Developments in the study of inequality
New stories about economic inequality seem to be appearing every month, sometimes every week. Economic inequality is a multidimensional issue and the stories are breaking along three broad frontiers.
First, there is the question of what's happening. This frontier was lit up by Thomas Piketty's Capital in the Twenty-First Century, which presented the long-run view. If the established trends continue, the distribution of wealth and income in the rich countries will come to resemble that which prevailed prior to the Great War, the antithesis of meritocracy. Last month we heard that the world’s eight richest people now own as much wealth as the poorest half of the globe’s population.
Second, there is the question of how well we are measuring what's happening, which is the subject of this brief report. The third frontier along which stories are breaking concerns the rather more complicated question of evaluation, i.e., what are the causes, what are the consequences, and what should be done about it.
This month's inequality-measurement news comes from the World Wealth and Income Database (WID.world). In a paper titled 'Global Inequality Dynamics' published by the U.S. National Bureau of Economic Research, five leading inequality scholars have extended the idea of incorporating distributional accounts into the system of national accounts, a major structural step toward integrating inequality into everyday macroeconomic policy management.
The WID has superceded the World Top Incomes Database (WTID), which was established in 2011 to provide information on the concentration of income, as calculated by over 100 researchers covering more than 30 countries. The new and more ambitious WID was established in January 2017 (another of last month's inequality stories), and aims to go forward in three directions: (1) to include countries with developing economies; (2) to include the distribution of wealth (as distinct from just income), the pivotal measure being the series of 'capital-income' ratios that is at the centre of Capital in the Twenty-First Century (and, beware, this measure is now more commonly referred to as the 'wealth-income' ratio); and (3) to cover the entire distribution of income and wealth, i.e., not just the distributions to the top 10%, top 1%, etc.
Pulling these directions together, the WID's long-run aim is to produce Distributional National Accounts (DINA) for as many countries as possible. The invention of DINA is an inequality story from two months ago, and entails developing concepts of income and wealth that are consistent with national accounts, thereby enabling countries to analyse economic growth and inequality in a fully coherent framework.
DINA's theoretical advances were not all that made inequality news in December. The concept of developing distributional accounts was illustrated with new data showing that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s; half the U.S. has been living in a no-growth society, while income at the top was skyrocketing. The gains reaped by the top 1% of the U.S. population since the 1970s have been so great that they fully equal the proportion of national economic growth that didn't go to the bottom 50%, a group 50 times larger (see graph here).
This month's inequality story extends the DINA series to China, and also includes France as a country broadly representative of the West European pattern (which is more likely to resemble Australia than either the U.S. or China). The new paper was written by the leaders of the pace-setting Paris-Berkeley group, Facundo Alveredo, Lucas Chancel and Thomas Piketty (from the Paris School of Economics), and Emmanuel Saez and Gabriel Zucman (from the University of California, Berkeley).
The paper shines a light on how the distribution of income and wealth in China is coming to resemble that of the United States. Note that the income data used by the paper is per adult pre-tax income (before taxes and social security transfers, but including pensions and unemployment benefits). Figure 1a below, for example, shows that the share of national income received by the top 1% in China in 2015 (about 13 per cent) now exceeds the share going the top 1% in the United States at the beginning of the period (about 11% in 1975).
Distributional accounts: DINA
But the main point of the new paper is to show how DINA can be used to analyse the distribution of economic growth across classes, as summarised in Table 1 below:
The above table shows that per capita (per adult) national income increased in all three countries over the 40 years 1975 to 2015: by an extraordinary 811% in China, by 59% in the United States and by 39% in France. Notice how DINA show that the growth has been distributed in radically different ways between classes across countries. In all three countries, there has been a clear pattern of rising inequality, with the top 10% capturing the lion's share or more, but the consequences for everyone else are quite different.
In the United States, the rising tide failed to lift most boats. While the income of the top 10% increased by 115% (with the income of the top 0.001% rising by an incredible 685%), no economic growth at all trickled down to the bottom 50% (-1). In China, the income of the top 10% increased by an extraordinary 1294% (with the income of the top 0.001% increasing by a boggling 3111%), but the country's aggregate growth has been so large that even the income of the bottom 50% grew by a remarkable 401%. France shows a different pattern again. The top incomes have clearly grown more than the average, but the bottom 50 per cent effectively experienced the same growth as the national average (+39%). while the share going to the middle 40% went backwards (+35%).
Apart from the growth of inequality across the board, the implicit lesson is that distribution is not preordained, but a function of national social and institutional characteristics. The refinement and extension of DINA is the key, conclude the authors, 'both to properly understand the present as well as the forces which will dominate in the future, and to design policy responses'.
The paper shows much else of interest to inequality scholars, but suffice it to conclude here with two charts that might be of more general interest. Figure 2a below shows the rising stock of net private wealth (or 'capital') as a ratio of the annual national incomes of the United States, China, France and the United Kingdom.
Notice, first, that the Global Financial Crisis didn't disturb the long-run trend to accumulating ever higher stocks of private national wealth. Notice, second, the extraordinarily large rise in the private wealth of China relative to its national income, with the stock growing from about 100% of income at the beginning of the period to more than 450% in 2015, almost equal to the levels in the three developed rich countries.
The structural rise in the stocks of private wealth relative to national incomes in recent decades has been caused by several factors, but all countries show that a common feature has been the transfer of public wealth to private hands, the ubiquitous process of privatisation.
As shown in Figure 2b below (which also includes Japan and Germany), the privatisation process has been spectacular in China, and yet its net public wealth (public assets minus public debt) is still equal to 35 per cent of national wealth. In the five rich countries, by contrast, privatisaton has bled public wealth to negative in the United States, Japan and the United Kingdom, and left it barely positive in Germany and France.
'This', as the paper's authors quietly note in passing, 'arguably limits government ability to redistribute income and mitigate rising inequality.'
Christopher Sheil is a social historian and the President of the Evatt Foundation.
Sheil, Christopher, 'China vs. the United States', Evatt Journal, Vol.16, No.1, February 2017.<https://evatt.org.au/china-vs-the-united-states>