Inequality is Falling Globally! (And Similar Nonsense)

I bet you think that the rich are getting richer and the poor poorer. A few well-known facts might lead you to this conclusion. For example, in the United States income after tax per household is now over 100% greater than forty years ago (1972), while average weekly earnings in the private sector are 14% lower (see chart below).

Average household income up, wage earning income down – how do you get that result? Rich households take all the increase in income, that’s how. We find similar outcomes in Europe — UK real wages falling after 2008, real wages in Germany frozen since the late 1990s, and even worse news from the euro crisis countries (Greece, Italy, Portugal and Spain, among others). Falling wages amidst rising incomes for the rich appears to have been a global phenomenon over the last several decades.

Source: Economic Report of the President 2013

As I write in my new book, Economics of the 1%, I never fail to be impressed by the proclivity of members of the mainstream economics profession to deny and distort reality in the interests of the rich. The New York Times provided a platform for this prominent feature of the profession in an article titled “Income Inequality is not Rising Globally – It’s Falling“. In this for-the-rich-to-feel-good contribution, we are told by someone identifying himself as a “Professor at George Mason University” (whose economics department makes the one at the University of Chicago look left-wing):

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, yet income inequality for the world as a whole has been falling for most of the last 20 years.

Telling us that “the problem has become more acute within most individual nations” is rather like describing an earthquake as a ground tremor. Except for a few countries in Latin America, I know of none whose income distribution has not become worse (the World Bank provides us with the relevant measures).

There are many techniques for turning fact into fiction and sense into nonsense. We find one of the least subtle in this dis-informing article in the NYT, mis-quoting and mis-representing a source. In this case the cited evidence for the alleged happy outcome of falling inequality is an article by an ex- and a current employee of the World Bank (the authors summarize it here).

Tweaking The Inequality Statistics

The authors tell us that in their empirical study, “we line up all individuals in the world, from the poorest to the richest…” To put it another way, they treat the world as one country. When they do this it is statistically possible that inequality could increase in every country, but decline when everyone from every country is thrown into the same statistical basket (inequality rising within countries is statistically outweighed by a reduction in differences in capita incomes across countries).

This perverse result is the statistical outcome that brings such delight to our George Mason Professor (and most members of my profession, I regret to report). China holds 20% of the world population (1.4 billion out of 7 billion). The Chinese economy has grown at an extraordinary rate over the last twenty years. An extraordinary increase in inequality has accompanied the notably brutal form of “trickle-down” fostered by the dictatorship that mis-governs China.

The graphic below tells the China growth story, rapidly rising national income (gross national product) and rampantly rising inequality. What that means “on the ground” is the concentration of income gains among very few Chinese households (and not a small portion linked to the “Communist” Party of this aggressively capitalist country). Yes, the number of Chinese households below the poverty line has fallen. Image how many more would have risen out of poverty if inequality in 2010 had been the same as in 2000 (hundreds of millions).

Source: http://www.kkr.com/company/insights/global-macro-trends-14, based on IMF statistics

The old cliché coined by Mark Twain, “lies, damn lies and statistics”, seems singularly “spot-on” in this case. The meagre improvement of those households at the bottom of the Chinese income distribution compared to the “making-out-like-bandits” 1% (and bandits many are) has narrowed the gap between the world’s poorest and richest. But the fact that the ratio of the income of the richest American and poorest Chinese peasant or factory worker is now less than in 1980, 1990 or 2000 is, to say the least, trivial to the point of meaningless.

The curse of inequality falls upon people at the national level. Inequality results in the degeneration of dictatorships into fascism, and democracies into oligarchies with politics derivative from wealth, not the consent of the governed. In the United States we find clear evidence of this degeneration in the notorious Citizens United decision of the Supreme Court, which formalized the principle of one dollar, one vote.

Growing inequality everywhere enhances the power of those opposed to social protection, equal access to health care and education, and eliminating discrimination. When you put these together — the economic power to control a political system, held by those opposed to public provision of social services — rising household income brings very limited benefit to the poor of the earth, in whatever country they may live.

The reduction of abject poverty in any country of the world represents good news. Achieving it as part of a process that increases inequality within the countries renders poverty reduction unsustainable and democracy a lost relic of a more egalitarian past.