Economics is about concepts - notions, ideas, some of them rather abstract - and the economics of inequality is one of the most important ones. Thomas Piketty's "Capital in the 21st Century" captured the mood and helped spur a huge debate about its causes and the remedies that policy-makers should or shouldn't adopt. But at 700 pages long, it wasn't an easy read. Branko Milanovic's new book "Global Inequality, A New Approach for the Age of Globalization" comes in at 299 pages and the last 34 of those are the references and the index. It's also a book with great charts, so that the first time I opened it, I just skimmed through the picture with a cup of coffee. For those two reasons alone, anyone interested in the economics of inequality should buy it (and read it).
There is a third, rather more serious reason,to be interested in the book. Thomas Piketty's focus was on how wealth inequality in particular grew in developed economies over time, and what policy-makers should do about it. The market, in his opinion, has and will feed widening inequality. Mr Milanovic's focus is on income not wealth and on global not national trends and is far more relevant to the world we find ourselves in. Martin Wolf reviewed the book more seriously here and talked about in a speech he gave for the Toynbee Foundation a couple of weeks ago.
The chart that Mr Milanovic is most famous for makes an appearance on the second page of the first chapter. It shows changes in income over 20 years plotted against income levels and can be loosely divided into four segments. On the left, the very poor are mostly in Africa (though you can reasonably throw Yemen, Afghanistan, even Pakistan and by now, Syria into this pot as well). The middle of the chart shows income growth for average/below-average income groups many of whom are in newly-developed economies, notably in Asia. The group in the the 70-90th percentiles of global income levels are the poor/median income groups in developed western economies (they're being left behind) and the far right grouping is the top 5%, or the 1%.
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The second chart shows the distribution of incomes in 1998 and 2011. Average incomes have gone up, but are still low by the standards of developed western economies. And the lack of growth in incomes in the 20-40,000 (2005) dollars per annum range is very apparent.
Apart from suggesting this is a book worth reading, I'll make a couple of observations. The first is that the reduction in global inequality levels isn't evenly-distributed; a lot of people, a lot of whom live on the other side of the Mediterranean, have been left behind. And secondly, the political debate in developed economies is going to be shaped by how the lack of growth in median/below-median incomes is tackled.
My generation has grown up with the effects of booming trade - imported goods are cheaper and industries which can't compete in the global market-place have withered. The Philips Curve has creaked and groaned in the face of a global labour market and the profit share of GDP has boomed on the back of lower labour costs. As the UK debates how (or even, whether) to keep the last bits of its steel industry alive, the issue hasn't gone away but now the main talking point is immigration, almost everywhere. It's the single biggest political issue in both Europe and the US. It fuels the 'Brexit' voters' ranks, it holds up support for Nigel Farage, Marine Le Pen and of course, Donald Trump. Meanwhile, those 1988-2008 charts don't even try to capture earnings gap that years of QE have opened up.
The failure of developed economies to tackle the humanitarian crisis in Syria (or Libya) before mass migration took over is miserably depressing. The response to the tide of refugees arriving on our shores over the last year, equally so. But even beyond the conflict zone, migration is globalisation's response to global economic inequality. The poor and oppressed of the world are going to go on moving and between them, the advance of technology and the aftermath of the global commodity boom, they'll go on fuelling inequality within developed economies and all the political baggage that comes with that. Maybe that won't result in Trump becoming President, or the UK voting to leave the EU, or Marine Le Pen making a serious push for power. But without structural reform aimed at boosting the earning power of median income earners in developed economies, major victory for an anti-immigration, anti-free trade, anti-liberal party in a developed economy near you and me, is inevitable within the next 5 years or so.
Branko Milanovic doesn't make friends with all his opinions. But then, nor does Thomas Piketty and that hasn't stopped him from becoming an economics superstar. Income inequality is more important than wealth inequality and global inequality is more interesting in a global economy than only looking at national trends. Meanwhile, as for forecasts of median wage growth in high-income economies, well that's going to be a function of political choices, rather than Phillips Curves, isn't it!
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