Who Benefits Most From a Booming Economy?

Prosperity plays favorites in unexpected ways.

Posted Aug 09, 2018

The quality of life in some poor communities remains shockingly bad. Meanwhile Wall Street investors are popping champagne corks. Who is really benefiting from economic growth? The conclusions of inequality experts might shock you.

The issue of some individuals or groups exploiting others has always been of concern in human societies. This reflects an evolutionary history of Darwinian competition.

The Fairness Problem

Subsistence human societies prior to agriculture were always aggressively egalitarian (1). The intrusion of major wealth disparities introduced hereditary privilege in the earliest towns and cities.

Is inequality acceptable today if it is accompanied by pervasive improvements in the quality of life for everyone? This is the devil's bargain offered by economic development.

Not everyone benefits from from economic growth in a global economy. Rumblings of discontent in the American rust belt have been obvious for decades and were highlighted by the financial collapse of 2008 and its destruction of net worth of the poor.

Even cities like Detroit and Flint are capable of renewal thanks to an influx of vulture capital and other elements of enterprise and renewal. Matters remain less hopeful in rural areas such as the depressed mining regions of West Virginia.

A West Virginia Horror Story

Just before the 2016 election, the PBS Newshour aired a segment on the problems faced by ordinary people in West Virginia. What was particularly shocking about this story was that it was hard to recognize this place as belonging to the wealthiest country in the world at the peak of its economic power.

One is reminded of the horror experienced by ordinary Americans when the TV cameras followed Robert Kennedy into the hovels of the South's rural poor.

The lives of the rural poor in West Virginia seemed just as desperate as the plight of those encountered by Kennedy. Apart from several generations living in poverty, there were issues of chronic illnesses, industrial diseases, under employment, low wages, lack of education, hopelessness, and drug addiction.

The pathos of their situation was highlighted by having to wait for a year to receive treatment provided by a free dental clinic. Of course, that is the situation of many people in third-world countries who benefit from the charity of groups such as Doctors Without Borders.

While there are certainly losers in a booming US economy, everything we know about economic history indicates that economic development brings huge increases in the general quality of life, as I pointed out in another post.

Advantages in health, longevity, disposable income, leisure, material goods, and services, are enormous. If the quality of life is so greatly improved, why are economists, and everyone else, so concerned about the distribution of benefits between the wealthy versus everyone else?

Who Benefits Most: The Shocking Truth

Adverse effects of an unequal distribution of income range from low social cohesion and poor community engagement to high crime, drug abuse, and even, reduce life expectancy and increased obesity (2,3).

In a widely read book, Thomas Piketty offered a depressing overview of modern economies where inequality inevitably rises (4). The underlying reason is quite simple. Wages in developed countries are quite static whereas the returns to capital tend to increase, as illustrated by the meteoric rise of stock market wealth in recent decades.

Of course, much of this financial wealth is hereditary. So one gets a hereditary elite whose current advantage over workers rivals that of the 1920s, a period of financial speculation that preceded the Great Depression.

A much more nuanced view is offered by Branko Milanovic, a leading income inequality scholar (5). Looking at countries around the world over a long period (1988-2011), Milanovic found that the cumulative gain in real income is actually the greatest for people who earn just slightly above average (the 55th percentile).

Only the lowest ten percent of earners did worse than the top one percent of earners. Contrary to Pikety's dismal scenario, he sees “very strong gains around the middle of the global income distribution but a slowdown of gains among the global top 1%.”

Of course the gains to top earners are sensitive to the time period studied. If the 2008 financial collapse is excluded, the elite do much better. It is also worth pointing out that gains relative to a high initial income are worth more in absolute terms than a similar proportional increase for middle-income workers.

Milanovic's rosy picture for the global economy also obscures a collapse of the middle class in developed countries, with the proportion falling from 32 % to 27% in the US between the 1980's and 2010 as conditions deteriorated for professionals due to technological replacement of photographers, journalists, typesetters, and others whose formerly-valued skills lost their worth. At the same time the proportion of income going to the top 5 % of earners rose from 16 % to 19%.

So What?

Milanevic's results demonstrate one very optimistic conclusion, namely that the bulk of economic gains go to the middle classes even if the very poor get left behind, and even if the middle class is suffering from a decline in the number of well-paid professionals.

Buried in all of this is a very dark truth about modern economies. This is that although economic growth does indeed raise all boats, there are also periodic sharp rises in inequality, and unfairness.

The even darker truth is that the most effective ways of reducing inequality is to destroy wealth. Whether it is the Great Depression, or World War II, the resulting financial damage often affects the wealthy more than others.

Then there is the option of destroying people so that there is more wealth to go around. This is what happened with the Black Plague of the fourteenth century when surviving workers saw their wages rise, boosting general wealth.

On the positive side, Milanevic notes that the decline in inequality after World War II occurred in the context of both a surge in private capitalism in addition to huge government investments in infrastructure. Economic development around the globe brings rising inequality. Communist countries that grew slowly retained greater income equality.

Anyone who desires greater income equality needs to be careful what they wish for. Who wants the Black Death, Communism, or a world war?!

References

1 Boehm, C. (2000). Hierarchy in the forest. Cambridge, MA; Harvard University Press.

2 Zuckerman, P. (2008). Society without God: What the least religious nations can tell us about contentment. New York: New York University Press.

3 Wilkinson, R., & Pickett, K. (2010). The spirit level: Why greater equality makes societies stronger. New York: Bloomsbury Press.

4 Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press: Cambridge, MA.

5 Milanovic, B. (2016). Global inequality. The Belknap Press of Harvard University Press: Cambridge, MA.