Why Piketty’s wrong (again): it’s the hump, not the trunk!

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Why Piketty’s wrong (again): it’s the hump, not the trunk!

Much has been written about voters converting to populism because they feel deprived, abandoned or humiliated.

Thomas Piketty even argues that inequality and populism are linked. In essence, Piketty says that both inequality and populism can be explained by dramatic shifts in the traditional two-party system that favour different elites.

Citing historical data from France, Britain and the US, Piketty suggests that left-wing parties, which used to attract and represent less educated voters, are now more associated with the highly educated. Right-wing parties, on the other hand, have consistently drawn wealthy voters, regardless of their education. As a consequence, “low education, low income voters might feel abandoned,” according to Piketty, due to what he calls “the rise of elitism”.

One may argue that Piketty missed the ninety-degree political shift from “left vs right” to “open vs closed”, although he does concede a potential realignment of the political cleavage along the lines of “globalists” (open) vs “nativists” (closed). Nevertheless, he deems populism largely a right-wing phenomenon, which implies either that

(1) he’s never heard of Messrs. Sanders, Corbyn, Maduro, Di Maio or Lafontaine, or

(2) he doesn’t consider them to be sufficiently anti-elitist to wear the “populist” label, or

(3) they are not sufficiently anti-capitalist to warrant an association with the left

None of those options speak well of Piketty’s political judgment. With regard to his home country, his lumping together of Macron and Melenchon into a monolithic “left” bloc is particularly telling.

ROOT CAUSE

Even more confused than Piketty’s system of political coordinates is his conclusion that the rise in populist (or “right-wing”) parties is due to income inequality. The story goes that low-income and low-education voters fall victim to populism when they learn about wealthier, better-educated countrymen reveling in an international luxury lifestyle. This argument is convenient for Piketty, since it reinforces his favourite trope of global capitalism as the root cause of Evil.

No one should be surprised that Piketty is wrong on this claim also:

(1) Either ignores the massive income gains that capitalism brought to the global middle class, or

(2) he discounts those gains since they accrue mostly to Asians, revealing himself as a racist

(3) he naively thinks the mechanisms driving those gains can be “stopped” by Western governments

Let’s examine each one of these points a little closer.

THE ELEPHANT CHART

Global income growth has been analysed in a monumental 2013 study by Christoph Lakner and Branco Milanovic, resulting in the so-called “elephant chart”, which reflects the distribution of global income growth from 1988 to 2008, arguably the peak era of global capitalism.

Tbe “elephant chart” from the Lakner/Milanovic study (2013)


Following the outline of the chart, one quickly notices two distinctive features of the “elephant”–the hump and the trunk.

  • The “hump” spans the 20th to 70th percentiles–a giant global middle class of more than three billion whose real incomes have risen by more than fifty percent during the study period.
  • The “trunk” is the global top one percent–a group of about 70 million of people earning more than $32,000 per annum. Before you protest, chances are that you are among them, too

Inbetween the hump and the trunk–the elephant’s face, so to say–we find a segment of about 500 million people (less than ten percent of the global population) whose incomes have barely grown during the study period. There is a trough especially around the 80th percentile, which even witnessed income decline, spawning the “populism from inequality” thesis. For those, the combination of trunk plus hump equals Trump, although he arose only to increase their detriment.

Nevertheless, one central conclusion is undeniable: global capitalism works beautifully, dramatically raising the incomes most of the three billion that comprise the global middle class. Their incomes rise like they have never risen before in human history.

EXAMINING THE HUMP

Still, they have a long way to go: median global and Asian incomes are still below the income levels seen in developed markets.

India and China have still a lot of catching up to do in terms of income, compared to the U.S. or other Western economies, or even their fellow BRICS, Russia and Brasil.

Despite their impressive gains, the income of a majority of Chinese citizens ranks still below the global average. And only a very small section of Indian society even made it into the global top 40%. This shows that even though much has been achieved, there is still a long way to go, especially for those two giant nations.

Comparing this to Europe, one cannot help but notice the striking difference: the poorest German percentile is still earning a higher income that 80% of the global population. For Italy, it’s still 60%.

ARE YOU HAPPY YET?

Nevertheless, Chinese and Indian populations seem relatively content. A majority of them say that things are going in the right direction, quite in contrast to a majority of Americans, Brits, Germans or Swedes, which claim the opposite.

Therefore, it is safe to conclude that it is rather the speed of income growth (or decline) that drives national satisfaction (or dissatisfaction) rather than absolute income levels.

The “elephant curve” retains its status as a key predictor of where things are going well, and where they are not. The conclusion remains that global capitalism has driven massive income gains among half of the human population, with most of the beneficiaries living in Asia.

BUT HOW ABOUT NOW?

Critics may argue that the global economic crisis had barely begun at the end of the study period (2008) and destroyed much middle-class income since. However, this can be easily refuted.

Countries representing more than half of the global population (China, India, Indonesia, Vietnam, Malaysia and the Philippines) have all seen their populations’ real disposable incomes rise by more than 5% per year–even during the relatively sluggish global economy of 2001-2016. Chinese incomes even rose by more than 10% per annum, extending the country’s economic ascent into the fourth decade.

One may even argue that the fifteen-year-period of 2001-2016 was even more bountiful for the leading Asian economies and their billions of workers than the already successful period of 1988 to 2008 that had been studied by Lakner and Milanovic. A five percent annual rise in average income, spread over fifteen years, means that many Asian citizens have essentially doubled their earnings.

At the time of writing, Asia is again on track to contribute more than half of global economic growth. So before Piketty and friends abolish capitalism, they better check with China, India and their neighbours.

In summary: on a global scale, there has never been a more just, more fair or more successful system than global capitalism. It has lifted three billion of Asian poor into the global middle class.

It is also evident that Asia’s (and the world’s) economic growth have not emerged purely from within those geographies, but rather as a result of growing global trade. Around 2012 this declined for China as a result of a massive domestic infrastructure programme.

WHAT MAKES US SO SPECIAL?

This brings us to point (2), assuming that Piketty is an educated men who is not ignorant of the massive income gains of the global middle class, particularly in Asian.

By focusing the economic discussion entirely on the “trough” around the 80th percentile of the elephant chart, and especially, by contrasting the 80th percentile’s drought with the sizable income gains of the global top 1%, Piketty unmasks his nationalist and racist nature.

It is inconceivable why the lower and middle classes of developed (Western) economies should be more deserving of income growth than their (far poorer) counterparts in China, India, Indonesia and similar developing countries. They are only beginning to take their fair share of the world economy. Their huge populations provide for the world’s largest market potential, applying the eternal law of economies of scale in their favour until their share of GDP reflects their population share.

Instead of blaming capitalism or inequality for the situation of the 80th percentile, Piketty and his acolytes should remind themselves that “abandoned” Western citizens are still wealthier than their Asian counterparts. They are just not managing to grow their incomes as rapidly, because their productivity has barely risen in the past decades.

And this is largely their own fault.

Shifting the blame won’t help. The circumstances encountered by the 80th percentile in Western economies are likely not to be worse than those of the Chinese, Indians and Indonesians that still managed rapid income growth during the decades in which the Occident stagnated.

Asia still has a lot of catching up to do, as the placement of its population on the global income distribution curve reveals. And yet, it’s trajectory is clearly on the up.

What can we learn from that?

ALL THE OLD TROPES

Let’s briefly revisit the favourite excuses of Pikettian apologists when they try to explain the rise of populism.

Austerity? Whatever the cuts to government spending, one will concede that Western social systems are still a lot more generous than the bare-bones pension and welfare systems still place in Asia today. One might argue that ageing Western demographics will force even more radical cuts to health and pension entitlements in the future.

Education? Western schools are still a lot better staffed and equipped than those usually encountered in Beijing, Delhi, Jakarta. Also, in a time where almost all of human knowledge is at your fingertips on any fifty dollar phone, putting more teachers in front of more chalkboards may not be the most effective answer.

Infrastructure? Surely, the roads, bridges and public transport systems of Detroit, Sheffield or Duisburg are no worse nor more crowded than those of Guangzhou, Mumbai or Bekasi. While Berlin struggles to complete a new airport within a decade, China plans to complete 216 new airports by 2035–about a dozen or so per year

Corporations? Of course, they’ll channel their investment to the areas (geographically and otherwise) that promise the best returns. And that’s only fair. The idea that a White Anglo-Saxon CEO should feel more obliged to her workers in Sunderland or Cincinnati than those in Shenzhen or Bangalore is nationalist and racist to the extreme.

Exploitation? Surely, working conditions in many factories in developing markets warrant improvement. Nevertheless, the Western stereotype of Asians remaining confined to derelict sweatshops no longer fits reality. Now churning out more university graduates than the West, Asians are more increasingly likely to become scientists, engineers, managers, lawyers and accountants

WHAT GIVES?

The answer lies the trajectory of a global economy driven by economies of scale, technology and intellectual property. Like fundamental laws of nature, the forces propelling the economy forward are not subject to the will of angry voters or Western national governments.

The economic avalanche set in motion by an ascending China, India and others will keep burying those who haven’t understood that new sets of skills are required to ride it.

And any populist claiming otherwise has revealed himself a snake oil merchant.

Still, this begs the question of what to recommend to those Westerners falling prey to populism–what could they do in order to become as successful as their Asian counterparts?

It speaks volumes of the current state of political debate that the wisest words uttered about globalisation by any politician have been spoken already more than ten years ago by Tony Blair, a man who’s nowadays considered widely disgraced.

“It [the global economy] is replete with opportunities, but they only go to those swift to adapt, slow to complain, open, willing and able to change. Unless we “own” the future, unless our values are matched by a completely honest understanding of the reality now upon us and the next about to hit us, we will fail. And then the values we believe in become idle sentiments ripe for disillusion and disappointment.”

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