Income Inequality

(Bloomberg) -- The pope has deplored it. It’s shifted Chinese economic goals and helped fuel populist political movements around the world. Even some of the world’s billionaires fear what might happen if it continues to rise. It is income inequality: a gap between rich and poor that has been widening in many countries for a generation. The term is often used imprecisely as a catch-all description of various related ills including poverty, job stagnation, class division and social disorder. Yet there’s much debate among economists about the impact of inequality itself and its relationship to prosperity. 

The Situation

Unequal distribution of wealth increased in every region of the world from 2007 to 2016. For the U.S., the average income of the poorest fifth of all households rose 12.1 percent to $12,943, while income of the wealthiest 5 percent saw a 30.6 percent increase to $375,088. The CIA World Factbook ranks Lesotho and South Africa as least equal among 157 nations, based on the Gini index, which measures family income distribution within a population. China is No. 29, with its disparities driven in part by rapid urbanization: Rural residents who receive less schooling and reap lower returns from education earn just a third of their urban counterparts. The U.S. is No. 39; Jersey, one of the Channel Islands, is the most equal, followed by the Faroe Islands north of Scotland, Kosovo and Slovakia. Researchers have linked rising inequality to greater political instability, sluggish wage growth, slow productivity gains, reduced investment and even to longer commutes and higher divorce rates. While it’s difficult to disentangle all the reasons populist politicians have won office in places such as the U.S., Mexico and Italy in recent years, their ability to tap into anxiety among people who see the economy as stacked against them has surely played some role.

The Background

After the Great Depression of the 1930s, the share of national wealth held by the richest citizens in many developed nations fell. But since the 1970s, it’s grown. Economists see lots of possible reasons. The export of manufacturing jobs from rich countries to poorer ones was often accompanied by widening inequality at both ends, with a gap arising in the latter between newly enriched factory workers and unskilled laborers. Computers and robots began handling tasks once done by lower-skilled employees, putting many out of a job even as companies paid premiums for highly trained staff. Many nations pulled back on rules protecting workers to make their labor markets more attractive for investment, which weakened union membership and bargaining power. In his 2014 bestseller “Capital in the Twenty-First Century,” French economist Thomas Piketty argued that unchecked capitalism concentrates wealth because the rate of return on capital generally exceeds the growth rate of labor income. The decades in the mid-20th century when inequality fell were the exception, not the rule, he concluded.

The Argument

Some scholars contend that democracy itself suffers when disparity grows, as the rich use their power and influence to shape public policy in their favor. Proposals to narrow disparities include increasing the minimum wage, instituting a universal basic income, boosting access to education and raising taxes on the affluent, inheritances and investments. Others see scant proof that inequality restricts opportunity. Instead, they say, it can act as an incentive for people to innovate, take risks, produce and create wealth. Some argue consumption, rather than income, is a better way to gauge quality of life, and people across the economic spectrum now consume more than in the past. Inequality isn’t necessarily a zero-sum game; when the 2009 recession shrank the stock portfolios of wealthy Americans, briefly reducing inequality, the poor did not get richer. New York City has one of the biggest rich-poor gaps in the U.S., but it has the lowest poverty rate among the nation’s five largest cities. Since 1990, the World Bank says, more than 1 billion people, many in India and China, have escaped extreme poverty even as inequality worsened globally. While greater disparity has been found to slow economic expansion in high-income countries, it’s boosted growth in low-income ones. And even though wealth per capita in developed nations is more than 50 times greater than in developing economies, the gap between nations could narrow in the future as emerging markets supply more skilled workers to the world’s labor force.

The Reference Shelf

• OECD data on income distribution and poverty.
• The World Wealth & Income Database grew out of data gathered for Thomas Piketty’s book, “Capital in the 21st Century.”
• Nick Hanauer, “one of those .01%ers,” wrote in Politico Magazine why “The Pitchforks Are Coming … For Us Plutocrats.”
• Bloomberg Opinion explored income inequality in its series “Getting to Fair.”
• A Bloomberg QuickTake on how much more CEOs are paid than average workers. 

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