Commentary 丨Bashusson: The Evolution of Global Income Inequality and Its Policy Implications

At present, the global attention to income disparity is rapidly increasing, from the perspective of policy research, many issues are traced back from the theoretical logic, and are directly related to the continuous widening of income disparities, such as the ELECTION in the United States in 2020. In fact, no matter which politician is elected, his policy direction is nothing more than how to take corresponding measures to correct in the context of the widening income gap between different classes in the United States. From the historical trajectory, the tone of the US foreign economic and trade policy has always been that diplomacy is a continuation of domestic affairs, and if the income gap cannot be optimized, the contradictions in the fundamentals of the US economy will be difficult to alleviate, and the existing foreign economic policy of the United States can only be a change in the specific mode of operation after the new president takes office, not a turning point in the direction.

During this time, the Wall Street market has undergone a sharp correction, which hides a very important concern: the Fed hopes to form clear inflation expectations in the market through stimulus policy. Whether this goal of financial policy, which forms inflation expectations, can be achieved is closely related to the issue of income disparity. If the income gap continues to widen under the stimulus of large-scale quantitative easing, it is difficult to form inflation expectations in the market, one of the main reasons is because most of the asset return is still attributed to the top 1% of the population, and the market will still be a more serious deflationary expectation. The issue of income disparities and their impact therefore needs to be raised for discussion.

Thomas Piketty, the author of Capital in the 21st Century, sorted out the topic more systematically, and on the whole, his data is relatively rich, but in fact the logical framework is very simple. Specifically, his core basic concept is the capital-to-income ratio. Piketty proposed two basic laws, the first basic law of capitalism and the second basic law of capitalism. These two basic laws are a description of a relatively long term. In addition, he made three important conclusions, which mentioned small differences in the rate of return on capital and the rate of economic growth, which have a very important impact on the inequality of wealth and income distribution. Another judgment is that the return on capital is higher than economic growth, so in the long-term accumulation, the income gap will continue to widen. Because from the historical data observation, the return on capital tends to be higher than the economic growth rate, so the gap between rich and poor in developed countries, from the perspective of the long-term examination cycle, will continue to widen. What is the solution to this problem? The solution that Thomas Piketty has come up with is not the trade friction that Trump is engaged in, nor is it just the high tax rate that Biden wants to implement, but in addition to the progressive taxation of capital, it is necessary to return to investment in education and knowledge diffusion to promote economic growth.

Thomas Piketty's basic logical framework provides theoretical support for many of our economic policies. For example, in his analysis, he disclosed a fact: the global capital-income ratio in the 21st century continues to increase, and the level of return on capital continues to increase. By the end of the 21st century, the global capital-income ratio could be close to 7 times, and capital income is always more unequal than labor income. We can draw this conclusion from fluctuations in the share of the top 10 U.S. revenues between 1900 and 2010. As can be seen from the data, in the early 2010s, most European countries, especially France, Germany, the United Kingdom and Italy, accounted for almost 60% of the total wealth of the richest top 10% of the population. Another surprising statistic is that Thomas Piketty's database shows that almost half of the population in these so developed social economies has barely increased their wealth during this period of study, and the poorest 50% of the population in these advanced economies account for less than 10% of national wealth, generally no more than 5%.

Analyzing these basic figures, it's not hard to understand that The demographics Trump is targeting in his campaign are the so-called forgotten groups (i.e., Forgotten) who are often seen as having little benefit from globalization, who think they have been forgotten by economic growth. They are very dissatisfied with the status quo, and if politicians claim to be able to change this pattern, it is good for them, and it may attract these people to choose him. It is conceivable that if the basic economic pattern such as the income gap in the United States remains unchanged, no matter which president comes to power, the logic of many policy operations will not change significantly. What is particularly noteworthy is that the extraordinary stimulus policy adopted by Trump in response to the epidemic, which was elected by these people, actually aggravated the imbalance in income, because the stimulus policy directly led to the rise of assets such as the stock market, if you calculate the asset share of the top 1% of the rich people and the share of the bottom 50% of the population before and after the introduction of the stimulus policy in response to the epidemic in the United States, the gap between the two continues to widen. Before the introduction of the U.S. stimulus policy to deal with the epidemic, roughly the top 10% of the people accounted for 70% of the wealth, and the US stimulus policy in response to the epidemic widened this gap.

If you try to understand the different policy logics of Trump and Biden from the perspective of income gap, it can be seen that the two are actually trying to alleviate this problem from different paths. For example, Trump hopes to adjust the industrial chain and supply chain by creating trade frictions, and promote the return of some jobs and manufacturing as much as possible. He hopes to promote a part of the opportunity to return to the US home market, so as to provide some low- and middle-end jobs for a small and low-income class, even if it is a less efficient option than the original globalization path, Trump is still actively pushing in this direction.

And Biden? He hoped to promote the imposition of taxes on high incomes and to increase the benefits of developed countries from globalization through the negotiation of trade rules. Unfortunately, from the existing research on income distribution, these two solutions will not change the basic trend of Thomas Piketty's statement that the return on capital is higher than economic growth in the long run. Therefore, in the coming period, the topic of income disparity and its changing trend is likely to become a very important topic affecting the United States and global economic policy, economic development theory, and financial markets.

In the context of the widening income gap in the United States, the US priority policy and the policy to deal with the epidemic that the United States is currently promoting, from the current effect, not only has not alleviated, but has also partially exacerbated the turbulence of the existing governance pattern in the United States and the world, so there is still great uncertainty about the impact of the widening income gap in the United States on global governance and domestic and foreign policies in the United States. There are also many research papers showing that whenever there is an inflection point between the wealth of the top 10% of the United States and the wealth of the bottom 50%, there will be a drastic change in the domestic and foreign policy of the United States. So I think everyone should pay attention to and study this topic together.

(This article is compiled from the speech of Professor Ba Shusong, Executive Dean of HSBC Finance Research Institute of Peking University, Chief Economist of China Banking Association, Vice President of China Macroeconomics Society, and Chairman of Zhang Peigang Development Economics Research Foundation, at the 3rd Zhang Peigang Development Economics Young Scholar Award Ceremony and "Double Cycle New Pattern and China's Economic Transformation and Development" Academic Forum, which has been authorized by the author)

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