The Pandemic Depression
The Global Economy Will Never Be the Same
Occupy Wall Street, “We Are the 99 Percent,” and the Spanish anti-austerity movement 15-M may lie at the opposite end of the political spectrum from populist movements such as the Tea Party, the National Front in France, and Pegida in Germany, but they share a root origin: an anger at others whom they feel profit at their expense. On the left, this anger is directed at the ultrarich who have gotten richer—living in a world of $50 million homes, $10 million weddings, and $10,000-per-night vacations—as the rest of the country stagnates or gets poorer. According to the U.S. Census, median family incomes have barely risen over the last 20 years. On the right, the anger is aimed at immigrants who seem to be outcompeting or undermining native workers and threatening their culture and way of life.
And yet the world as a whole is better off than ever before: people everywhere are, on average, living longer lives, staying in school longer, becoming more productive, and, thanks to the Internet, enjoying inexpensive and nearly unlimited access to information and entertainment. Why, then, is there so much populist rage when things have, in many measurable ways, never been better?
Part of the answer lies in the way in which global patterns of inequality have changed in the last 30 years. In the 1980s, the world was to a large degree divided into “developed” or rich countries and “undeveloped” or poor ones. The rich countries included Japan and those in Europe and North America. In comparison, the rest of the world was mostly quite poor. In fact, the World Bank economists Christoph Lakner and Branko Milanovic found that in 1988, average incomes in developed countries were 20 to 30 times higher than the average in poorer countries.
At the same time, inequality within the wealthier countries had undergone a sharp decline, creating remarkably egalitarian societies. From the end of World War II in 1945 to the end of the Vietnam War in 1975, vigorous industrial growth in the developed world generated well-paid jobs for vast numbers of moderately skilled manual workers and midlevel managers. This growth was driven by expanding manufacturing, construction, and professional services—in education, banking, health care, transportation, and retailing—which provided solid middle-class jobs. As the middle class grew, its share of national income rose. In Canada, the United States, and the United Kingdom, the share of national income going to the top one percent of earners went from 10 to 16 percent before World War II to seven to eight percent in the late 1970s. In continental Europe and Japan, which had strong pro-labor policies, the share going to the top one percent fell even more dramatically, from 11 to 18 percent before World War II to four to nine percent by the early 1980s. As measured by the Gini coefficient, inequality based on disposable income (that is, after taxes and government benefits) dropped to levels of 0.2 to 0.3 across Europe and Japan and to 0.34 in the United States. Meanwhile, most people in the poorer countries remained mired in agricultural poverty, falling further behind the richer nations.
After this golden age for the middle classes of the developed world, however, the decline of global inequality abruptly reversed course. Since the 1980s, the level of inequality between developed and developing countries has been sharply reduced, while inequality within richer countries has greatly increased.
The 1980s saw the opening up of China, and then of India, to the global economy. This led to a proliferation of global supply chains that produced inexpensive goods and services through cheap Asian labor. There was also a boom in commodities and construction as the developing countries built their own cities, railways, roads, and manufacturing plants. Commodity producers such as Brazil, Indonesia, and South Africa became major global exporters. In addition, the OPEC-led rise in oil prices shifted income from the rich world to oil-producing nations.
In the following decades, wages in the developing world rose rapidly, pulling hundreds of millions out of poverty in China, India, Latin America, the Middle East, and parts of Africa. Many nations became “middle-income countries,” not yet rich but no longer mired in poverty, and even the poorest countries (including India and China, which in 1980 were poor indeed) developed a number of fast-growing cities with a substantial middle class.
As a result of these changes, the division between “rich” and “poor” nations became far less marked and indeed began to blur. By 2011, there was no longer the stark division, as in 1988, in average incomes between developed and developing countries. This was a result of the rise of the new “global middle class” in the developing world and the stagnating incomes of the middle classes in the richer nations.
Countries that were once insignificant players in the global economy suddenly emerged as major economic powers, and the former dominance of the Western nations started to fade. In 1980, the United States’ economy was more than ten times the size of China’s, according to the International Monetary Fund (IMF), even though China was the largest economy in the developing world. Its GDP was only eight percent of that of the United States. By 2014, China’s economy was only slightly larger than that of the United States, if adjusted for purchasing power parities. And by 2014, India had also grown remarkably, achieving a GDP that was 40 percent of the United States’. Brazil was at nearly 20 percent.
From a European perspective, the changes within the developing world are even more striking. In 1975, in current international dollars, France’s economy was more than twice the size of China’s and almost three times that of Brazil. By 2014, China’s economy was nearly four times larger than France’s, and Brazil’s economy was only marginally smaller. These are overwhelming changes, and they happened over barely a generation.
Thus, in the last 40 years the rapid growth of the developing countries has dramatically shrunk inequality between rich and poor countries. A large number of former developing countries have become the top 20 wealthiest in the world: China, India, Brazil, Indonesia, and Mexico, in order of size, all have larger economies than Italy (which is the fourth-largest economy in Europe). Even Egypt, Pakistan, and Thailand now have larger economies than the Netherlands, which up until 1945 was the largest colonial power in Southeast Asia. On a per capita basis, the rich countries remain wealthier, but by far less than before. According to the IMF, when incomes are adjusted for purchasing power parity, the income per capita of countries such as France, Germany, and the United States was 20 to 30 times that of China and India in 1980. By 2014, that gap had shrunk to six to ten times for India and just three to four times for China. The middle classes in today’s richest nations are now not that much better off than the middle classes in some developing market nations.
At the same time, the middle classes of the richer nations have also been experiencing sharp increases in inequality within their own societies. The integration of Asian labor and global commodity supply chains into the world economy has shifted wealth upward to the managers of global enterprises. They, along with the financial institutions that provided credit for global investment, trade, and construction, have seen their share of global income leap skyward. In the United States, the share of total income going to the top one percent of earners nearly doubled over the last three decades, from eight percent in 1980 to 18 percent in 2010. In Australia, Canada, Ireland, New Zealand, and the United Kingdom, the share going to the top one percent has similarly increased by anywhere from one and a half to two times since the early 1980s. In Europe, the shares going to the top one percent did not always increase quite as much, rising by a fraction from 1980 levels in Germany and not at all in the Netherlands. In most Scandinavian and southern European countries, however, the share going to the top one percent nearly doubled in the last three decades. But more broadly, inequality is still on the rise. In Germany, for example, even though the gains of the top one percent were constrained, inequality over the entire income distribution still increased: the Gini coefficient for disposable income rose from 0.25 in 1985 to 0.29 in 2011, a greater increase in proportional terms than in the United States, where it rose from 0.34 to 0.39 over the same period of time.
The rise of the Internet, in which trillions of dollars are exchanged and hundreds of billions of dollars of revenue are generated with few or no middle-skilled or manual workers at all, has further shifted the distribution of wealth and income. Thus, Alphabet Inc., owner of Google and the most valuable corporation in the United States today, employs 61,000 workers in the United States; the next most valuable company, Apple, employs 76,000 in country. By contrast, at its peak, General Motors had 618,365 U.S. workers. Even Airbnb with a total of 1,600 employees has a market value of over $25 billion. It simply is no longer necessary to have a great number of workers making things or performing services to generate billions of dollars in value.
At the same time, the flow of global manufacturing to lower-wage countries has targeted workers in the developed world who once enjoyed high-wage work—within both blue- and white-collar industries—and deprived many of their livelihoods. A study by economists at MIT estimated that 2.4 million U.S. jobs have been lost because of shifts from local production to imports. Thus, for the last 30 years the fruits of global growth within the wealthy countries have been deeply concentrated in the hands of global managers, executives, and financiers. As a result, those in the middle and lower classes—middle managers and owners of small-scale local enterprises, for example—feel left behind and squeezed out of their middle-class status within their own countries. And many literally have been: a new study by the Pew Research Center found that while 61 percent of U.S. adults lived in middle-class households in 1971, by 2014 that portion had fallen to 50 percent.
In developing countries, those who have managed to acquire an education or a bit of capital and moved to the cities have been able to leave bitter poverty behind. Millions have gained white-collar jobs and the appurtenances of middle-class life. Many of those within the middle class now have the means to migrate to developed countries. Although the evidence is strong that immigrants are not taking jobs away from Americans—they tend to take jobs at the higher and lower ends of the spectrum, as physicians and engineers or as construction and agricultural workers—the rise in immigration has contributed to the middle class’s view that their world is changing beyond recognition. By blaming immigrants for economic hardships that are actually caused by changes in globalization and technology, nativists feed resentment, using calls for restricted immigration to polarize domestic politics. Even though migration has strengthened the U.S. economy and enriched its culture, the new patterns of global inequality are causing both Americans and Europeans to turn against what should be a source of economic strength and renewal.
The resentment against rising inequality is felt within the developing world as well. Those who remain stuck in the villages and slums, or who labor in mines and other dangerous jobs, feel trapped by poverty and yet are taunted by the spectacle of those who have obtained obscene amounts of wealth. It is no wonder that the Arab Spring, which was very much a symptom of deep economic malaise, happened when it did. Notably, the cry on the streets during the Egyptian revolution of 2011 was, “They wear the latest fashions while we live ten to a room!” In many developing countries, inequality has been rising sharply. In Indonesia and India, the Gini coefficient has increased significantly— in the latter, almost as much as in the United States since 1980. In China, the Gini coefficient has increased by twice as much as in the United States, making China one of the most unequal countries in the world. A recent United Nations report notes that between 1990 and 2010, income inequality in developing countries increased by 11 percent; more important, more than 75 percent of the population in developing societies are living in places where inequality is greater today than in 1990.
This frustration resonates at a global level, too. The large, emerging economies in Asia, Latin America, and the Middle East are angry that they continue to remain left out of leadership roles in major institutions of global governance crafted by developed countries. The IMF, the World Bank, and the UN Security Council are still primarily exclusive Euro-American clubs. This trend is pushing developing countries to exhibit more aggressive behaviors. It spurred China, for example, to create its own Asian Infrastructure Investment Bank as an alternative to the World Bank. That is also partly why China has begun to assert itself militarily in the South China Sea. It wants to prove that it, too, is a dominant global player.
Sadly, it would be unrealistic to present simple or easy solutions to this growing imbalance. But nations can start by adopting domestic legislation that provides more opportunities and essential services, as well as basic affordable health care, housing, and social security, to diminish the scope and sting of inequality within their own societies. In the United States, this involves making college more affordable for middle- and working-class students; reducing the costs of health care; refitting federal lenders to provide support for creditworthy borrowers; and shifting some of the burden of Social Security to high-income earners. This latter tactic can make the economy seem less unfair without having to raise government spending. Income inequality itself is not harmful if the only difference it makes is the type of car or artwork or holiday someone can afford. But income inequality breeds anger, anxiety, and distrust when it affects whether people can educate their children, get decent housing, afford health care, and qualify for well-paid jobs.
Globally, the diminishing inequality among nations cannot be reversed, and this is a good thing. But accepting it calls for a wholesale revision of global governance institutions (including better institutions to cope with the inevitably swelling flows of migrants and refugees). If we do not recognize these changes and respond accordingly, both domestically and globally, the world’s internal politics and international relations will become ever more extremist and dangerous.