TheGlobalEconomy
andInequality
Joseph E.Stiglitz
Hong Kong, TheChinese UniversityofHong Kong
May2016
Enormousgrowthininequality
• Especially inUS,andcountries thathavefollowed USmodel
• Multiple dimensions ofinequality
•
•
•
•
•
•
Moremoneyatthetop—especially thevery top
Morepeople inpoverty
Evisceration ofthemiddle
Inequalities inwealthexceed those inincome
Inequality inhealth—especially largeinUS
Inequality inaccesstojustice
USTop1%incomeshare-includingcapitalgains
30
25
20
15
10
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
1928
1925
1922
1919
1916
0
1913
5
Source:ThomasPikettyandEmmanuelSaez,"IncomeInequalityintheUnitedStates,1913-1998"Quarterly
JournalofEconomics,118(1),2003,1-39(LongerupdatedversionpublishedinA.B.AtkinsonandT.Pikettyeds.,
OxfordUniversityPress,2007)(TablesandFiguresUpdatedto2013inExcel format,January2015).Seriesbased
onpre-taxcashmarketincomeincluding realized capitalgainsandexcluding governmenttransfers.
Source:EmmanuelSaez andGabriel Zucman,2014,"Wealth InequalityintheUnitedStatessince
1913:Evidence fromCapitalized IncomeTax Data"NBERWorking Paper,October,reviseand
resubmit QuarterlyJournalofEconomics.
Stagnation:U.S.medianhouseholdincome
(constant2014US$)
60,000
55,000
50,000
2014:$53,657
45,000
40,000
35,000
30,000
25,000
20,000
1975
1980
1985
1990
1995
2000
Source:U.S.CensusBureau
2005
2010
Declineinmedianincomeoffull-time
maleworker
RealMedianIncomeofFull-TimeMaleWorker,1965-2014
60,000
55,000
50,000
45,000
40,000
35,000
30,000
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
U.S.minimumwage,1938-2012
Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm
InequalityinAsia:ontherisesince
early1990s
Regionalcomparison:IncomeInequality
Mostinvidiousaspect:
inequalityinopportunity
• Notasurprise:systematicrelationshipbetween
inequalityinincomes(outcomes)andinequalityof
opportunity
Incomeinequalityandearnings
mobility
Source:“UnitedStates,TacklingHighInequalitiesCreatingOpportunitiesforAll”,
June2014,OECD.
Globalinequality
• AlmostallOECDcountrieshaveseenincreased inequality in
last30years
• Thetrendaroundtheworld issomewhat mixed, butremains a
concernalmosteverywhere
Gini changesinOECD
Source:OECD2015,InItTogether:WhyLessInequalityBenefitsAll,http://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1Overview-Inequality.pdf
Globalinequality:Ginis worseinmany
countries,late2000svs.1980s
Source:Branko Milanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:
incomegrowthbypercentile,1988-2008
Source:Branko Milanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:
incomegrowthbypercentile
• Whatprevious chartmeans isthat,globally:
• Veryrich—those atfarrightofgraph—have seen theirincomes
growatahighrate
• Developing Asianmiddleclass(especially China)hasalsogrownat
afastrate.Thisisrepresented bythose inmiddle-left ofthegraph.
• Theincomes oftheworld’sverypoor—those onthefarleftofthe
chart—have notkeptpace.
• Advanced countrymiddleclassincomes—those around the80th
percentile—have stagnated completely
• (ThisistheanalysisthatBranko Milanovic hasputforward)
Majorchangesin
understandingsofinequality
• Trickledowneconomicsdoesn’t work
• Thereneverwasgoodtheoryorempiricalevidenceinsupport
• Inaway,ObamaadministrationandFedtrieditagain:bail-outto
bankswassupposedtobenefitall;QEwouldworkbyincreasingstock
marketprices,benefittingmostlythoseattop
• “Repeal” ofKuznets law
• WasperiodafterWWII,the“goldenageofcapitalism,”anaberration,
theresultofthesocialcohesionbroughtonbythewar?
• Withtheeconomy nowreturning tothenaturalstateofcapitalism?
• Oristheincreaseininequalityafter1980aresultofachangein
policies?
Majorchangesin
understandingsofinequality
• Largedifferences inoutcomes/opportunities amongadvanced
countries
• Suggestingthatitispolicies, notinexorable economicforces that
areatplay
• Inequality isachoice
• Aresult ofhowwestructure theeconomythroughtaxand
expenditure policies, throughourlegalframework, our
institutions, even theconductofmonetary policy
• Allofthese affectmarketpower,bargainingpowerofdifferent
groups
• Evenaccesstojobsandabletoparticipate inlabormarket
• Resulting indifferentdistributions ofincomeandwealthbeforetaxes
andtransfers
• Beginning aboutathirdofacentury ago,webeganaprocess
ofrewriting therules
• Loweringtaxes andderegulation wassupposed toincrease
growthandmakeeveryone better off
• Infact,onlytheverytopwasbetter off—incomes oftherest
stagnated, performance oftheeconomyasawholeslowed
• Resulting inbasicnecessities ofamiddle classsocietybeing
increasingly outofreachoflargeproportionofpopulation
• Retirement security, education ofone’s children, abilitytoowna
home
Majorchangesin
understandingsofinequality
• “Repeal” ofOkun’s Law
• Economies withlessinequality andless inequalityofopportunity
perform better
• Equalityandeconomicperformance arecomplements
• Manyreasons forthis
• Lackofopportunitymeansthatwearewastingmostvaluableresource
• Macro-economic
• Instability:Linkbetweeninequalityandfrequencyofcriseshasbeenshown
byIMFaswellasothers.
• Weaker growth
• Richestconsumeasmallerproportionoftheirincomesthanthepooror
middle
• Greaterequalitywouldstrengthenaggregatedemand
• Smallandmedium-sizedbusinesses,buoyedbystrongmiddleclass,are
driversofeconomicgrowth
• Weakergrowth(cont’d)
• Politicaleconomy
• Harderfordividedsociety tomakeneeded publicinvestments in
infrastructure,technology,education,etc.
• Asdemocraticprocesses areskewed(e.g.inU.S.),policies that
protectinterestsandrentsofwealthiest replacethosethatsupport
broad-basedgrowth
• Erosionoftrust
Majorchangesin
understandingsofinequality
• Wecanaffordtohavemoreequality
• Infact,itwouldhelpoureconomy
• Somemuchpoorer economies have chosenmoreequalitarian
policies
• Becauseinequality istheresultofpolicies, itisshaped by
politics
• Economicinequalitygetstranslated intopoliticalinequality
• Politicalinequalityleadstoeconomicinequality
• Viciouscircle
Broaderconsequences
• Undermining democracy
• Dividing society
• Especiallywhen inequalities areonracialandethniclines
Alternativeinterpretationsof
growthininequality
1. Marketforces--Based oncompetitive markets--Changes in
supply anddemand fordifferent factorsjustturnedout
badlyforpoor:
(a)skillbiased biased technological change
• Overwhelming impactofincreased number ofeducated
individuals
Unpersuasive
• Skilled workers’ wagesgoingdown
• Doesn’texplain gapbetween averageproductivityand
averagewages
• Doesn’texplain wealthinequality
Competitivemarket
explanations
(b) Globalization
• Predicted bystandardtheory
• Evidence thatithasplayedanespecially importantrolesince2000
(c) Intergenerational transmission ofadvantage
• Richleavetheir childrenwithmore humanandfinancialcapital
• Equilibriumwealth distributionreflects balancebetween between
centrifugal andcentripetal forces
• Increased inequalityreflects increasedintergenerational
transmission—an upsetting ofprevious balance
• Contrarytoprinciple ofequalopportunity
Alloftheseareaffectedby
policy,byrulesofgame
• Incentives forskilledbiased technological changevs.resource saving
technological change
• Fedpolicy—lowinterestrates—encouragecapitalintensive
technologies
• Absenceofclimatechangeunderminesincentivesforresourcesaving
technologicalchange
• Thewaywestructured globalizationencouraged outsourcing ofjobs
• Especiallyinabsenceof industrial policies
• Andweakenedbargainingpowerofworkers
• Justaswewereweakening unions
• Regressive taxationandweakening publicschools leadstoincreased
intergenerational transmission ofadvantage
Alternativeexplanation:
increaseinrents
• Increased monopoly, monopsony powershiftsdistribution of
income andwealthtothosewiththesepowers
• Butalsootherreasonsforanincreaseofrent—with increased
income andwealthtothosewhocontrolassetsgenerating
rents
•
•
•
•
Landrents
Intellectual property rents
Rentextraction fromgovernment
Rentextraction fromconsumers
Oureconomyismarkedby
increasingrents
• Somearesultoftechnology
• Networkeffects
• Somearesultofchanges ineconomy
• Increasedroleofservices,muchofwhichislocalized,withlimited
competition
• Increasedurbanlandrents
• Somearesultofpolicies
• ChangeinIPRlaws
• Deregulation—allowingextractionofmorerentsfromgovernment
andconsumers
• Somearesultofmarket “innovation”
• Betterwaysofexploitingconsumers
Piketty’sexplanationisavariantofintergenerational
transmissionhypothesis
• Twoclasses,capitalistssaveeverything, wealth growsatr,
returnoncapital
• Workers savelittle
• Withr>g,growthofeconomy, ifrdoesnotfall,shareof
income ofcapitalistsgrows
TechnicalcritiqueofPiketty
• Savingsrateofcapitalistsfarlessthan1
• Returnoncapitalendogenous, andshould bedeclining as
capitalistsaccumulate
• Models needtohavemacro-/micro- consistency
• IfWwereK(wealth andKwere same), thenlawofdiminishing
returns wouldimplyrwouldfall
• Andwageswouldrise
• Infact,virtually allmodels showthatinlongrunsr <g:
Piketty’sresultcannothold
• Infact,Piketty’smodelhadbeen well-studied inoldergrowth
literature
WhatPiketty’smodelcannot
explain
• Growthinlife-cycle wealth
• Gapbetween averagewagesandproductivity
• Eveniftechnical changeisskill-biased
Failuretoexplainstylizedfacts
• Canonly explain½to¾ofgrowthinwealth income ratioby
nationalsavings
• Wealth“residual” explained bestbygrowthofrents
• Landrents
• Exploitation rents(monopolypower,political power)
• Intellectual propertyrents
• Wealth cangoupeven if“K”isgoingdown
• Andmanyincreases inwealthassociated withrents leadto
decreased productivity
Consequencesofinequalityfor
theglobaleconomy
• Growthin2015weakest sinceGlobalFinancialCrisisandone
ofpoorestperformances inrecentdecades; 2016ontrackfor
beingequally weak
• Underlying problem: lackofglobalaggregatedemand
• Oneofreasons: highlevelofinequality
• Inequality alsoaffects aggregate demandindirectly
• Increasesinstability
• Realization ofthiscreatesuncertainty
• Uncertaintyleads tolowerinvestment
Newdimensionsofinequality
• Inmodern economy,keydistinctionisnotsomuchbetween debtors
andcreditors, butbetween lifecyclesavers andinherited wealth
• Differencesinportfoliocomposition
• QEhasbenefitsinheritedwealthatexpenseoflifecyclesavers,
contributingtoinequality
• Atsametime,implyingQEmayhavelittleeffectonaggregate
demand—oradverseeffect
• Adverseeffectonconsumption of elderly
• Adverseeffectonconsumption of thosesavingforretirement (other
targetsavers)
• Mayoutweigh slightpositive effectoninvestment
Concludingcomments
• Addressing inequality isavitalstepinbringingglobal economy
backtohealth
• Incremental changeswillnotsuffice
• There isacomprehensive agenda whichwillsignificantlyreduce
inequalityandincrease equalityofopportunity
• Urgency—decisions todaywillaffectinequality decades later
• Keyisrewritingtherulesonceagain
• Realquestion isnoteconomics: itispolitics