Twin Peaks Planet
by Paul Krugman
In 2014, soaring inequality in advanced nations finally received the
attention it deserved, as Thomas Piketty’s “Capital in the Twenty-First
Century” became a surprise (and deserving) best seller. The usual
suspects are still in well-paid denial, but, to everyone else, it is now
obvious that income and wealth are more concentrated at the very top
than they have been since the Gilded Age — and the trend shows no sign
of letting up.
But that’s a story about developments within nations, and, therefore,
incomplete. You really want to supplement Piketty-style analysis with a
global view, and when you do, I’d argue, you get a better sense of the
good, the bad and the potentially very ugly of the world we live in.
So let me suggest that you look at a remarkable chart of income gains
around the world produced by Branko Milanovic of the City University of
New York Graduate Center (which I will be joining this summer). What Mr.
Milanovic shows is that income growth since the fall of the Berlin Wall
has been a “twin peaks” story. Incomes have, of course, soared at the
top, as the world’s elite becomes ever richer. But there have also been
huge gains for what we might call the global middle — largely consisting
of the rising middle classes of China and India.
And let’s be clear: Income growth in emerging nations has produced huge
gains in human welfare, lifting hundreds of millions of people out of
desperate poverty and giving them a chance for a better life.
Now for the bad news: Between these twin peaks — the ever-richer global
elite and the rising Chinese middle class — lies what we might call the
valley of despond: Incomes have grown slowly, if at all, for people
around the 20th percentile of the world income distribution. Who are
these people? Basically, the advanced-country working classes. And
although Mr. Milanovic’s data only go up through 2008, we can be sure
that this group has done even worse since then, wracked by the effects
of high unemployment, stagnating wages, and austerity policies.
Furthermore, the travails of workers in rich countries are, in important
ways, the flip side of the gains above and below them. Competition from
emerging-economy exports has surely been a factor depressing wages in
wealthier nations, although probably not the dominant force. More
important, soaring incomes at the top were achieved, in large part, by
squeezing those below: by cutting wages, slashing benefits, crushing
unions, and diverting a rising share of national resources to financial
wheeling and dealing.
Perhaps more important still, the wealthy exert a vastly
disproportionate effect on policy. And elite priorities — obsessive
concern with budget deficits, with the supposed need to slash social
programs — have done a lot to deepen the valley of despond.
So who speaks for those left behind in this twin-peaked world? You might
have expected conventional parties of the left to take a populist stance
on behalf of their domestic working classes. But mostly what you get
instead — from leaders ranging from François Hollande of France to Ed
Milliband of Britain to, yes, President Obama — is awkward mumbling.
(Mr. Obama has, in fact, done a lot to help working Americans, but he’s
remarkably bad at making his own case.)
The problem with these conventional leaders, I’d argue, is that they’re
afraid to challenge elite priorities, in particular the obsession with
budget deficits, for fear of being considered irresponsible. And that
leaves the field open for unconventional leaders — some of them
seriously scary — who are willing to address the anger and despair of
The Greek leftists who may well come to power there later this month are
arguably the least scary of the bunch, although their demands for debt
relief and an end to austerity may provoke a tense standoff with
Brussels. Elsewhere, however, we see the rise of nationalist,
anti-immigrant parties like France’s National Front and the U.K.
Independence Party, or UKIP, in Britain — and there are even worse
people waiting in the wings.
All of this suggests some uncomfortable historical analogies. Remember,
this is the second time we’ve had a global financial crisis followed by
a prolonged worldwide slump. Then, as now, any effective response to the
crisis was blocked by elite demands for balanced budgets and stable
currencies. And the eventual result was to deliver power into the hands
of people who were, shall we say, not very nice.
I’m not suggesting that we’re on the verge of fully replaying the 1930s.
But I would argue that political and opinion leaders need to face up to
the reality that our current global setup isn’t working for everyone.
It’s great for the elite and has done a lot of good for emerging
nations, but that valley of despond is very real. And bad things will
happen if we don’t do something about it.