Are the middle class or the rich happier?
"Rich people don't like to tell how rich they are"
THE STANDARD: You have been researching the area of income distribution for years: is the global income gap widening or widening?
Milanovic: It is global. The income of the world's citizens is more evenly distributed than it was 30 years ago. The irony is that over the same period of time the distribution within the individual countries has become more unequal. In Europe, for example in Spain, but also in Sweden and the Netherlands, the poor are getting poorer and the rich are getting richer. The development in the USA and Great Britain was very dramatic, but the distribution has also become more unequal in China and Russia.
THE STANDARD: Why are incomes evenly distributed around the world?
Milanovic: Because those people whose real incomes have risen were previously very poor. If you look at the development since the 1980s, you can see that the incomes of the poorest have risen slightly and that of the global middle class has risen sharply. The global middle class includes people who still earn little compared to the European middle class: Chinese, Thais and Indians with good incomes, for example, but they are catching up. The top percent of income has also benefited from globalization worldwide. The loser in this development is the lower middle class in Europe and the USA, whose incomes have stagnated for years.
THE STANDARD: Is it because of the Asian middle class that these incomes are stagnating?
Milanovic: Partly yes. Due to globalization, outsourcing and cheap imports. But technological progress has also contributed to the development: the educated benefit, the less educated do not. And the fact that the rich pay less and less taxes in the USA is also one reason for the increasing inequality in the country.
THE STANDARD: Where will this lead?
Milanovic: Continental Europe would like to go back to the Golden Age of the 1950s, when real wages rose for everyone. But that is not possible. Globalization has advanced, we have the problem of an aging population, and the level of education in Europe is now also at a high level. The Europe of today is no longer the Europe of 1955. The world of today is no longer the world of 1955 either.
THE STANDARD: So we'd better get used to the trend?
Milanovic: To a certain extent, yes. China, India, Thailand and Indonesia are emerging countries. Next up are Nigeria and Ethiopia. The competition is not getting any less.
THE STANDARD: What would you do about the increasing inequality in the western world?
Milanovic: Education should be accessible to all, and the losers of globalization should be supported with transfers. These are not dramatically new measures, but the possibilities within a country are currently quite limited due to globalization.
THE STANDARD: And where should the money for the transfers come from?
Milanovic: Tax rates in Europe are already very high, and income can hardly be taxed any higher. In this respect, I think Thomas Piketty's idea of taxing the very high fortunes makes sense. There is much to suggest that tax evasion would be less dramatic than some would like to portray it. I think, for example, that Johnny Hallyday and Gérard Depardieu were exceptions in France.
THE STANDARD: Are you happy with the way distribution is measured?
Milanovic: I am not so happy with the way the data is collected, namely through household surveys. The rich don't like to tell how rich they are. So it can be that we underestimate the inequality. In addition, we are not well informed about the income situation in Africa, especially from Sudan, the Congo or Somalia there is a lack of data. These are poor but big countries. This can also contribute to our inaccurate assessment of the distribution. A third point is that we are delayed in receiving data from some countries. For example, I'm still waiting for the results of the 2012 household survey in China.
THE STANDARD: What do we know about the distribution of China?
Milanovic: In the meantime, incomes in China are just as unevenly distributed as in the USA. The big question for the country is now whether the inequality will continue to rise or whether there will be a reduction through social transfers, which is why I am so curious about the new data.
THE STANDARD: What do you think?
Milanovic: I am optimistic. I think China will go through a similar process as Europe. When the income and age of a population rise - both are the case in China - the pressure on politicians to build a social network increases. Especially with pensions that do not exist in China, which leads to a high, inefficient savings rate.
THE STANDARD: What actually came first? The financial crisis or the unequal distribution?
Milanovic: Before the crisis, the incomes of the middle class stagnated compared to the rich. This is difficult to sell by politicians, they had to hide the increasing inequality. So they made it easier for the middle income bracket to borrow money. That is exactly what happened in the United States. It worked in the short term, politicians and financial markets were happy. In the end, however, it triggered the real estate crisis. The unequal distribution is therefore one of the reasons for the crisis.
THE STANDARD: And how is income now distributed after the crisis?
Milanovic: Interestingly, the first effect of the crisis was a more even distribution, because the stock market was hit first. But that changed quickly. As it progressed, unemployment rose, social benefits fell and inequality increased. The top earners quickly got better, but real incomes of the middle class and low-income groups have fallen massively, especially in the countries of southern Europe and Ireland. (Sonja Spitzer, DER STANDARD, August 19, 2014)
Branko Milanovic (60) studied economics and statistics in Belgrade. From 1991 to 2013 he was one of the leading economists at the World Bank and is currently researching distribution issues at City University in New York.
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