Globalization and Inequality--Posner's Comment

Becker has accurately summarized the International Monetary Fund’s recent report on the effect of globalization (meaning increased integration of the world’s economy) on inequality. (It is chapter 4 of the IMF's "World Economic Outlook" published this month and available online at http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/c4.pdf.) In essence, the report, while acknowledging serious data limitations, finds that average incomes have increased significantly in most nations in recent decades, but that income inequality has also increased in most nations, mainly because of disproportionate increases in the incomes of the top fifth of the populations. The incomes of the other quintiles have increased too, but not as fast, so that overall the gap between rich and poor has increased although the poor are better off--just not as better off. Both the increase in average incomes, and especially the increase in inequality, are driven mainly, the report finds, by increased utilization of advanced technology, which increases the returns to high-skilled workers relative to the returns to low-skilled or unskilled ones. The report suggests that greater investment in education would tend to reduce inequality by increasing the proportion of high-skilled workers. I want to question three assumptions of the IMF report. The first is that increased income inequality is a bad thing, the second is that an increase in world average incomes is a good thing, and the third is that greater investments in education are bound to reduce inequality. I do not think that increased income inequality is bad (regrettable, unfortunate, deplorable, etc.), in general (an important qualification, relaxed below), when it does not involve any reduction in the incomes of a substantial fraction of the population. Suppose that over some period the average income of people in the bottom four quintiles of a nation's income distribution increases by 2 percent and the average income of people in the top quintile increases by 10 percent. The result is increased income inequality, but so what? Everyone is better off, and why should the fact that the rich are better off by a larger percentage concern anyone? What is true is that if the baseline is extreme inequality and many people are below the poverty level, a further increase in inequality can be politically destabilizing. Suppose 99 percent of a nation's people live in poverty and the other 1 percent are rich and over some period the average income of the 99 percent rises barely at all, lifting few above the poverty level, while the average income of the 1 percent who are already rich doubles. Such a pattern would exacerbate what would doubtless already be a high degree of social unrest. I argued in my blog post of December 10, 2006, that the continuing enrichment of the already superrich stratum of the American population is a potential source of political problems too. But concern with the impact of particular forms and degrees of inequality in particular countries at particular junctures in their history does not justify concern with a rise in inequality in the world as a whole, an approach that while natural for the IMF to take treats the entire world as if it were a single nation, thus abstracting from particular circumstances of particular nations, though it is the particulars that determine whether inequality is a serious problem. It might be argued that, given diminishing marginal utility of income, average and total human happiness would be increased if the incomes of the poor grew more rapidly than those of the rich, because presumably an extra dollar confers less utility on a rich person than on a poor one. But this observation would be pertinent only if rising inequality were a product of unsound policies, whereas the IMF report attributes it to economic factors, such as technological progress and absence of barriers to foreign investment, that are vital to continued growth in average incomes. The poor, unless consumed by envy, are not made better off by policies that leave them as poor (or make them even poorer) but reduce the incomes of the rich. Concern with inequality, it should be noted, is distinct from concern with poverty. It would be possible to alleviate poverty without reducing the share of income going to the wealthiest quintile of the population. Focusing on quintiles tends to break the link between equality and welfare. Suppose some adjustment in the tax code resulted in reducing the average income of persons earning $100,000 a year by 2 percent and increasing the average income of persons earning $50,000 a year by 1 percent (the difference reflecting the much larger number of persons in the lower income bracket and the deadweight cost of the tax increase on the higher-income taxpayers); would that increase average happiness? I doubt it. My second proposition is that, while again it is natural for an international organization like the IMF to consider increased global wealth a very good thing, there is no reason for any given individual to think that. None of us is a citizen of the world. We are citizens of particular countries, and our personal welfare is bound up with the welfare of our country rather than with that of the world as a whole. Do Americans benefit from the rapidly increasing wealth of China? Some do, of course, both as consumers and as suppliers. But there many losers (besides the obvious ones--those who make products that compete with imports to the United States from China), since China's rapid growth has increased the price of commodities such as oil, severely aggravated the problem of global warming, and contributed to the rapid growth of Chinese military power, which is a potential danger to the United States. Russia's increasing wealth has made Russia more bellicose and less friendly to the United States; and, in general, nations such as Russia that are rich in natural resources, especially oil, are not dependable allies of the United States--and they are all growing richer. And the technological progress that is such a big factor in increased world wealth makes international terrorism more dangerous than it would otherwise be. Where would terrorists be without cellphones, the internet and web, and cheap international air fares? Third, it is not certain that increased investments in education would result in less inequality. There is the cost of such investments to consider, and who within a society would bear that cost. (Taxpayer-subsidized tuition for students at Berkeley does not increase income equality in the United States.) One must also consider who would benefit the most from education. Suppose everyone in a nation had the identical opportunity to obtain as much education as he or she could benefit from. The abler students would receive a better education than the less able, and the preexisting inequality of human capital might persist or even increase. For notice that in the United States income inequality has been growing even though educational opportunities are abundant, with more than a third of the population obtaining some college education; most of the rest could obtain it as well if they thought they would benefit from it. Presumably, then, the countries that ought to be considering greater investment in education for the sake of reducing income inequality are those in which that inequality is greater than it is in the United States. In countries in which it is less, a greater investment in education would increase average incomes but might leave inequality unchanged--or even increase it to the U.S. level.

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