The Levelling

by Michael O'sullivan

  Taken all together, this means that the debate on globalization takes place largely in the international press, is subject to wild distortion, but, perhaps most importantly, needs to be much better grounded in terms of its impact on households. The view that households have of globalization and of what the world is evolving into is colored by the many social, cultural, and economic changes that are materializing. Chief among them is inequality.

  Is It Really Inequality?

  Inequality is rightly a prominent policy issue, though the link between it and globalization is only partial because inequality depends on many different factors. Inequalities have strong structural causes, and in most cases they emanate from social policy choices within countries—for example, decisions about access to education, taxation policy, and the ways in which mortgages are structured—rather than from the impact of globalization on economies and societies per se. In fact, there is a weak correlation between the extent to which a country is globalized and its level of inequality, and many of the more highly globalized countries have decent social welfare systems that mitigate inequalities. For instance, Ireland is more globalized than its close neighbor England but has a lower inequality score.

  The most commonly used measurement of inequality is the Gini coefficient, which measures how skewed or unequal the distribution of income is across a society. It has a value of zero if there is complete equality and of one if a single household has all the income. Typically, a score of above 0.31 signals higher inequality. According to the OECD website, the United States has a score of 0.39, which is very high compared to other countries. Mexico has a Gini of 0.46. In contrast, Canada has a lower inequality score (Gini coefficient of 0.31) partly because it has a very different approach to policy making.

  Inequality is a concern in the developed world because it is persistent. In the context of low growth in incomes and wealth, the tensions associated with inequality are exacerbated. In emerging countries, inequality in income seems to be much less of a political and social issue, because with incomes and wealth growing at a relatively fast pace, people continue to expect to do better in the longer run, which is not the case in developed countries. Also, in emerging countries there is the sense that once the economy becomes less underdeveloped, inequality will drop as a result (i.e., a middle class will form).

  In this regard, attacks on globalization appear to stem from the simple fact that its winners have largely been in developing countries and its relative losers have been in countries like the United States. The notable trend is that the middle to lower classes in the West have in general seen stagnant real income growth.11 According to the McKinsey Global Institute, from 2005 to 2014, over 90 percent of the working population in Italy, 80 percent in the United States, 70 percent in the United Kingdom, and on average 75 percent of the working population of the twenty-five advanced economies saw stagnant or falling real incomes.12 As a consequence, those people feel that politics, globalization, and perhaps governance in general are not working for them.

  Thus, to put it very generally, the beneficiaries of globalization have been the lower to middle classes in emerging countries like China and Indonesia and the wealthier classes in the developed world. These uneven benefits are reflected in a World Economic Forum survey’s findings that over 70 percent of people in the Philippines, Vietnam, India, and Thailand thought globalization was a force for good, whereas only 40 percent of respondents in America and France felt the same.13 Emerging countries are now in the process of levelling out the distribution of wealth globally relative to the likes of the United Kingdom and the United States. Infrastructure is an example. Consider the rapid rise in the wealth of the United Arab Emirates—the jewels in the crown of globalization. The high quality of their infrastructure has been part of this rise, and in many cases, transport infrastructure in emerging countries is far better than that in the “old” world.

  Other survey evidence also confirms the divide between the perceived winners and losers of globalization. For example, a Pew Research Center Spring 2016 Global Attitudes Survey showed that 50 percent of people in Western economies (Japan, France, the United States, and the United Kingdom) believed that the economic situation in their own country was bad,14 though the vast majority of respondents in the two most populous countries in the world (China and India) held that the outlook was positive.

  The reality that there are winners and losers from globalization has exposed the narrative of the upper echelons of Western society, for whom inequality is now a preoccupation. For example, the IMF, the World Bank, and the McKinsey Global Institute all profess alarm that inequality is too high. This newfound sympathy for the less-well-off may have several motivations, not least the popular reception of Thomas Piketty’s book on inequality, Capital in the 21st Century, which has managed to stir interest in an arcane topic.15 In general, the lion’s share of evidence shows that inequality is at historically very high levels, especially in the larger economies of the world such as the United States and, to a growing degree, China.16

  In recent years, inequality has not risen sharply (though the number of news reports on it has done so), but it has been persistently high. This persistence is perhaps the key link to sociopolitical tension in that continued inequality conditions people’s long-term expectations of the world around them. The political consequence is that people form a view that the system is against them and vote against the system.

  Evidence from a range of sources—the World Bank, OECD, and Branko Milanovic, a leading academic in the areas of development economics and inequality—shows that across the developed world inequality is high, with the United States and South Africa in the lead in this respect, followed by Turkey, Chile, Israel, the United Kingdom, and Spain.17 Among other countries, Sweden has become slightly less equal though its Gini coefficient is nonetheless at a very low level, close to that of France, the Netherlands, and Canada.

  There are other ways of examining differences in income distribution. For example, according to the Economic Policy Institute,18 income inequality as captured by the share of income of the top 1 percent is now back to levels not seen since the 1920s. In New York, the ratio of the income of the top 1 percent to that of the other 99 percent is 45 to 1. A good portion of this gap is driven by high executive pay, which across the range of industries in the United States averages three hundred times the pay of the average worker. It is hard to find such an extreme relationship at any other time in history. In Rome in AD 14, for instance, the income of a Roman senator was one hundred times the average income, and legion commanders received an income of forty-five times the average!

  Against this backdrop the political sensitivity to inequality has heightened for a number of reasons: conspicuously high salaries at the top end of the labor market, lower overall economic growth, and persistently low income growth. Such persistent inequality causes people to form permanent views about the state of the world and its relative justice. Real incomes have until very recently (in the United States at least) stayed low, which has manifestly hurt purchasing power, and many people have not participated in the rise in asset values seen in the postcrisis era. In fact, with large pension deficits mounting, inequalities may now be carried into the future.

  Another striking way of examining how average people are faring compared to previous generations is to measure their real incomes compared to what they might have been ten years earlier to get a sense of how incomes are growing. In the United States there has been a sharp decline in real per capita income relative to where it was in 2008. In fact, between 2010 and 2017, growth in per capita real income was easily the lowest in over sixty years. This is a useful way of picking up the sense that people feel much less well off, especially those who may have been working long enough to recall periods of stronger income growth.

  In the developing world the picture is somewhat different, reflecting Branko Milanovic’s assertion that though inequality has in many cases increased within countries, it has narro
wed when between-country relationships are accounted for. Here the positive effects of globalization are the clearest: it, together with national growth dynamics, has lifted hundreds of millions out of poverty into relative prosperity.19

  More generally, in the last twenty years wealth and incomes have exploded in many emerging countries so that sensitivity to inequality is lower. For the moment, household expectations of prosperity across emerging markets are rising, despite stark inequality in some cases. If these aspirations are checked, as has happened in Mexico and Brazil, then other emerging countries may witness the same political volatility seen in the developed world.

  Wealth of Nations

  However, income inequality is only half the picture. Wealth is a more important metric, because it is the key factor that motivates people’s large-scale purchasing decisions. When someone wants to buy a new car, she doesn’t necessarily think of the expected GDP growth of her country; she tends to think in terms of the stock of their wealth. Wealth inequality, compared to income inequality, is important because shifts in wealth are typically slower moving but longer lasting in their effects on consumption behavior. Arguably, income inequality can be fairly easily affected by tax policy and redistribution by governments, but wealth inequality is harder to tackle across the board. Though the likes of Piketty and Milanovic have grabbed headlines for their work on income inequality, the internationally recognized experts on wealth are Professors Tony Shorrocks and Jim Davies, who have worked at institutions such as the United Nations and the London School of Economics.20 Their research is noteworthy because, unlike the study of income inequality, the examination of wealth, and by extension wealth inequality, is hampered by the lack of detailed data across countries. However, Shorrocks and Davies have compiled the most comprehensive data set available.

  Recent trends in wealth inequality are stark and show that globally, with a focus on the United States, wealth inequality remains close to a multidecade high. In fact, the share of total world wealth (financial assets plus property less debt) held by the top 10 percent of wealthy people has risen steadily to levels not seen since the 1930s. The top 1 percent of wealthy people now own over 47 percent of the world’s wealth.

  At the country level, the United States is joined by Switzerland and Hong Kong in having very high wealth inequality (top 10 percent own over 70 percent of the wealth). Switzerland differs from the United States in that although its wealth inequality is high, its income inequality is low and it scores very well on social stability factors such as health-care availability. In the developing world, Argentina, Brazil, India, Turkey, and South Africa all have similarly high wealth inequality scores. China, where the top 10 percent hold over 60 percent of wealth, also has relatively high wealth inequality. It currently has over sixteen thousand individuals with a net wealth of over USD 50 million,21 which is more than the number of individuals with wealth over USD 50 million in Germany, the United Kingdom, and France put together. In contrast, many European countries—France, Italy, the United Kingdom, Ireland, Spain, and Greece—have what academics would consider moderate levels of wealth inequality (top 10 percent owns over 50 percent of wealth).

  My own sense is that the vast majority of wealth is generated by entrepreneurship, the success of family businesses and property markets. In recent decades there may be two new factors in wealth creation. First, in some emerging markets, the early stage of wealth creation has allowed individuals and families with close ties to governments or ruling structures to profit to an enormous degree. James Crabtree makes this point with respect to India in his book The Billionaire Raj. Second, senior executives in large companies and financial institutions are able to gain enormous wealth through generous equity-based compensation. Unsurprisingly, the Anglo-Saxon countries—that is, the United Kingdom, the United States, Canada, and Australia—feature prominently here.

  The picture of wealth inequality broadens if we take in other data sources. In the United States, wealth is also unevenly divided between generations. According to the Survey of Consumer Finance, which is produced every three years by the Federal Reserve to shed light on the quality of household balance sheets, 30 percent of households have no wealth, and the vast majority of wealth is held by those over forty-five years of age. Several Pew studies reflect this also. The report “American Middle Class Is Losing Ground” highlights the “squeezed middle” and reports that the number of people considered to be middle class (roughly 120 million people) is now outnumbered by the combined lower and upper classes and that, importantly, the share of total income of the middle class has fallen from 62 percent in 1970 to 43 percent in 2015.22 In fact, America’s wealthy middle class (close to 92 million people, with net wealth of USD 50,000 to USD 500,000) is now surpassed by China’s middle class (over 102 million people, who, in relative terms, have wealth of USD 20,000 to USD 200,000).23

  The trend toward greater inequality is clear. What is more difficult to measure, though arguably less demanding on intuition, are the many other ways in which inequalities reinforce and manifest themselves. A great many of them are deeply rooted in socioeconomic networks, such as access to professions, justice, and education. These are the factors that typically differentiate the insiders/elite from the rest. One could build a picture of a (Western) world where class mobility is slowing and where access to education, capital, and health care, to name a few, is increasingly restricted. Each of these sustains inequalities in different ways.

  Access to capital is one route by which wealth inequalities are perpetuated and around which sociodemographic changes occur. In more recent years, those with access to capital have been able to take advantage of low interest rates and the flatteringly positive effect of quantitative easing on asset prices, while also being less exposed to some of QE’s negative consequences (such as rising pension deficits).24 This has fueled explosive growth in property prices in prestigious metropolitan areas, which, among many other things, now means that middle wealth / middle income households are being forced out of city centers. One example appears in a letter of resignation written by Kate Downing, a Palo Alto, California, transport and planning commissioner,25 whose salary did not enable her to live in the area she was responsible for overseeing. In fact, if she were to buy the apartment she rented, the mortgage payments would amount to her entire before-tax salary. The same is true in many other cosmopolitan cities around the world, from Sydney to Tel Aviv to Hong Kong to Boston, and many readers, especially younger ones, may have faced this acute problem of affordability.

  Education is another area where emerging inequalities show themselves. In most countries, the educational experience is often as valuable for the social networks and conditioning it provides as for the knowledge and skills it produces, and free online courses have little to offer in this regard. The difficulty and cost of accessing the best schools in global cities such as London and New York are extreme examples of this educational inequality. And the same thing may be coming for people in other cities and countries who do not yet have to confront this kind of contest in their everyday lives. In France, for instance, there is a growing divide between the relatively large number of decently educated middle-class students, most of whom achieve good international test scores, and an underclass of students who—for a variety of reasons—struggle to attain a basic level of education.26

  Yet another vital manifestation of inequality is uneven health care. An important paper by Anne Case and Angus Deaton, “Rising Morbidity and Mortality in Midlife among White Non-Hispanic Americans in the 21st Century,” highlights the deterioration in health conditions, especially those relating to mental health, for middle-aged white men and women in the United States. The mortality rate for this cohort has increased sharply owing to drug and alcohol poisoning, suicides (the United States is seeing a sharp rise in suicides, according to the Centers for Disease Control and Prevention),27 and related diseases such as cirrhosis of the liver. Groups with lower levels of education saw a sharper rise in mortalit
y. Deaton, a professor at Princeton University, won the Nobel Prize in Economics in 2015 for his work linking topics like welfare, health, and poverty.

  The worsening of health conditions is a sign that politicians should pay much greater attention to health care in public policy, especially in the United States, where life expectancy is on average four years below that of other developed countries such as Canada, Germany, France, and Spain. There is also evidence to show that in other countries with arguably better or more widely available health-care systems (such as France), health-related inequalities (such as in infant mortality) are much lower than in the United States. Janet Currie, also at Princeton University, has, together with other researchers, shown that public policy can make a difference to health- and mortality-related inequalities.28 Effectively, an American from a disadvantaged background would be healthier if he or she moved to France at birth (or before!). In coming years health-care inequality in the United States may get worse. One particularly troubling development is the opioid crisis, which is claiming tens of thousands of lives and is estimated by the Council of Economic Advisers to have cost 3 percent of US GDP in 2015 alone.29

  Another more detailed example of health-care inequality is in dental care. Mary Otto’s book Teeth shows the startling differences in dental health across social classes and reports that they spring from differences in education, diet, and upbringing. In her book Otto tells of a boy who died when a tooth infection, undetected because his parents had no dental-care insurance, spread to his brain. Another trend she highlights is the growing lack of attention by dentists in the United States to basic dental hygiene, in favor of higher-paying procedures such as dental surgery.

  Technology is another factor that may help cement existing inequalities. For example, in her book Automating Inequality, Virginia Eubanks describes how automation of welfare services through the growing use of algorithms to sift welfare recipients, and in areas like medical insurance assessments, can lead to institutionalized inequalities (the algorithm throws out the more needy welfare applicants) and injustice. She describes a regime of data analytics that, through design or error, denies assistance to those in poverty, with low education levels or poor computer literacy, or with a history of mental health issues. Minor glitches in computer databases or overlays by algorithms (such as circuit breakers for suspected fraud) have the effect of cutting people off from benefits—which happened to Eubanks’s partner and alerted her to this potentially systemic problem.