Income Inequality: The Global Haves And Have-Nots In The 21st Century

hello and welcome to new economic thinking inequality has become an important policy preoccupation since 2008 but my next guest has been dealing with it for virtually his entire career as an economist professor Branko Milanovic professor of economics at the City University of New York thank you for joining me today thank you very much for having a martial arts a pleasure you've been dealing with the subject of inequality since your days as a PhD student which I won't say it's that far back but it's certainly more than seven years well it is quite far back you know it's definitely in double digits ooh okay we I think you mentioned to me that you were then a student at in Yugoslavia right which no longer exists and then you went to Eastern Europe and you were still studying inequality and a lot of Eastern Europe no longer exists at least in its current form so uhm I don't know what the implications are studying global inequalities running out of topics so what I should begin reading my new books on the apocalypse perhaps and I mean as a result I hope but it is it must be somewhat gratifying to you that it has become a respectable quote-unquote subject because of course you were considered to be in order to or at least a class warrior if you looked at this area pre 2008 it's absolutely true you know it's a kind of a an underground topic you know it everybody of course knew that inequality existed and it was a topic but it was very often like put like in development economics as it as if it were really an issue only in developing countries and it was generally really assumed the way in modern macro or micro textbooks because the assumption was essentially that you know factor shares will be constant so capital labor would get the same proportion of GDP then it was assumed that interpersonal inequality would be the constant or declining and then it was assumed that if you really were interested in capital and on the ownership really you should not be really worried about that because these are endowments and as you know in micro models we actually take endowments is given so we really looked at what happens after the agents already their endowments so really that some extended topic was essentially assumed away in the kind of standard macro or micro tax but I I remember first thing you discuss it because I have not been aware of your scholarship before 2009 when the Institute had its first conference you linked it very closely to the emergence of financial bubbles and the aftermaths which in turn knew you are going to it created expanded the inequalities on I always thought that in many respects that was a much more productive way of looking at it than saying as far as the debate about capital arriving inexorably to regardless what Gina he was doing because he literally it just seems to me that you know you have a crash the the people that have the the assets and the money and by whom the distress seller so the next bubble comes along and it's a the the inequality expands you know it is actually something that came to somebody who studied inequality like myself so the way natural first explanation of the bubble and the crisis because what we knew and of course it was known you know that you had a stagnation of middle class income stagnation of the median wage and so on on the other hand the consumption of this house cause as we know too was rising faster than the ring comes partly because they were trying to compensate for the fact that's actually the real incomes were not rising and on the other hand you had an an incentive among the financial sector to lend because every lending that every every loan was actually for them more money so you really said one hand named for keeping up with the Jones if you want and on the other hand you have a need to find a placement for your capital so it came to me somebody who was actually working on inequality is a natural way to look at the possibility that that might actually lead to the crisis but the danger with that was that it was considered a little bit like under consumption his theory which goes back you know in the 19th century was very much associated with left-wing views I mean John Hobson in 1904 actually put this up as a explanation for British imperialism for example saying that domestic consumption was not sufficient so then basically capitalist in search of new markets had to go elsewhere and then of course they would need state support in order to go to Africa India so on so you know that was a theory which existed but then it was kind of forgotten it sounds actually quite credible but it was at the notion that it was linked so inexorably to imperialism that people had problems with I mean the causality actually seems quite quite credible it does actually you know of course you know it kind of got forgotten afterwards Keynes brought it up a little bit by Keynes but a little bit uncomfortable I believe in the general theory with implications that Hobbes had you know Hobbes was actually against British imperialism because he was in favor of the British working class because he saw that money which would actually go out of the UK as essentially money that could be used to employ British workers so in that sense you know it's interesting some of the themes I think of globalization come back now hundred years later because you know slightly different countries you can see that people who are against us you know outsourcing or large investments abroad they can say from the trained Union point of view they can say look about that money if you stayed in the u.s. that would be actually employing armed workers they would get a bit better off and instead it goes to India and employs you know term I mean Indian workers so it's it's really kind of it's difficult to say that one is right and the other is wrong because it's actually Indian workers are very poor and they're very happy to have somebody who is meant to employ and so in many respects you you you you you in theory that should cause some diminution of the north south and you know that's actually interesting that you mentioned it because in my work now on global inequality which started like mid to late 90s and there is clear now evidence that global inequality is definitely not on the rise meaning inequality between all citizens in the world and it's probably declining precisely because of very high rates of growth in China and India and we are essentially saying seeing their people who started 20 years ago with very low incomes very poor not all of them obviously but we're talking about the bulk of population and then they gain particularly in China they doubles triple their incomes and that created what we now call this out of a global middle class and then reduce global inequality so you know that when you study inequality I might say also you realize that there are really strong statements like this is good this is bad I'm never totally accurate because something bad it's awful linked with something good because in that specific example you've effectively had a global wage arbitrage which of course has benefited those workers in India and China but of course people in the United States and Europe suffering it's one way to explain the the wage stagnation that we've had over the last 30 years and in in the West absolutely you know if you actually you look at the data that actually the word that I would be Twista flattener we've had results for 20 25 years of my disel of income distribution for more than a hundred countries and what you find out there is actually there are three key points one point is that you find people around the median of the world which is not very much by Western standards but where you have most of the Chinese population they have gained very substantially so you really have this peak then you go further and you find American or German lower middle class and you see almost no growth in income and then you come to the top 1% globally and you see massive increases so really we see that really in the data that actually that contrast or contradiction between the gains among relatively poor Indians and Chinese and really absence of gains among the working class in in rich countries let me take a step back and ask a more philosophical question is there's something inexorable or inevitable about inequality which seems to be one of the implications at piketty's book for example you know I'm actually currently I have to say actually I'm Finnish in my own book on inequality and I take a position that we may be now in what may be called the second Kuznetsov or we might actually talk about HughesNet cycles rather than whose next curve because I believe that with the Second Industrial the second technological revolution that happened in 1980 we have entered a period of rising inequality so it's because of the technological change because of the rents which have been created and because of the movement in the rich countries from a Greek from manufacturing into services which are much more heterogeneous in terms of wages you have you know investment bankers and you have you know people at McDonald's so I don't think it's inexorable I think that if I'm right we are really on the up sort of upward rising portion of that goodness curve but that is not going to go forever so there is at some point as countervailing forces will be set in motion and do these countervailing forces come just naturally or other ways that we can you adopt policies which would mitigate the the inequality or mitigate the worst aspects of the the Kuzmin cycle you know I think actually one of them may be problems somewhat of a problem with the original formulation is that actually problem formulation was for one curve because that's basically what could knit so and I think now with 50 years of experiment we might actually speak of of cycles but you know there is two elements there I think as you mentioned them now one is worse politics but the politics is to a large extent endogenous so if you have increased inequality if you have stagnation of incomes if you have dissatisfaction with suppose parties in power then of course politics will respond to that so there would be a change in policies in principle and democracies but even in non democracies and then there are other forces which are really forces which you can call may be spontaneous forces of economic adjustment so they will be controlling forces is it actually some of the rents may be dissipated because you get them in the beginning but then we start losing them because you have competitors who catch up with you then you can have actually also education levels catching up so there I think two forces there are think forces of policy and politics which are somewhat endogenous to increase inequality and then there are forces of spontaneous readjustment and as far as policy goes if we do assume that inequality is a problem that must the address what do you think is the best policy makes a big head he talks about a global world tags or the other specific policy ideas that you would have to address the issue or is it unnecessary to do so you know I think it's necessary but I'm afraid you know none of us is it's very original on that you know people talk about education about particularly early education equality of opportunities you know it's very hard for anybody to be against you know equalization opportunity that's very very clear but then when you come to the real action I've read recently for example a very interesting study that shows the amount of tax expenditures that for example US private universities get but by not paying tax on their endowment which turns out to be like you know sixty thousand dollars per student whereas of course state funds their own public universities with the two non ten thousand dollars per student so we know the problem the problem exists but is there political will what do you do I mean are you going to start taxing endowments of the private universities it's a very big political decision or you have other things like obviously the minimum wage which we know has been in the u.s. like on the decline and actually currently it's lower than it was in 1968 in real terms in real terms because it would have to be adjusted something closer to sixteen seventeen dollars right in sixty which is actually quite striking because obviously the level of income in 1968 was probably at about fifty percent of what is now and we're a full-employment economies which does and it has a lie on the the notion that somehow if you jack up the minimum wage you create unemployment and you know even 1968 was not the kind of oddity or kind of a unique event because actually when you look throughout the 50s and the 60s it was still higher in real terms obviously than it is today so that's another policy so there are many other policies of course people have been talking about that so it is nothing totally original I don't think that all of them would really yield results immediately because if you look at education probably it would not yield results in under ten years but one has to start at some point what about to go back to your point about financial bubbles financialization and the increasing power of big finances seems to play a very very important role both in terms of creating bubbles speculation and obviously the the upshot of being in inequality surely there must be something we can do to downsize finance as an example and that would that have a very affair these it could be an impact on inequality you know I would only add the data which actually show of course high participation of people who are linked with the financial sector in the top one percent and there is also there an issue which we have not really yet solved how we consider the in terms of such people because as you know they are often linked their salaries they are actually officially labouring them and their salaries but they are linked to the performance which is really practically very similar but the return from capital because they get the percentage so that's one issue actually even we cannot be sure if these people are paid as capitalist or they're being paid as workers and certainly some kind of limits would be helpful for reducing inequality but you know it's also as you know a very difficult problem particularly in the UK and the US where the financial sector is very powerful in the UK you know it has also geographical component because London like New York is the center not only for the United States so for the UK which is the Centre for the whole world and provides lots of jobs it writes lots of money so going after that is I think politically difficult you just to come back to a point you you you mention earlier you talked about income versus capital which do you think is more important income inequality or wealth inequality this is such a difficult question do you prefer your own good sand or your older side it's a very difficult question but it has the implications not to make an difficult question but clearly policy different policy implications flow from which one you choose you know I would actually tend to be biased because I work with on income inequality and to say income inequality but I will refrain from being bias and I would say wealth inequality and the reason is that actually if you equalize some way you know wealth endowments which means human capital and actually assisted your own and asses that you inherit then thereby you have really equalized also incomes because you know lots of our difference in income stems from really big differences in our endowment and that endowment it's not only money that maybe I got from you know my parents it's also number of other things that they might have they might have done for me to go to a fancy school to have good connections that are very important so in that sense equalization of endowments I would say or capital is more important and specifically in the area of capital you've done some more of this and also Joe Stiglitz has done a lot night suggesting that the most important variable to isolate his land and the economic rents that flow from the ownership of land what are your thoughts on actually a little bit it's a little bit interesting and ironic it's actually when Piketty of course did his work and he's still doing it it was and there is a paper of his which is called the return of capital because he really refocused our attention on capital there were lots of work about wage inequality in the US and increasing the wage premium among the very highly skilled people and so on but capital was a little bit forgotten what's interesting is that what Stiglitz is now bringing in to some extent may be stimulated by piketty's work it's really the return of land so no no exactly he did that like many years ago but it kind of kind of became forgotten yes you know it was like subsumed it was believed like it was a factor of production from the 19th century but now it's because of the housing because of housing and because of the fact that actually we have obviously land is limited and number of people in my lifetime has gone from like 380 billion to 7 we have really had a huge increase in you know labor over land ratio and maybe in great demand also for land for better you know housing for and then internationalization as you know of the of the real estate market and so on so land it's definitely back and and and leaving aside the the political constraints which come with treating life very different way III wonder whether some forms instead of talking about a global wealth tax maybe a land taxes it's the kind of thing we should be focusing on and the nice thing about land is it's not portable so you can't avoid it and and if you if you say for example taxed on the basis of a land holding or even a a McMansion thing on the basis of square footage of a home you would probably catch a lot of those people would otherwise be able to avoid the tax that's true you notice in the past you used to have as you know the tax on on windows and it was very hard actually to avoid the tax of course the result was actually build two houses with you know very few windows but in this case really I think you would catch lots of people who are very rich and have really expensive property it was of course going back to the idea that was like hundred years more than 100 years ago Henry George had the idea of taxation of land because it was delays this distortionary tax you know if you tax the income or consumption obviously we've changed our behavior a land is essentially something that you can change your behavior on margin but it's basically something that is there it's very visible hard to to hide so you could actually you could tax it so you know that's a I mean cigarettes I think mentioned the other day is a possibility why do you think it has been considered again he said is it purely politics or is it or is there some sort of economic flaw in the thinking behind taxing land yeah I honestly think I'm not quite sure but I honestly think that it was a little bit sort of disregarded because we were really in the world of labour and capital and we were more and more into the world of labor and human capital so called human capital even more a land really seemed like a sort of a throwback to the olden days you know landed aristocracy and so on and I think the biggest contribution was very important because when you look at these graphs with you know capital is a capital over the GDP of the country's rising cup a lot of that is increase in land which is basically increase in housing so we knew obviously that the father was a housing bubble and the prices of housing not only have risen in the US but in Europe and elsewhere but if somehow it was never it seemed to me it was never called somehow put together so it is a problem mistake and oversight of the fashion so it's another it's a classic illustration where new economic thinking it might not be the right way to look at this it's a it's a sometimes it's it's reclaiming from the wisdom of the past we've already mentioned some people like Henry George for example and there's many more solutions we could pass to learn from acid and dealing this problem Branko Milanovic it's a great pleasure to speak to you as always the price I speak to you for this subject and I look forward to receiving your book soon well hopefully we can have you on again and we can discuss it when it comes out thank you very much Marshall thanks a lot it's a pleasure thank you

Channel: New Economic Thinking

Views: 6,226

Rating: 4.8730159 out of 5

Keywords: NET Season 3, INET, Institute For New Economic Thinking (Nonprofit Organization), Marshall Auerback, Branko Milanovic

Id: XbNk-biYXTo

Length: 20min 25sec (1225 seconds)

Published: Sun Nov 15 2015