The public debate about inequality and income growth sometimes seems entirely focused on intra-country differences, and ignores the global trend of decreasing inequality.  In my reading on the subject I came across this graph, used in more than one article (but here’s one), which puts a lot of information in perspective:

Branko Milanovic, “Global Income Inequality by the Numbers: in History and Now” (click graph and go to page 12)

The U.S. middle class is roughly at the 80th percentile by real, purchasing-power-adjusted income.  The “stagnation” of the American Middle class is actually the low point in global income growth across the distribution. China’s middle class, residing at approximately the 40th percentile, has seen tremendous income growth.

Krugman calls this “The Valley of Despond” and designates it as one of the most important graphs of the year.  Scott Sumner addresses the issues of focusing on the top 20% here.  Scott is right to question whether people who advocate policies that help the 80th percentile at the expense of lower percentiles have the “moral high ground”.  It’s more accurate to say that they are thinking in near mode.  But that’s a distraction to the really important point for me.

This graph is the intersection of the most prominent political debates of our today: inequality, markets/capitalism, and the alleged “great stagnation”:

• We have seen extraordinary gains against the depredations of extreme poverty over the last 100 years and to me there can be little doubt that the world’s gradual conversion to trade and market-based systems are responsible for these unprecedented improvements in the human condition.  But the same trends that bring the world’s poor massively increased lifespans, clean water, indoor plumbing, electrification, shorter work weeks, cheap medicines, access to information and education, etc., have done so by opening up the market opportunities of the most developed countries to those  in the least developed ready to take them (i.e. India and China).  Less-skilled jobs migrate to places where people will work very hard for less (read, below the 60th percentile in the graph), replacing higher-payed and better-protected jobs at home. The remaining bastions of non-exportible unskilled labor are government and local entertainment and services.
• At the top, those who can take advantage of a globalized economy are increasingly in a winner-take-all environment.  Internet companies can make incredibly rapid gains of market share, expensive movies are supported by global viewership, those with perceived financial skills can rapidly attract the huge and portable supply of financial capital.
• The very bottom of the global heap are trapped by gangs of violent thugs, sometimes with the trappings of government.

I want to be careful to state that this is not zero-sum thinking. In fact, it’s amazing that these 80th percentile US incomes have grown in real terms (yes, grown, if you include value of non-cash income) while so much of the lower global percentiles have seized so many of their opportunities.  It is testimony to how non-zero-sum trade and capitalism are that productivity growth offered this much protection.  Still, improvement seems critical to human happiness, and it has been hard won for the US middle class in recent decades.

We would not want to cure this problem by protecting our labor markets.  It would not only harm US productivity and growth, but harm poorer individuals globally.  We cannot wave our hands and command capitalism to spread its benefits evenly across the income distribution.  Better to remain in far mode, and worry most about the very poorest.

The good news is that growth for the world’s poorest has narrowed labor arbitrage opportunities and made labor markets more meritocratic.  Automation has increased the productivity of laborers. US Manufacturing has had a small renaissance. In the future, institutional factors such as workforce education, stable and simple regulation, and proximity to other businesses will drive more middle class job growth.  Unfortunately, there seems to be very little political energy around those issues.