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”. He deems populism an almost entirely right-wing phenomenon, which implies that

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

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

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

None of those options speak particularly well of Piketty’s judgment.

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: global capitalism is the root cause of Evil!

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

(1) He 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.

(1) 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.

File:Global changes in real income by income percentile - v1.png

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 comprised 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 70million of people earning more than $32,000 per annum. Before you protest, chances are that you are among them

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.

This is because 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.

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. In the U.S., for eample, Top 5% to top 10% income bands haven’t substantially risen even since 2000.

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The below table shows that 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, spread over fifteen years, means that the incomes of those Asian citizens have essentially doubled.

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.

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 ugly visage as a nationalist and racist.

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.

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 much wealthier than their Asian counterparts. They are just not managing to grow their incomes fast enough, because their productivity has barely risen in the past forty years.

And this is largely their own fault.

Shifting the blame won’t help, because 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?

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, they must concede that Western social systems are still a lot more generous than the bare-bones pension and welfare systems that are 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 or less 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.

Global 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.

Worker 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? Again, 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.

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