The Tale of Rising Inequality Turned Out to Be Wrong
The conventional wisdom about the global economy is that the rich have been getting richer and the poor have been getting poorer. What if that isnt true? D uring the Great Recession, public discourse about the economy underwent something of a Great Disappointment. For much of the countrys history, most Americans assumed that the future would bring them or their descendants greater affluence. Despite periodic economic crises, the overall story seemed to be one of progress for every stratum of the population. Those expectations were largely borne out: The standard of living enjoyed by working-class Americans for much of the mid-20th century, for example, was far superior to that enjoyed by affluent Americans a generation or two earlier. But after the 2008 financial crisis, those assumptions were upended by a period of intense economic suffering coupled with a newfound interest among economists in the topic of inequality. Predictions of economic decline took over the conversation. America, a country long known for its inveterate optimism, came to dread the futurein which it now appeared that most people would have less and less. Adam Ozimek: The simple mistake that almost triggered a recession Three arguments provided the intellectual foundation for the Great Disappointment. The first, influentially advanced by the MIT economist David Autor, was that the wages of most Americans were stagnating for the first time in living memory. Although the income of average Americans had roughly doubled once every generation for most of the previous century, wage growth for much of the population began to flatline in the 1980s. By 2010, it looked as though poorer Americans faced a future in which they could no longer expect any real improvement in their standard of living. The second argument had to do with globalizations impact on the worldwide distribution of income. In a graph that came to be known as the elephant curve, the Serbian American economist Branko Milanovic argued that the worlds poorest people were experiencing only minor income growth; that the middle percentiles were benefiting mightily from globalization; that those in the upper-middle segmentwhich included many industrial workers and people in the service industry in rich countries, including Americahad seen their incomes stagnate; and that the very richest were making out like bandits. Globalization, it seemed, was a mixed blessing, and a distinctly concerning one for the bottom half of wage earners in industrialized economies such as the United States. The final, and most sweeping, argument was about the nature and causes of inequality. Even as much of the population was just holding its own in prosperity, the wealth and income of the richest Americans were rising rapidly. In his 2013 surprise best seller, Capital in the Twenty-First Century , the French economist Thomas Piketty proposed that this trend was likely to continue. Arguing that the returns on capital had long outstripped those of labor, Piketty seemed to suggest that only a calamitous event such as a major waror a radical political transformation, which did not appear to be on the horizoncould help tame the trend toward ever-greater inequality. The Great Disappointment continues to shape the way many Americans think about the current and future state of the economy. But as the pandemic and the rise of inflation have altered the world economy, the intellectual basis for the thesis has begun to wobble. The reasons for economic pessimism have started to look less convincing than they once were. Is it time to revise the core tenets of the Great Disappointment? O ne of the mos t prominent labor economists in the U.S., Autor has over the past decade provided much of the evidence regarding the stagnation of American workers incomes, especially for those without a college degree. The U.S. economy, Autor wrote in a highly influential paper in 2010, is bifurcating. Even as demand for high-skilled workers rose, demand for middle-wage, middle-skill white-collar and blue-collar jobs was contracting. Americas economy, which had once provided plenty of middle-class jobs, was splitting into a highly affluent professional stratum and a large remainder that was becoming more immiserated. The overall outcome, according to Autor, was falling real earnings for noncollege workers and a sharp rise in the inequality of wages. Autors past work on the falling wages of a major segment of the American workforce makes it all the more notable that he now sounds far more optimistic. Because companies were desperately searching for workers at the tail-end of the pandemic, Autor argues in a working paper published earlier this year, low-wage workers found themselves in a much better bargaining position. There has been a remarkable reversal in economic fortunes. Disproportionate wage growth at the bottom of the distribution reduced the college wage premium and reversed the rise in aggregate wage inequality since 1980 by approximately one quarter, Autor writes. The big winners of recent economic trends are precisely those groups that had been left out in preceding decades: The rise in wages was particularly strong among workers under 40 years of age and without a college degree. Even after accounting for inflation, Autor shows, the bottom quarter of American workers has seen a significant boost in income for the first time in years. The scholar who previously wrote about the polarization in the U.S. workforce now concludes that the American economy is experiencing an unexpected compression. In other words, the wealth gap is narrowing with surprising speed. A utor is not the only leading economist who is calling into doubt the underpinnings of the Great Disappointment. According to Milanovic, his elephant curve proved so influential in part because it confirmed fears many people had about the effects of globalization. His famous graph was, he now admits , an empirical confirmation of what many thought. He is no longer so sure about that piece of conventional wisdom. A few years ago, Milanovic set out to update the original elephant curve, which was based on data from 1988 to 2008. The result came as a shocka positive one. Once Milanovic included data for another decade, to 2018, the curve changed shape. Instead of the characteristic rise, fall, rise again that had given the curve its viral name, its steadily falling gradient now seemed to paint a straightforward and much more optimistic picture. Over the four decades he now surveyed, the incomes of the poorest people in the world rose very fast, those of people toward the middle of the distribution fairly fast, and those of the richest rather sluggishly. Global economic conditions were improving for nearly everyone, and, contrary to conventional wisdom, it was the most needy, not the most affluent, who were reaping the greatest rewards. In a recent article for Foreign Affairs , Milanovic goes even further. Were frequently told, he writes, that we live in an age of inequality. But when you look at the most recent global data, that turns out to be false: In fact, the world is growing more equal than it has been for over 100 years. T o this day , Piketty remains the patron saint of the Great Disappointment. No thinker is invoked more often to justify the theory. But even Pikettys pessimistic diagnosis, made a decade ago, has come to look much less dire. In part, this is because Pikettys work has come in for criticism from other economists. According to one influential line of argument, Piketty mistook why returns on capital were higher than returns to labor in many industrialized countries in the decades after World War II. Absent concerted pressure to prevent this, Piketty had argued, the nature of capitalism would always favor billionaires and giant corporations over ordinary workers. But according to Matthew Rognlie, an economist at Northwestern University, Pikettys explanation for why inequality increased during that period was based on a misinterpretation of the data. The outsize returns on capital during the latter half of the 20th century, Rognlie argues, were mainly due to the huge growth in house prices in metropolitan centers such as Paris and New York. If returns on capital were larger than returns to labor over this period, the reason was not a general economic trend but specific political factors, such as restrictive building codes. In addition, the main beneficiaries were not the billionaires and big corporations on which Piketty focused; rather, they were the kinds of upper-middle-class professionals who own the bulk of housing stock in major cities. Economists continue to debate whether such criticisms hit the mark. But even as Piketty defended his work, he himself started to strike a more optimistic note about the long-term structure of the economy. In his 2022 book, A Brief History of Equality , he talks about the rise of inequality as an anomaly. At least since the end of the eighteenth century there has been a historical movement towards equality, he writes. The world of the 2020s, no matter how unjust it may seem, is more egalitarian than that of 1950 or that of 1900, which were themselves in many respects more egalitarian than those of 1850 or 1780. Like Autor and Milanovic, Piketty seems to have concluded that the thesis of the Great Disappointment was, in key respects, wrong. I t would be premature to put worries about stagnating incomes or rising inequality to rest. The three former prophets of doom all emphasize the role that social and political factors play in shaping economic outcomes. As a result, they see recent wage growth for poorer Americans as caused in part by the expansionary economic policies that both Donald Trump and Joe Biden pursued in response to the pandemic. Similarly, the huge gains that some of the poorest people in the world have made in recent decades derive in part from their governments efforts to use industrial policy to shape the impact of globalization on their countries. Whether, as Piketty has argued, the returns on capital will in the long run outstrip the returns to labor depends on political decisions about taxation and redistribution, about the strength of trade unions and the rules governing labor markets. Oren Cass: The labor-shortage myth Recent good news about our economic prospects should not lead us to conclusions that could quickly turn out to be overexuberant. But we should also avoid perpetuating an instinctive pessimism that looks less and less warranted. Although pessimism may seem smart or shrewd, cynicism about our collective ability to build a better world only makes it harder to win support for the kind of economic policies we need to create that future. Progressives sometimes seem to believe that they can mobilize people by making the future look scary. But when voters feel threatened, it is usually unscrupulous reactionaries who make unrealistic promises and scapegoat outsiders who benefit. Wage stagnation and rising inequality are still real dangers about which we must remain vigilantbut the fact that a better economic future has come to look a good deal more achievable should be cause for full-throated celebration.