June 20, 2015


Falling Inequality Defies Piketty's Dark Vision (Noah Smith, 6/16/15, Bloomberg View)

A Belarusian immigrant economist who eventually won a Nobel, [Simon] Kuznets helped create the notion of gross domestic product, which measures a society's overall wealth. But Kuznets was concerned with more than just GDP -- he recognized that inequality was a bad thing for society, and that the only good economy was one where a rising tide lifted all boats. 

Kuznets hypothesized that as a society gets rich, inequality first goes up, and then falls. The rationale was simple: in the early stages of industrialization, a flood of workers migrating from farms to cities holds down wages and enriches the owners of land and factories. But when the flood of cheap labor is over, wages will rise and inequality will fall. This hump-shaped pattern was dubbed the Kuznets Curve. It seemed to fit the experience of the rich Western nations, which had seen inequality soar in the Gilded Age, but then plummet after the World Wars. 

Nowadays, people are starting to question the sunny optimism of the Kuznets Curve. Inequality has risen in rich countries as globalization has progressed. People are beginning to turn to the darker prophecies of Thomas Piketty, who claims that inequality will naturally widen until a catastrophe (like the World Wars) strikes. 

But I believe the doomsayers are jumping the gun. If you think of countries as being self-sufficient, isolated units -- as people did in the era of Kuznets -- then you have to be worried. But if you think of the worldwide economy as one integrated unit -- as might be more appropriate in a globalized age -- then you should be encouraged by what the data show. 

Tomas Hellbrandt of the Bank of England and Paolo Mauro of the International Monetary Fund show in a new working paper that global inequality is falling, as poor countries power ahead. The global Gini coefficient -- a standard measure of income inequality -- is falling fast. In 2003 the coefficient was 69 (with 0 being perfect equality and 100 being perfect inequality). In 2013 it was down to 65. If current trends continue, it is on course to reach 61 by 2035. 

Now consider that the developed economies are simply at the point where outsourcing (via trade and immigration) and outright elimination (via software and machines) of labor are once again driving wages downwards--eventually to zero for most people.  As we reach that point the wealth being created will just be redistributed by some mechanism other than wages.

Posted by at June 20, 2015 9:14 AM

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