The Return of the Gilded Age, Ctd.

By Benjamin Landy

Although we primarily looked at the United States yesterday, increasing income inequality is undeniably a global trend. Economists and politicians frequently cite the inexorable process of “globalization” as the driving mechanism for this change. As low-wage labor in Asia and the third world became available to world markets, multinational corporations had little reason to maintain their manufacturing bases in America and Europe. The blue-collar jobs that supported much of the middle class disappeared overseas, causing wages to decline for less educated workers. A corollary hypothesis is that we have experienced “skill-biased technological change,” with advances in information technology shifting demand toward highly skilled and better educated labor. The profits from consequent gains in productivity likewise filtered to the top.

(Source: Piketty and Saez, 2005)

However, while the entire world has been affected by globalization, not all first world nations have suffered equally. In fact, the increase in income inequality in several European countries has been mild in comparison to the United States, suggesting that the economic impact of globalization can be mitigated by effective policy, including taxes and social transfers.

Although we will be looking more closely at the so-called “social market economies” of Europe in later posts, it is worth noting here that the higher taxes and lower income inequality of the SMEs has not adversely affected their GDP growth, as is often claimed would happen in the United States if we were to adopt similar policies. In his 2005 “Inequality and Prosperity: Social Europe vs. Liberal America” (a Century Foundation book), Princeton University professor Jonas Pontusson demonstrated that GDP growth rates for European SMEs actually outpaced liberal market economies (LMEs) like the United States from 1960 to 1980, and remained at nearly the same rate through 2000.

The above graph, which compares national Gini coefficients (a measure of inequality wherein ‘1’ represents all the money in the economy going to one individual, and ‘0’ indicates complete equality), shows that the United States is by far the most unequal society of its peers. (Social scientists often cite a Gini coefficient between 0.4 and 0.5 as a tipping point for potential social instability, though no such fears have yet manifested themselves in the United States.) Although several nations have comparable levels of inequality before taxes and transfers — including a few with even higher levels of inequality, like Italy and France – the United States continues to do the least to redistribute wealth to the poor and middle class.

Reposted from my Graph of the Day Series at Taking Note.