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Inequality Diagnosed But Uncured

Sep 17

Global Inequality: A New Approach for the Age of Globalization
By Branco Milanovic
Harvard University Press, 2016

Chronicles on Our Troubled Times
By Thomas Piketty
Penguin Books, 2016


When politicians talk about the American Dream, they implicitly evoke the decades-long period of economic expansion from the end of World War II to the early 1970s: An era when working Americans could have suburban homes with white picket fences, college educations, well-paying jobs, and a pension plus Social Security, and then go off to Florida to enjoy visits from the grandkids, bridge games, and evening walks along the beach as the sun set. 

Mounting evidence suggests that this American Dream has run its course, and the country has entered a new era of slow growth and rising economic inequality. 

Branko Milanovic of the CUNY Graduate Center has written an accessible, powerful book about economics called Global Inequality, A New Approach for the Age of Globalization, full of nifty graphs that tabulate reams of economic data. He starts from the theories of Nobel Prize-winner Simon Kuznets—that as countries industrialize, inequality increases at first, but then decreases. This is of course not an accurate description of the United States of America in 2016. Instead of discarding Kuznets, however, Milanovic lays out the argument that there are alternating waves of increasing inequality and equality—capitalism is dynamic, and the balance of power shifts. 

Milanovic talks about “malign” and “benign” forces that drive economic inequality and equality. He dates the “Great Leveling” to after World War I. “Between 1914 and 1980,” he writes, “the decrease in inequality was brought about through a wrenching process, a combination of malign forces like wars and benign economic policies that were characterized by the confluence of interests between left-wing political parties and property-owning classes that, out of fear of new socialist movements… accepted measures that created a broad-based middle class.” 

The United States emerged from both world wars largely unscathed in terms of destroyed cities, demolished industrial plants, and weakened currency, while Europe and Japan were smoldering fire pits and China closed its doors. Trade-union influence, high tax rates, the GI bill (increasing access to education), robust government spending (much of it military), increasing population, and technological advances powered American growth and spread the wealth.

This implicit social contract, however, sputtered with the election of Ronald Reagan as President in 1980, a year after Margaret Thatcher’s election as prime minister marked a similar turning point in the United Kingdom. They successfully attacked labor unions (Thatcher the miners and Reagan the air-traffic controllers), lowered tax rates, and began to dismantle social safety nets. Their less right-wing successors, the Labour Party’s Tony Blair and Democrat Bill Clinton, brokered global trade deals and loosened financial regulations. Global Inequality traces the rise of internal inequality in Western nations to this period, and names the winners (the Asian middle class) and the losers (the Western lower-middle class). “Between 2008 and 2011, the average urban income in China doubled, and rural incomes increased by 80 percent,” he says. “The absence of growth in the rich world meant not only that incomes of the lower middle classes… stagnate but also that the stagnation extended toward the top.” 

As inequality deepens in Western industrialized societies, Milanovic argues that “there have been unmistakable signs of a decrease in global inequality” between nations because the middle classes in India, China, and other Asian countries are getting richer. Nonetheless, he also posits “citizenship premiums,” comparing how people fare at various points on the economic ladder in different countries. In other words, it is better to be poor in Sweden, with its generous social safety net, than in the Congo but it is also better to be rich in Brazil than rich in the Congo. Milanovic’s book contemplates that this could influence migration to countries with stronger social safety nets, and the paths taken by Syrian refugees bear this out: It is better to be at the bottom of German society than the bottom of Hungarian society.

Milanovic’s work is greatly influenced by French economist Thomas Piketty’s economic tome Capital in the Twenty-First Century. Piketty has a new book out, Chronicles on Our Troubled Times, that makes similar points. “It’s almost inevitable that growth in the twenty-first century will settle at a rate far lower than the rate of return on capital—that is, what wealth earns on average over the course of a year.as a percentage of its initial value,” Piketty writes.

Chronicles is a compilation of 700-word newspaper columns that Piketty wrote over the past decade for the Paris-based newspaper Liberation. In it he offers practical solutions to the European debt crisis. Germany and France enjoy low interest rates for borrowing money, he says, and should extend this power to other European Union members by socializing the heavy debt carried by countries such as Spain and Greece in the form of Euro bonds. Piketty also argues that the EU should reverse austerity measures and end tax havens.

Both Milanovic and Piketty are bearish on the prospects for stemming inequality in the U.S. Milanovic writes of a “perfect storm” of forces such as further rising incomes at the top, highly skilled labor and capital merging (super-managers earning big salaries), and the rich buying elections. Piketty cheekily asks “will oligarchy, or plutocracy, be America’s future?” While racist and nationalist forces are gathering strength in both Europe and the U.S. in a backlash against immigration and economic stagnation, there are bright spots. Black Lives Matter challenged both the Bernie Sanders and Hillary Clinton campaigns and the underlying inequalities in the justice system. While Donald Trump’s message is mostly crass showmanship and deeply antagonistic towards immigrants, he’s forcing the Republican party to at least pay lip service to the economic concerns of its white base, although his actual economic proposals, except for opposing unfair trade deals, are standard-issue GOP “cut taxes and deregulate” prescriptions.