Income Inequality Is Not Rising Globally. It's Falling.
The New York Times, JULY 19, 2014
Income inequality has surged as a political and economic
issue, but the numbers don’t show that inequality is rising from a global
perspective. Yes, the problem has become more acute within most individual
nations, yetincome inequality for the world as a wholehas
been falling for most of the last 20 years. It’s a fact that hasn’t been noted
often enough.
The finding comes from a recent investigation by Christoph
Lakner, a consultant at the World Bank, and Branko Milanovic, senior scholar at
the Luxembourg Income Study Center. And while such a framing may sound
startling at first, it should be intuitive upon reflection. The economic surges
of China, India and some other nations have been among the most egalitarian
developments in history.
Of course, no one should use this observation as an excuse
to stop helping the less fortunate. But it can help us see that higher income
inequality is not always the most relevant problem, even for strict
egalitarians. Policies on immigration and free trade, for example, sometimes
increase inequality within a nation, yet can make the world a better place and
often decrease inequality on the planet as a whole.
International trade has drastically reduced poverty within
developing nations, as evidenced by the export-led growth of China and other
countries. Yet contrary to what many economists had promised, there is now good
evidence that the rise of Chinese exports has held down the wages of some
parts of the American middle class. This was demonstrated in a recent paper by the economists David H.
Autor of the Massachusetts Institute of Technology, David Dorn of the Center
for Monetary and Financial Studies in Madrid, and Gordon H. Hanson of the
University of California, San Diego.
At the same time, Chinese economic growth has probably
raised incomes of the top 1 percent in the United States, through exports that
have increased the value of companies whose shares are often held by wealthy
Americans. So while Chinese growth has added to income inequality in the United
States, it has also increased prosperity and income equality globally.
The evidence also suggests that immigration of low-skilled
workers to the United States has a modestly negative effect on the wages of
American workers without a high school diploma, as shown, for instance, in research by George Borjas, a Harvard economics
professor. Yet that same immigration greatly benefits those who move to wealthy
countries like the United States. (It probably also helps top American earners,
who can hire household and child-care workers at cheaper prices.) Again, income
inequality within the nation may rise but global inequality probably declines,
especially if the new arrivals send money back home.
From a narrowly nationalist point of view, these
developments may not be auspicious for the United States. But that narrow
viewpoint is the main problem. We have evolved a political debate where
essentially nationalistic concerns have been hiding behind the gentler cloak of
egalitarianism. To clear up this confusion, one recommendation would be to
preface all discussions of inequality with a reminder that global inequality
has been falling and that, in this regard, the world is headed in a
fundamentally better direction.
The message from groups like Occupy Wall Street has been
that inequality is up and that capitalism is failing us. A more correct and
nuanced message is this: Although significant economic problems remain, we have
been living in equalizing times for the world — a change that has been largely
for the good. That may not make for convincing sloganeering, but it’s the
truth.
A common view is that high and rising inequality within
nations brings political trouble, maybe through violence or even revolution. So
one might argue that a nationalistic perspective is important. But it’s hardly
obvious that such predictions of political turmoil are true, especially for
aging societies like the United States that are showing falling rates of crime.
Furthermore, public policy can adjust to accommodate some
egalitarian concerns. We can improve our educational system, for example.
Still, to the extent that political worry about rising
domestic inequality is justified, it suggests yet another reframing. If our
domestic politics can’t handle changes in income distribution, maybe the
problem isn’t that capitalism is fundamentally flawed but rather that our
political institutions are inflexible. Our politics need not collapse under the
pressure of a world that, over all, is becoming wealthier and fairer.
Many egalitarians push for policies to redistribute some
income within nations, including the United States. That’s worth considering,
but with a cautionary note. Such initiatives will prove more beneficial on the
global level if there is more wealth to redistribute. In the United States,
greater wealth would maintain the nation’s ability to invest abroad, buy
foreign products, absorb immigrants and generate innovation, with significant
benefit for global income and equality.
In other words, the true egalitarian should follow the
economist’s inclination to seek wealth-maximizing policies, and that means
worrying less about inequality within the nation.
Yes, we might consider some useful revisions to current
debates on inequality. But globally minded egalitarians should be more
optimistic about recent history, realizing that capitalism and economic growth
are continuing their historical roles as the greatest and most effective
equalizers the world has ever known.
Tyler Cowen is professor of economics at George Mason
University.
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