TheGlobalEconomyandInequality

JosephE.StiglitzHongKong, TheChineseUniversityofHongKongMay2016

Enormousgrowthininequality• Especially inUS,andcountries thathavefollowedUSmodel

• Multipledimensions ofinequality• Moremoneyatthetop—especially thevery top• Morepeople inpoverty• Eviscerationofthemiddle• Inequalities inwealthexceed those inincome• Inequality inhealth—especially largeinUS• Inequality inaccesstojustice

Source:ThomasPikettyandEmmanuelSaez,"IncomeInequalityintheUnitedStates,1913-1998"QuarterlyJournalofEconomics,118(1),2003,1-39(LongerupdatedversionpublishedinA.B.AtkinsonandT.Pikettyeds.,OxfordUniversityPress,2007)(TablesandFiguresUpdatedto2013inExcel format,January2015).Seriesbasedonpre-taxcashmarketincomeincluding realizedcapitalgainsandexcludinggovernmenttransfers.

0

5

10

15

20

25

30

1913

1916

1919

1922

1925

1928

1931

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

USTop1%incomeshare-includingcapitalgains

Source:EmmanuelSaez andGabriel Zucman,2014,"Wealth InequalityintheUnitedStatessince1913:Evidence fromCapitalized IncomeTaxData"NBERWorkingPaper,October,reviseandresubmit QuarterlyJournalofEconomics.

Stagnation:U.S.medianhouseholdincome(constant2014US$)

Source:U.S.CensusBureau

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1975 1980 1985 1990 1995 2000 2005 2010

2014:$53,657

Declineinmedianincomeoffull-timemaleworker

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

RealMedianIncomeofFull-TimeMaleWorker,1965-2014

U.S.minimumwage,1938-2012

Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm

InequalityinAsia:ontherisesinceearly1990s

Regionalcomparison:IncomeInequality

Mostinvidiousaspect:inequalityinopportunity

• Notasurprise:systematicrelationshipbetweeninequalityinincomes(outcomes)andinequalityofopportunity

Incomeinequalityandearningsmobility

Source:“UnitedStates,TacklingHighInequalitiesCreatingOpportunitiesforAll”,June2014,OECD.

Globalinequality• AlmostallOECDcountrieshaveseenincreased inequality inlast30years

• Thetrendaroundtheworld issomewhatmixed,butremains aconcernalmosteverywhere

Gini changesinOECD

Source:OECD2015,InItTogether:WhyLessInequalityBenefitsAll,http://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf

Globalinequality:Ginis worseinmanycountries,late2000svs.1980s

Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html

Globalinequality:incomegrowthbypercentile,1988-2008

Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html

Globalinequality:incomegrowthbypercentile• Whatprevious chartmeans isthat,globally:• Veryrich—those atfarrightofgraph—haveseen theirincomesgrowatahighrate

• DevelopingAsianmiddleclass(especially China)hasalsogrownatafastrate.Thisisrepresented bythose inmiddle-left ofthegraph.

• Theincomesoftheworld’sverypoor—those onthefarleftofthechart—have notkeptpace.

• Advancedcountrymiddleclassincomes—those around the80thpercentile—have stagnatedcompletely

• (ThisistheanalysisthatBranko Milanovic hasputforward)

Majorchangesinunderstandingsofinequality• Trickledowneconomicsdoesn’twork• Thereneverwasgoodtheoryorempiricalevidenceinsupport• Inaway,ObamaadministrationandFedtrieditagain:bail-outtobankswassupposedtobenefitall;QEwouldworkbyincreasingstockmarketprices,benefittingmostlythoseattop

• “Repeal”ofKuznets law• WasperiodafterWWII,the“goldenageofcapitalism,”anaberration,theresultofthesocialcohesionbroughtonbythewar?• Withtheeconomynowreturning tothenaturalstateofcapitalism?

• Oristheincreaseininequalityafter1980aresultofachangeinpolicies?

Majorchangesinunderstandingsofinequality• Largedifferences inoutcomes/opportunities amongadvancedcountries• Suggestingthatitispolicies,notinexorable economicforces thatareatplay

• Inequality isachoice• Aresultofhowwestructure theeconomythroughtaxandexpenditure policies, throughourlegalframework,ourinstitutions,even theconductofmonetarypolicy• Allofthese affectmarketpower,bargainingpowerofdifferent

groups• Evenaccesstojobsandabletoparticipate inlabormarket• Resulting indifferentdistributions ofincomeandwealthbeforetaxes

andtransfers

• Beginningaboutathirdofacentury ago,webeganaprocessofrewriting therules• Loweringtaxesandderegulationwassupposed toincreasegrowthandmakeeveryone betteroff

• Infact,onlytheverytopwasbetteroff—incomes ofthereststagnated,performance oftheeconomyasawholeslowed

• Resulting inbasicnecessities ofamiddle classsocietybeingincreasingly outofreachoflargeproportionofpopulation

• Retirement security,educationofone’schildren,abilitytoownahome

Majorchangesinunderstandingsofinequality• “Repeal”ofOkun’s Law• Economieswithlessinequalityandless inequalityofopportunityperformbetter

• 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 public investments ininfrastructure,technology,education,etc.

• Asdemocraticprocesses areskewed(e.g.inU.S.),policies thatprotect interestsandrentsofwealthiest replacethosethatsupportbroad-basedgrowth

• Erosionoftrust

Majorchangesinunderstandingsofinequality• Wecanaffordtohavemoreequality• Infact,itwouldhelpoureconomy• Somemuchpoorereconomieshavechosenmoreequalitarianpolicies

• Becauseinequality istheresultofpolicies, itisshapedbypolitics• Economicinequalitygetstranslated intopoliticalinequality• Politicalinequalityleadstoeconomicinequality• Viciouscircle

Broaderconsequences• Undermining democracy

• Dividing society

• Especiallywhen inequalitiesareonracialandethniclines

Alternativeinterpretationsofgrowthininequality1. Marketforces--Basedoncompetitivemarkets--Changes in

supply anddemand fordifferent factorsjustturnedoutbadlyforpoor:

(a)skillbiasedbiased technological change• Overwhelming impactofincreasednumberofeducatedindividuals

Unpersuasive• Skilledworkers’wagesgoingdown• Doesn’texplain gapbetween averageproductivityandaveragewages

• Doesn’texplainwealthinequality

Competitivemarketexplanations(b) Globalization• Predictedbystandardtheory• Evidence thatithasplayedanespecially importantrolesince2000

(c) Intergenerational transmissionofadvantage• Richleavetheir childrenwithmorehumanandfinancialcapital• Equilibriumwealthdistributionreflects balancebetween betweencentrifugalandcentripetal forces

• Increased inequalityreflects increasedintergenerationaltransmission—an upsettingofprevious balance

• Contrarytoprincipleofequalopportunity

Alloftheseareaffectedbypolicy,byrulesofgame• Incentives forskilledbiased technological changevs.resourcesavingtechnological change• Fedpolicy—lowinterestrates—encouragecapitalintensivetechnologies

• Absenceofclimatechangeunderminesincentivesforresourcesavingtechnologicalchange

• Thewaywestructured globalizationencouragedoutsourcingofjobs• Especiallyinabsenceof industrialpolicies

• Andweakenedbargainingpowerofworkers• Justaswewereweakeningunions

• Regressive taxationandweakeningpublicschools leadstoincreasedintergenerational transmission ofadvantage

Alternativeexplanation:increaseinrents• Increasedmonopoly, monopsony powershiftsdistributionofincomeandwealthtothosewiththesepowers

• Butalsootherreasonsforanincreaseofrent—with increasedincomeandwealthtothosewhocontrolassetsgeneratingrents• Landrents• Intellectualproperty rents• Rentextraction fromgovernment• Rentextraction fromconsumers

Oureconomyismarkedbyincreasingrents• Somearesultoftechnology• Networkeffects

• Somearesultofchanges ineconomy• Increasedroleofservices,muchofwhichislocalized,withlimitedcompetition

• Increasedurbanlandrents• Somearesultofpolicies• ChangeinIPRlaws• Deregulation—allowingextractionofmorerentsfromgovernmentandconsumers

• Somearesultofmarket“innovation”• Betterwaysofexploitingconsumers

Piketty’sexplanationisavariantofintergenerationaltransmissionhypothesis• Twoclasses,capitalistssaveeverything, wealth growsatr,returnoncapital• Workers savelittle

• Withr>g,growthofeconomy, ifrdoesnotfall,shareofincomeofcapitalistsgrows

TechnicalcritiqueofPiketty• Savingsrateofcapitalistsfarlessthan1• Returnoncapitalendogenous, andshouldbedecliningascapitalistsaccumulate• Modelsneedtohavemacro-/micro- consistency• IfWwereK(wealthandKweresame), thenlawofdiminishingreturnswouldimplyrwouldfall

• Andwageswouldrise• Infact,virtually allmodels showthatinlongrunsr <g:Piketty’sresultcannothold• Infact,Piketty’smodelhadbeenwell-studied inoldergrowthliterature

WhatPiketty’smodelcannotexplain• Growthinlife-cycle wealth• Gapbetweenaveragewagesandproductivity

• Eveniftechnical change isskill-biased

Failuretoexplainstylizedfacts• Canonlyexplain½to¾ofgrowthinwealth income ratiobynationalsavings

• Wealth“residual”explainedbestbygrowthofrents• Landrents• Exploitation rents(monopolypower,political power)• Intellectual propertyrents

• Wealth cangoupeven if“K”isgoingdown• Andmanyincreases inwealthassociatedwithrents leadtodecreased productivity

Consequencesofinequalityfortheglobaleconomy• Growthin2015weakest sinceGlobalFinancialCrisisandoneofpoorestperformances inrecentdecades; 2016ontrackforbeingequallyweak

• Underlying problem: lackofglobalaggregatedemand

• Oneofreasons: highlevelofinequality

• Inequalityalsoaffects aggregatedemandindirectly

• Increases instability

• Realization ofthiscreatesuncertainty

• Uncertainty leads tolowerinvestment

Newdimensionsofinequality• Inmoderneconomy,keydistinctionisnotsomuchbetween debtorsandcreditors,butbetween lifecyclesaversandinheritedwealth• Differencesinportfoliocomposition

• QEhasbenefitsinheritedwealthatexpenseoflifecyclesavers,contributingtoinequality

• Atsametime,implyingQEmayhavelittleeffectonaggregatedemand—oradverseeffect

• Adverseeffectonconsumption ofelderly

• Adverseeffectonconsumption of thosesavingforretirement (othertargetsavers)

• Mayoutweigh slightpositiveeffectoninvestment

Concludingcomments• Addressing inequality isavitalstepinbringingglobal economybacktohealth

• Incremental changeswillnotsuffice

• There isacomprehensive agendawhichwillsignificantlyreduceinequalityandincreaseequalityofopportunity

• Urgency—decisions todaywillaffectinequality decades later

• Keyisrewritingtherulesonceagain

• Realquestion isnoteconomics: itispolitics