December 12, 2017

Why We Can’t Talk About Economic Inequality

It is not just the super-rich who don’t like to talk about rising income inequality. It can be an ideologically uncomfortable conversation for many of the rest of us, too. That’s because even — or perhaps particularly — in the view of its most ardent supporters, global capitalism wasn’t supposed to work quite this way.

That’s from Plutocrats: The Rise of the new Global Super Rich and the Fall of Everyone Else, Chrystia Freeland (2012). The book reads like an extended academic version of People Magazine meets CNN meets The New York Times, and could only have been written by someone who logged years on the insider track and took lots of notes.

Turns out that’s precisely who Chrystia Freeland is. She’s a Canadian writer, journalist, and politician. She worked in a variety of editorial positions at the Financial Times, The Globe and Mail, and Thomson Reuters, was elected to the Canadian Parliament in 2013 (the year after the book came out), and was appointed Canada’s Minister of Foreign Affairs earlier this year. She’s a Harvard grad, a Rhodes Scholar, and was named one of Toronto’s 50 most influential people by Toronto Life Magazine in 2015.

The book takes names and tells stories, and is awash in dates and times and statistics. Reading it all the way through can be a bit of a slog, and I wonder how many people actually do — I confess, I skimmed a lot. I quote it here because it does a great job of capturing the lessons of my last two posts: 1) most of us haven’t updated our understanding of economics since Econ 101, and 2) we don’t like talking about economic inequality. Beginning with the quote above, the book provides a useful overview of how those two things are related. (These quotes are particularly re: income inequality, but apply to capital inequality as well.)

Until the past few decades, the received wisdom among economists was that income inequality would be fairly low in the preindustrial era—overall wealth and productivity fairly small, so there wasn’t that much for the elite to capture— then spike during industrialization, as the industrialists and industrial workers outstripped farmers (think of China today). Finally, in fully industrialized or postindustrial societies, income inequality would again decrease as education became more widespread and the state played a bigger, more redistributive role.

(This theory was articulated by Nobel Prize winning economist Simon Kuzmets, and can be plotted in what has become known as the Kuzmets curve. According to Wikipedia, Kuzmets won the award in 1971 “for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development.”)

Continuing with Plutocrats:

Until the 1970’s, the United States… was also an embodiment of the Kuzmets curve. The great postwar expansion was also the period of what economists have dubbed the Great Compression, when inequality shrank, and most Americans came to think of themselves as the middle class.

But in the late 1970’s, things started to change. The income of the middle class started to stagnate and those at the top began to pull away from everyone else. The shift was most pronounced in the United States, but by the twenty-first century, surging income inequality had become a worldwide phenomenon, visible in most of the developed Western economies, as well as in the rising emerging markets.

The switch from the America of the Great Compression to the America of the 1 percent is still so recent that our intuitive beliefs about how capitalism works haven’t caught up with the reality. In fact, surging income inequality is such a strong violation of our expectations that most of us don’t realize it is happening.

We’ll look at some inequality stats next time.

 

Kevin Rhodes is on a mission to bring professional excellence and personal wellbeing to the people who learn, teach, and practice the law. His past blog posts for the CBA have been collected in two volumes — click the book covers for more information.

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