Saturday, August 6, 2016

Weekend Politics: Global Trade and Immigration and Inequality

Global trade is a big deal in Washington State. We are a big exporter. We also support a lot of exports from other states and imports as well as goods and commodities move through our state. Of late some of the export schemes have been a bit controversial - namely coal and oil. And of late global trade is a hot subject and how that plays out at a national level could have a profound impact on Washington State given our export economy and position as a trade pass through state.

Global trade has gotten a fair bit of political rhetoric. The GOP leader is wanting to pull the GOP in a sharply different direction and there is infighting within the Dems.  Branko Milanovic put out a paper (milanovic.pdf) a few years ago that in part might explain some of the discontent that is being expressed by some voters in the United States or is being tapped into by some politicians regarding trade. Two charts in the paper stand out to help visualize the impact of global trade:

This first one shows how income increased across the spectrum of different wealth classes worlwide. The far left side shows the poorest people and the far right side shows the wealthiest. As can be seen for most of the world's populations income increased substantially between 1988 and 2008. The poorest of the poor are one exception - they have remained poor. The other exception is that big dip at the 80th percentile. That is the American middle class as well as other country's middle classes and some countries upper middle classes. Stagnant wages on average or some making out fine and improving being off set by a lot doing worse. And that sharp rise on the far right shows that the wealthy have gotten even wealthier. Keep in mind that the chart shows percent change; hence, that percent rise for the wealthiest is a lot of money. The curve explains the resentment that is being tapped into and the directions that resentment might be aimed. Blame the wealth elites or all those once poor people in China or Mexico.

Milanovic discusses the results further

"But the biggest loser (other than the very poorest 5%), or at least the “non-winner,” of globalization were those between the 75th and 90th percentile of the global income distribution whose real income gains were essentially nil. These people, who may be called a global uppermiddle class, include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated. 

The most interesting developments, though, happened among the top quartile: the top 1%, and somewhat less so the top 5%, gained significantly, while the next 20% either gained very little or faced stagnant real incomes. This created polarization among the richest quartile of world population, allowing the top 1% to pull ahead of the other rich and to reaffirm in fact -- and even more so in public perception -- its preponderant role as winners of globalization."

The second chart looks at inequality due to class and location and how that balance has shifted between 1870 and 2000.

Milanovic describes the way this chart was crafted:

"The first part (class) is due to differences in incomes within nations, which means that that part of total inequality is due to income differences between rich and poor Americans, rich and poor Chinese, rich and poor Egyptians and so on for all countries in the world. If one adds up all of these within-national inequalities, one gets their aggregate contribution to global inequality. This is what I call the “class” component to global inequality because it accounts for (the sum) of income inequalities between different “income classes” within countries. The second component, which I call the “location” component, refers to the differences between mean incomes of all the countries in the world. So there, one actually asks “how much are the gaps in average incomes between England and China, between the Netherlands and India, between the United States and Mexico and so on influencing global inequality?” It is the sum of inter-country differences in mean incomes. In technical terms the first part - “class” – is also called “within inequality”, the second part – “location”- is called “between inequality”.

Inequality according to this chart has become greater, but class is not as an important factor than it once was. It suggests that world wide that countries are governing better at limiting internal inequality. Perhaps that is what is slipping in the United States. Location is now more critical. It has become very hard to do well more because of where one lives. To a degree there will be location differences within countries as well, particularly big diverse countries like the United States. Indeed, there are big income differences around the United States.

The two charts combined allow for some perspective on policy ideas regarding immigration and trade and income equality.

Milanovic speaks directly to this in his concluding remarks:

"But the remarkable thing is that a very large chunk of our income will be determined by only one variable, citizenship, that we, generally, acquire at birth. It is almost the same as saying, that if I know nothing about any given individual in the world, I can, with a reasonably good confidence, predict her income just from the knowledge of her citizenship. 

Those who are considered nationally poor in the United States or the European Union have incomes which are many times greater than the incomes of the poor people in poor countries and moreover often greater than the incomes of the middle class in poor countries. And if that gap is so wide, then one cannot expect any kind of coalition between these income-heterogeneous groups of nationally poor people

 If the main determinant of one’s income is now location, who are the underdogs? People who live in poor countries. And what do underdogs want to do? They want to become richer at home, or failing that, to migrate to richer places. 

This is because the major implication of a world where location matters is that migration can significantly increase a person’s income. The way to improve one’s standard of living is simply to move to a richer country. In Albania, about 30% of the population have incomes that are below the poverty threshold in Italy, and obviously these people, even if they were to become the poorest people in Italy after migration, would still improve their real income. The same is true for Argentina: a very high percentage –about a quarter of the population—have incomes that are below the Italian de facto poverty threshold. And finally consider the Ivory Coast, as a representative of African countries. There, a staggering 80% of the population live below the Italian poverty threshold. So if these 80% of Ivoirians were to move to Italy, they would all become better off— even if they were just to join the poorest Italians.

I conclude with something that resembles a slogan: either poor countries will become richer, or poor people will move to rich countries. Actually, these two developments can be seen as equivalent. Development is about people: either poor people have ways to become richer where they are now, or they can become rich by moving somewhere else. Looked from above, there is no real difference between the two options. From the point of view of real politics, there is a whole world of difference though." 

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