Expectations of the rich

September 20, 2010

This is a fantastic piece from Delong, the economist at Berkeley.  This section on increasing inequality at the top of the wealth distribution is illuminating:

He doesn’t say: “Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!” For he doesn’t look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Henderson doesn’t look down.

Instead, Mr. Henderson looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them–widening income inequality over the past generation has excluded him from the rich who truly have money.

It reminds me of a conversation I had recently with my father.  I was relating my recent (and belated) reading of Polanyi’s The Great Transformation and he was recounting a lecture that argued that critical to our modern economic system was the commercialisation of envy — that desiring or coveting what another possesses is the driving force of our demand-driven economies.  This suggests the causal mechanism operating on the rich — if those around you are becoming richer (or you become increasingly aware of those in the upper echelons of the top 1%, versus those in your immediate vicinity), you will covet more and more.  In addition, I would suggest that this mechanism was mitigated by social norms of modesty and gratefulness.  And that, in addition to increasing inequality at the top, this counteracting mechanism is increasingly unable to discourage the (already) rich from complaining about their lot.

Rodrik asks whether China’s mercantilism policies and its undervalued currency, the renminbi, has a positive or negative effect on other developing countries.

Arvind Subramanian from the Peterson Institute takes the negative position, arguing it makes the goods of other developing countries less competitive on international markets.

Helmut Reisen from the OECD takes the positive position, because the growth of many poorer countries are (increasingly) dependent on China’s growth.

Rodrik argues for the former, but focuses on the type of growth the two positions imply.  The latter sees growth in the provision of primary materials to China, which does the value-adding and final export to international markets.  The former encourages other developing countries to re-structure away from primary goods to higher productive activities, such as manufacturing and service provision.

I think it’s probably difficult to generalise to all other developing countries.  Some countries would have a tougher time re-structuring their economies.  For example, some African countries that export primary materials to China would surely struggle to re-structure their economies; whereas countries like Indonesia would surely benefit from doing more value-adding in country rather than becoming increasingly reliant on primary exports to China?

Here’s the link to the article: