentially a citizen premium whereby the country of birth (independent of individual effort) is essentially a rent.
Wealth inequality is greater than income inequality, and both kinds of inequality are increasing. The global top 1% claimed 15.7% of income and 46% of wealth in 2010, compared to 14.5% of income and 32% of wealth in 2000. For hyper-wealthy individuals (the top 0.0001% with more than $1 billion in 1987 dollars), the share of GDP more than doubled from 1987 to 2013 from less than 3% to more than 6%, mostly because of increased numbers of individuals in that category. Meanwhile, even in advanced countries like the U.S. and Germany, 1/4-1/3 of the population has negative or zero wealth.
Since 1970, the marked inequality between countries has decreased somewhat, but the inequality within countries has increased in ways that differ substantially between emerging and developed nations. This has resulted in hollowing out of the middle class of the developed world. From 1988 to 2008, relative income growth was 75% for the developing world middle class (mostly China and other Asian counties) and 65% for the global top 1% (mostly rich countries) but only 0-5% for the rich countries’ middle class. (See fig. 1.1) Consequently, China’s middle to upper class (80th percentile) is converging with the U.S. lower to middle class (20th percentile). (See fig. 1.6)
However, for absolute income growth, those at the top got the lion’s share (19% for the top 1%, 44% for the top 5%, and 60% for the top 10%). The rich countries’ middle class, essentially from the 70th to the 90th percentiles, got 20%. The developing world middle class and all others got only the remaining 20%. The share of income for the developing world middle class is much lower than suggested by its relative increase since 1988 because its starting baseline was so low. (See fig. 1.2) In 2008, global per capita after tax income was $71,000 for the top 1%, $1,400 at the 50th percentile, and under $450 for the bottom decile.
Technology, globalization, and political influence of the rich are said to be the three major forces responsible for this evolving pattern of markedly increasing inequality. For the past several decades, these forces have resulted in the income from economic growth going almost entirely to the wealthy elite rather than to the general population. On the other hand, inequality could be decreased by benign forces, such as education, social transfers, and progressive taxation. Malign forces, such as wars, natural catastrophes, and epidemics could also drive down inequality but drive down mean income, as well.
In the U.S., inequality is quite high, particularly compared to other developed countries. Those at the top in the U.S. do well and account for 50% of the global top 1%, but the middle class and poor are comparatively worse off. U.S. inequality was at a sustained peak until about 1933 with the Great Depression and high unemployment, fell after World War II with the New Deal, strong unions, and high marginal taxes, and rose again after 1980 with globalization, reduced marginal taxes, declining unions, and mostly pro-rich government. Half of the recently increased income inequality in the U.S. comes from just five counties—Manhattan (borough); Santa Clara, San Francisco, and San Mateo Counties in California (Silicone Valley), and King County in Washington (Seattle).
The author sees increasing inequality in the U.S. as inevitable for the foreseeable future due to a perfect storm of the following economic, social, and political factors:
1. Higher substitution of capital for labor (automation and robots).
2. Highly concentrated capital ownership among the rich.
3. Decreased power of labor vs. capital (globalization, decreased unions, service jobs).
4. Increased tendency for the same people to have both high labor and high capital income (CEOs, children with inheritance and high paying jobs).
5. Assortative mating—skilled, usually rich, individuals marrying each other, particularly with increased women in the workforce at higher positions.
6. Growing importance of money in electoral politics.
A. The rich as the major contributors to campaigns and lobbying.
B. Congress enormously more responsive to the rich (6 times more responsive for the rich than the middle class; not responsive for the poor).
7. Democracy suppression by the rich directed against minorities and the poor.
A. Suppression of voting by poor and minorities—voting 80% for the top decile, 40% for the lowest decile.
B. Creation of False Consciousness of lower middle class and poor (media, think tanks).
a. Diversion from economic interests toward divisive social or religious interests.
b. Misbelief in USA social mobility (now less than in northern Europe).
c. Misbelief in USA equality (more inequality and smaller middle class than Europe).
d. Blaming the poor as responsible for their poverty and undeserving of support.
C. Gerrymandering redistricting to dilute the vote of the poor and minorities.
D. Citizens United—financed by the rich to increase their political influence.
8. Declining middle class (defined as 25% below to 25% above the median).
A. 1979-2010 decreased share of population from 33 to 27% and of income from 26% to 21%.
B. Leads to decreased support for social services like education and health care.
C. Decreases middle class ability to limit power of both the rich and the poor.
9. Race—less support for the safety net than in Europe because voters see the beneficiaries as outside of their group, rather than within it, as in Europe (until recent increased immigration).
10. Favorable taxation for the rich.
The author sees the consequences of increasing inequality as lower economic growth and an increased risk of plutocracy or populism. He sees plutocracy (dictatorship by the propertied class) as emerging in the U.S. due to the entrenchment of the rich at the top of politics. He sees this as leading to social separatism like that of Latin America with the rich paying for their own higher quality education, policing, etc. and not supporting public goods like education, health care, and infrastructure. He sees the influence of populism emerging in Europe which has multiparty systems, more democracy, and less political influence of money, while the welfare state built on homogeneity is being undermined by globalization, rising inequality, and markedly increased immigration.
11. Global Inequality (summary by international economist of global inequality)
