0.4 Income distribution  (Page 10/18)

Nevertheless, some important lessons have already emerged from the controversy over Piketty’s work.

There are perhaps four such lessons. First, published literature focused on the distribution of income or wealth is bound to be controversial, as it inevitably involves political as well as economic issues, not to mention disputes over data on wealth and income.

Second, it is apparent that while inequality has risen in many wealthy nations, global inequality has declined, not risen since 1980, Xavier Sala-i-Martin (2006), “World Distribution of Income”, The Quarterly Journal of Economics , 121(2): 351-397. as people in developing nations have been getting rich faster than have rich people in rich nations (See Figure 4-3). Moreover, the percentage of the world’s population living on less than $2.00 per day (adjusted for inflation) has halved since 1990.

Third the expenditure side of government budgets cannot be ignored in any serious discussion of income inequality. Piketty’s work ignores the redistributive effects of the spending side of government budgets. He does not take into account transfers and other benefits flowing from government expenditure programs especially entitlement programs and especially direct budget transfers to the poor, as in the earned income credit in the U.S., and conditional cash transfers in Brazil and Mexico. We will see in Chapter ___ that these benefits can be very sizable at the lower end of the income scale.

Finally, any serious discussion of capital in the 21st century cannot ignore what has been happening to the stock and quality of human capital. Significantly, Piketty’s definition of capital includes only what he calls non-human capital. Human capital as a component of total wealth is ignored, and especially ignores the rapid accumulation of human capital worldwide in recent decades. We will see in Chapter ___ (Human Capital) that certainly in the U.S. and other developed nations over the period 1975-2000 human capital was far more important than non-human capital in the nation’s growth. See Paul Beaudry&David Green (2002), “Changes in U.S. Wages 1976-2000”, NBER Working Paper No.8787. We will see in the next chapter just how important human capital has become worldwide, exceeding investment in physical capital in virtually all developing nations.

Finally, prescriptions of large tax increases designed to improve income distribution cannot ignore the unsuccessful history of such measures. Piketty’s conclusions are that only sharp increases in top rates of tax on high income, high wealth individuals will improve equality in income and wealth. The history of economic policy suggests otherwise.

That history discussed a few pages earlier suggests that, for developing nations these proposals would be even more dysfunctional than in rich nations, given the much lower capacity for tax enforcement and collection in the former. (See Chapter___).

A final reason that Piketty type proposals will likely have little effect on curbing income and wealth inequality in developing nations in the 21st century is because a growing source of inequality there has been the increasing worldwide displacement of labor in production, owing to technological revolutions now underway.