Beating Populism

The Dangerous Wage Gap

  • Why it matters

    Why it matters

    Consensus is growing among economists that global income inequality within nations is the biggest single factor threatening the stability of societies and economies.

  • Facts

    Facts

    • Between 1988 and 2008 the income growth of the lower classes in the U.S. and Europe was zero percent.
    • Forty-four percent of the world’s absolute income growth now accrues to the top 5 percent of the world’s population.
    • The richest 1 percent of the U.S. population take home one fifth of the nation’s entire income.
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    Audio

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Germany Daimler
The wage gap between ordinary workers and the wealthiest classes is growing dangerously wide. Source: AP

The concept of so-called “post-factual politics” has been gaining ground among the West’s chattering classes and intellectual elites for months. It signifies a type of politics not based on fact and reason but rather on feelings and moods.

It was a feeling exploited masterfully by Donald Trump in his stunning rise during the U.S. election campaign. The same anger that won him the White House is being used by other populist politicians in Europe, like the French nationalist politician Marine Le Pen, or the Brexit camp that succeeded in getting Britain booted out of the European Union.

But there’s some truth to this new era as well. The post-factual politics of feelings has risen up in recent years in large part due to an irrational economic order: one in which new money was created out of nothing and lent out free of interest; in which systemically-important banks operated without residual risk; corporate headquarters were often the size of a mailbox and large parts of digitized financial markets were literally removed from the real economy.

At the same time, inequality among Western industrialized countries has grown. Capital gains have risen higher than labor incomes while globalization, automation and migration have all depressed wages, particularly among low-skilled workers and the middle classes. It’s created a cauldron of anger that is in the process of exploding onto the political scene.

Many establishment policymakers and economists have marginalized these developments in the past, in part because of a fear of being tarnished as leftish wealth redistributors. Given the apparent seething anger of the lower classes, it says little of German Chancellor Angela Merkel’s statesmanship and her feeling for the governed when she simply promises we will eventually emerge from this difficult phase “in a better state than we entered it.”

In contrast to Ms. Merkel, outgoing U.S. President Barack Obama realized that the depressed material state of many people in the United States and Europe is real – it’s measurable in terms of money worries and negative personal experiences of many on the lower rungs of the financial ladder.

In a powerful article Mr. Obama penned for the “Economist” magazine before the election, Mr. Obama advised his successor to, on the one hand, respect the blessings of global capitalism and open markets and, on the other hand, to keep a sharp eye on growing inequality and the shrinking wage increases of the middle classes.

There is, unfortunately, no magical solution to resolve these tensions. Much would be gained if inequality and ideas about the justice of wealth redistribution no longer triggered ideological responses but were discussed as complex issues. What is really needed is a more nuanced and differentiated view of the historical, national and intergovernmental aspects of inequality.

Happily, the days when rich countries became ever richer while poor countries became ever poorer appear to be over. Today it is generally acknowledged that excessive inequality and poverty weakens social cohesion, leads to more crime, slows down demand and has a profoundly damaging effect on public health.

The economist Thomas Piketty, author of “Capital in the 21st Century”, and his pupil Gabriel Zucman, author of “The Hidden Wealth of Nations”, surprised the world three years ago with a stupendous mixture of indignation and academic self-confidence when they railed against the wealth of the top 1 percent of the world’s population and against financial capitalism.

Two further seminal books on the subject will doubtless influence and inform the debate about inequality in the coming years.

One of these books is “Global Inequality: A New Approach for the Age of Globalization” by the Serbian-American economist Branko Milanovic, a former World Bank economist. The second book is “Inequality: What can be done?” by Anthony Atkinson, the British doyen of research into inequality.

Both authors analyze the impact of inequality on the totality of entire societies, over the course of history and on international comparisons.

Mr. Milanovic’s attention is focused on global developments. He suggests that, while inequality has a long history, the world is now a more equitable place than it has been in the past. The reason for that conclusion is that there are more winners than losers from the processes of globalization.

The living standards of one and half billion people in China and India have been vastly improved in the last couple of decades, he argues, as have those of people in Vietnam and Indonesia.

On the other hand there have been hundreds of thousands of losers in the U.S. and Europe, particularly among the lower middle classes. Between 1988 to 2008 their income growth was zero percent.

But looking at absolute income growth, even the emerging classes in the newly industrialized countries are at most the second-placed winners. Not because they still rank far behind the shrinking middle classes of the industrialized Western countries, but because the richest of the richest are the overall winners.

According to Mr. Milanovic, 44 percent of the world’s absolute income growth now accrues to the top 5 percent of the world’s population, while 19 percent went to the top 1 percent: that’s much more than the entire center ground of those in emerging economies.

Mr. Atkinson’s work, meanwhile, concentrates on the rise of inequality in industrialized countries, which has risen steeply since the 1970s, particularly in the United States.

While nine out of ten Americans have endured real income losses since 1972, the richest 1 percent now take home one fifth of the nation’s entire income. And the richest 1 percent of this 1 percent (in other words the top 0.01 percent of the population) account for 4 percent of national income.

Messrs. Milanovic and Atkinson are in no doubt that a more equitable distribution is urgently needed if Western democracies do not want to become unstable. A society in which no one can afford private trips into space but everyone can pay their food bills in normal shops would have more cohesion, they argue.

Both economists offer a wide panoply of revolutionary proposals. These include making “heritage” payments to every adult, to be financed by a tax on property. They also propose concentrating research funding on innovations that create employment, while also arguing for higher tax rates for immigrants.

But are these ideas affordable? The counterargument, they say, is that the cost and consequences of not doing anything about inequality would be far higher as well as unpredictable.

The Scottish historian and philosopher Thomas Carlyle famously called economics “the dismal science”, but that was in the nineteenth century. In the era of Messrs. Piketty, Zucman, Milanovic and Atkinson, has there ever been a time when economics was more inspiring?

This article first appeared in the German business weekly WirtschaftsWoche, a sister publication of Handelsblatt. To contact the author: dieter.schnaas@wiwo.de

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