This week, international leaders from business and politics meet for the 47th World Economic Forum in Davos, Switzerland, to discuss pressing global issues (and improve their networks). In the face of inequality, one of the topics that is on top of this year’s agenda is to design new economic systems that ensure more equally distributed and inclusive economic growth. The organisers of the forum have recognised the disrupting role that the Fourth Industrial Revolution will play in these developments. The importance of issues of inequality has been emphasised by new findings and data that have been published in recent weeks, although situations differ substantially between countries and available data is still highly imperfect. Recent political developments might spell trouble for any collective international efforts to curb inequality.
At the beginning of this year, a new, more user-friendly version of the The World Wealth and Income Database (WID) was launched by Facundo Alvaredo, the recently deceased Tony Atkinson, a pioneer in inequality studies, Thomas Piketty, Emmanuel Saez and Gabriel Zucman. I highly recommend checking out the website and discovering the various visualisations of world inequality data. The creators of the WID presented new findings derived from their data at the ASSA Annual Meeting in Chicago during the first week of this year. Alvaredo et al. (2016) show that the income share of the top earners (the top-1 and top-10 percent) has risen substantially in the US, China and has been stagnant or slightly increasing in France, which is a good representation of West European countries according to the authors, during the last decades. For the data, the authors “combine national accounts, survey, and fiscal data in a systematic manner in order to estimate the full distribution of pre-tax national income”. Note that especially survey data tends to underestimate the level of inequality and that the authors understand their estimates as lower bounds.
The share data shrouds the fact that while in China, the bottom 50 percent average income grew remarkably by 551 percent, during the same time in the US, the income of the bottom half even shrank by one percent. In France, rising inequality has only benefitted the top one percent unevenly and the income of the bottom half increased by 39 percent during the period of observation. (For a visualisation of top one percent income shares and a discussion of income inequality see this article from July.) Depicted are pre-tax income shares (including tax exempt capital income and undistributed profits) and to some extent, the developments have been offset by government transfers.
Alvaredo et al. (2016) further point out that the wealth-to-income ratio has been on the rise in nearly all countries in recent decades. This is a reversal of the development caused by the two World Wars and the subsequent “economic miracle” that led incomes to outgrow wealth for some time. Together with the advancing automisation of large parts of the economy, this could mean that the growing role of capital in the production of goods increasingly threatens the livelihood of countless workers.
Moreover, the growing stock of wealth is distributed highly unevenly. After nearly a century of falling wealth shares of the top one percent, this development has stopped or even reversed itself since the 1980s. The variety of developments suggests that “different country-specific policies and institutions matter considerably”. The data on wealth distribution is highly imperfect, not least due to the lack of political initiative. Alvaredo et al. (2016) conclude that “it is not an easy task to predict whether the observed trend of rising concentration of wealth will continue” since it depends on various complex and interdependent factors such as the savings rate, the rates of return on capital and the progressivity of taxes. They furthermore stress that “policy discussions about rising global inequality should focus on how to equalize the distribution of primary assets, including human capital, financial capital, and bargaining power, rather than merely discussing the ex-post redistribution through taxes and transfers”. This is especially important considering the explosive forces that a left-behind lower class without minimum subsistence means on the one hand or an aggressive confiscating redistribution policy on the other hand could spark. The World Inequality Lab that is responsable for maintaining the WID will publish its first comprehensive World Inequality Report at the end of this year, a thing to look out for.
This week, Oxfam published its “An Economy for the 99%” study in which its concludes that eight men own the same amount of wealth as the poorest half of humanity and that the richest one percent owns more than the rest of the planet. Note that these estimates are based on incomplete and imperfect data provided by the Forbes Billionaires listing and the Global Wealth Databook 2016 published by Credit Suisse (2016). Nevertheless, the numbers could be far off and still be striking and the fact that data on wealth distribution is so fragmentary only illustrates one of the main problems that policy makers need to tackle in the future.
Any development towards more unequal societies will be aggravated by the likely automisation of many tasks in the near future (e.g. Frey & Osborne (2013) estimate that 47 percent of total US employment is at risk). Millions of taxidrivers, truck drivers, assembly line workers and even doctors and lawyers will be rendered uncompetitive by artificial intelligence and ever-improved robots. Without large-scale initiatives to improve education systems and new, internationally inclusive redistributional frameworks, this further shift of productivity towards the high-skilled and the wealthy does not only spell economic trouble. Rising levels of inequality will likely also cause mounting political tension. (On a personal side note, people who have lost their jobs in manufacturing seem to prefer to hear that their jobs have been stolen by foreigners and can be brought back rather than that a robot, which they will not learn to operate in this lifetime, now does their job. Compare the US presidential election map of 2016 with that of 2012 and you might see that this fact has possibly won Trump the election – hint: Rust Belt.)
However, it seems that this year international policy initiatives have become even farther out of reach. The Trump administration that comes into power in the US on Friday so far has interpreted international trade as a zero-sum game and is likely to implement an America-first economic policy, giving low priority to international tax cooperation. The UK chancellor has implied that his country might become the tax haven of Europe as a threat before the Brexit negotiations. And it remains unclear how the troubled European Union might agree on a joint effort to tame tax avoidance and evasion (especially given that its commission’s president has long been blocking EU curbs on tax avoidance during his time as a PM). At this point in time, anything resembling the global capital tax conceived by Piketty (2014) to mitigate growing wealth inequality seems utopian.
And also on the national level, most administrations appear to be of the opinion that no fundamental measures are needed. In the meantime, it will be intriguing to observe how basic income experiments in Finland, the Netherlands and Canada will turn out to affect workers’ incentives and government costs. For economists, it is imperative to gather more and improved data in order to derive meaningful policy implications and to further investigate what the main causes and ramifications of inequality are today and can be in the future. And if there is one positive thing to take away from the current political landscape, it might very well be the fact that it is not lacking large-scale natural economic experiments.
Alvaredo, Facundo, Lucas Chancel, Thomas Piketty, Emmanuel Saez & Gabriel Zucman (2016). Global Inequality Dynamics: New Findings from WID.world. Preliminary version for the AEA 2017 meetings.
Credit Suisse (2016). Global Wealth Databook 2016.
Frey, C. B., & Osborne, M. A. (2013). The Future of Employment: How Susceptible are Jobs to Computerisation?
Hardoon, D. for Oxfam International (2017). An Economy for the 99%. Published by Oxfam GB for Oxfam International.
Piketty, T. (2014). Capital in the 21st Century. Cambridge: Harvard Uni.
written by Jonas