Thursday, March 27, 2014

Globalization and Inequality

In my book The Politics of Simple Living, I argue that it is possible for the global economy to bring a future with widespread prosperity, if we act decisively to control environmental problems such as global warming, and if nations shift to slower growth when they reach the point where growth no longer improves well-being - about half the current per capita GDP of the United States.

Increasing income inequality seems to challenge this view. In the United States, most income gains are now going to the rich, while low and moderate incomes are stagnating or even declining. Some economists, such as Thomas Pickety, claim that this trend will get worse in the coming century.

But this is an American perspective.  Globally, those with middle incomes are doing well, as we can see in this graph.

Globalization has created a huge pool of low-cost labor in the developing nations that competes with labor in the developed nations. Because of this competition, wages in the developed nation are stagnating, but wages in the developing nations are growing.

If we manage to avoid ecological crisis and current trends continue, wages in most of the developing nations will reach middle-class levels by the end of this century.  At that point, the world will be in a situation like the United States in the 1950s and 1960s, where wages go up steadily because there is little competition from low-cost labor.

Economists should realize that wages depend on supply and demand. In the United States, in western Europe, and in the other developed nations, wages went up during the post-war period, because population growth had slowed, limiting the supply of labor at a time when there was little competition from the developing nations.  Since the 1980s, wages have stagnated, because globalization made a vast new pool of labor available.  But by the end of this century, population growth will slow world-wide, and the supply of cheap labor will dry up, as it did in the developed nations in the 1950s and 1960s.

Of course, this possible future should not make us ignore the current problems of the American middle class.  We should use the tax system to reduce inequality, by increasing taxes on the rich and on unearned income, by lowering taxes on the middle class, and by increasing the Earned Income Tax Credit for those with lower incomes.

And this possible future should not make us complacent that global economic growth will solve all our problems.  On the contrary, unless we act decisively to control global warming and other environmental problems, economic growth will lead to an environmental crisis that will cause more human suffering than has ever occurred in history.

But if we succeed in dealing with environmental problems, we could have a world with widespread prosperity by the end of this century.  All through history, the great majority of people have lived in poverty.  We could move toward a future where the great majority live in middle-class comfort.

The graph is from the New York Times article, "A Global Boom but Only for Some," by Eduardo Porter.