International Policy Digest

World News /29 Dec 2019
12.29.19

Wealth Distribution, Democracy, and Global Capitalism

Despite recent protests in places such as The Economist proclaiming that the world is getting richer and more equal, the reality is that global capitalism is producing or reproducing three trends that portend bad news–a North-South, individual, and a generational wealth gap.

Thomas Piketty’s 2013 Capital in the Twenty-First Century reminded the academic and broader community to the reality of growing economic inequality in the world. While nineteenth-century writers as diverse as John Stuart Mill, Henry George, Karl Marx, and Rosa Luxembourg pointed to the production of economic inequality and the challenges it posed to democracy, by the middle of the last century this critique had largely been muted. It happened because from the 1930s to the 1970s globally inequality across the world decreased due to instabilizers such as two world wars, a great economic depression, and ascent of labor. After that it began to creep up dramatically as the impact of these instabilizers weakened and wealth and income began to concentrate again. The rosy picture by the late 1960s was that capitalism had been tamed and an egalitarian future was upon us, thus refuting the doomsayers.

Mathematically, Piketty expressed this process with the equation r > g, suggesting that when the rate of return on capital (r) over the long run is greater than the rate of growth (g), inequality increases. More specifically, when return on capital increases more rapidly than income from labor in terms of wages the gap between the rich and poor increases. How this new inequality played out in the United States, for example, was dramatic.

A 2011 Congressional Budget Office study found that the after-tax income gap (and this includes after calculating in transfers payments and welfare) between the top one percent of the population and everyone else more than tripled since 1979. After-tax income for the top one percent increased by 275% between 1973 and 2007, for the bottom quintile it was merely 18% while for middle class or middle three quintiles it increased by not quite 40%. According to the Census Bureau, the median family income fell in 2012 from $51,100 to $51,017, with average Americans earning less now than they did in real dollars in 1989. However, there is some good news–since 2009 the income of the wealthiest 1% has increased by 31%.

But income only tells part of the story. Maldistributions in wealth is also exacerbating and growing. According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%. The racial disparities for wealth mirror those of income. An April 2013 Pew Research Center report documents how since the crash of 2008 that the “mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.” The richest have recovered nicely from the Great Recession, the rest of us have not done so well.

But some have speculated that since the world has recovered from the Great Recession of 2008, the gap between the rich and poor would narrow. But that is not the case. The most recent and powerful documentation of that is Credit Suisse’s Global Wealth Report 2019. The Credit Suisse report has largely been ignored by the mainstream and alternative media as well as by economists and policymakers. It presents several startling macro and micro conclusions. One, while aggregate global wealth reached a record high of $360.6 trillion by mid-2019, and over the last two decades global wealth gaps have decreased somewhat, its distribution was hugely uneven.

North America and Europe are 17% of the global population but control 57% of the wealth. While much has been made of the rising economic power and wealth of China, the U.S. by far remains the wealthiest state in the world, also possessing by far the greatest number of millionaires and ultra-high net worth individuals. Wealth per adult reached a new high of $70,850. However, 57% of all adults have a net worth of less than $10,000, while less than 1% of the population controls 44% of the world’s wealth. The top 10% of the adults possess 82% of the global wealth. Women have gained wealth over the last two decades due to their increase in labor force participation, but the relative gain to men has been modest and varies by country. Finally, the Millennial generation are suffering in wealth accumulation compared to their parental Baby Boomers, mostly as a result of high household costs and decreased incomes, especially post-2008 recession.

Overall, the Credit Suisse study reports that what used to be called the North-South, developed versus undeveloped, or First World-Third World economic gap persists. Second, there is a powerful intergenerational wealth gap.

What does all this mean in the short and long term? Neo-liberal economic policies, but domestically and in terms of globalization, have mostly benefitted the already privileged in terms of countries, generations, and individuals. Countries and people that were the winners 20 or 30 years ago continue to be the winners. Second, despite protests by President Donald Trump that the global trade system has taken advantage of America, the U.S. overall continues to be a winner proving that the “American Century” proclaimed in 1942 by Henry Luce is still a winner, at least for some. Thus, policy-wise, Trump would be smarter to have left the trade and other policies in place since they were to the advantage of the U.S.

Longer-term, the question is whether global capitalism and democracy can survive as wealth inequalities grow worse by the year. There is much to argue that the increased wealth disparities which are impacting especially the working class are fueling resentment against immigration and democracy. In effect, the policies that have produced the inequalities are undermining the institutions that have produced them. It is doubtful that a global authoritarian turn will prop up democracy, and the declining delivery of economic goods by capitalism is undermining non-first world and future generational support for democracy. The picture suggests a future less democratic and maybe less capitalist, yet what exactly these new institutions will be and what the global order will look like is open to question.