The Economist Who Brought You Thomas Piketty Sees ‘Perfect Storm’ of Inequality Ahead

Branko Milanovic: “Pay attention to the losers.” Photo: Rade Krstinic/ Courtesy of Havrard University Press

Branko Milanovic has spent decades studying income inequality. During most of his 20 years as a lead economist at the World Bank, he says, “even the word inequality was not politically acceptable, because it seemed like something wild or socialist or whatever.” That began to change a few years ago, thanks in part to Milanovic, who helped introduce the English-speaking world to Capital in the Twenty-First Century, by Thomas Piketty, with a widely circulated 20-page review months before it went on sale in the U.S. in 2014. Since then, inequality has become a buzzword, and a central issue of the American presidential campaign. 

And now the Serbian-American economist — a senior scholar at the Luxembourg Income Study Center, a hub of international-inequality research at CUNY — is out with a book of his own. Global Inequality looks at income disparities both within countries and between them, how we got here, and whether there’s a way out. 

Millennials are basically being shafted in a number of wealthy countries, and in the U.S. young people are really behind Bernie Sanders, the inequality candidate.
There is this cleavage between millennials and baby-boomers, who are doing very well, who set up the social systems in times of prosperity, which, of course, now are all guaranteed. They benefited from large increases in real [inflation-adjusted] incomes over a period, and now from Social Security. I don’t think that can be reversed.

So are we looking at inevitable intergenerational warfare?
It’s unrealistic to expect that the type of jobs that people are likely to have in the future are going to be protected from foreign competition and that they will be stable jobs, that you’re going to get rid of these precarious or short-term jobs. And the danger is that people who were able to make reasonable amounts of money and wealth are now able to transfer that to their children. That creates another cleavage: within millennials.

That’s certainly felt very acutely in New York City — all those kids who are subsidized. But when it comes to tackling inequality, you’re skeptical that redistributive policies, like a more progressive income tax, could make much of a dent in inequality.
My impression is that people’s willingness to pay higher taxes — even though they’re lower than they used to be — has reached a limit. It could be because the perception now is that the government is inefficient.

Rich people might take their capital and go somewhere else.
Highly qualified people who make lots of money can work in London or Singapore. There’s an objective limit to the amount of redistribution we can do.

Both Trump and Sanders have denounced trade deals and vowed to protect American workers. Is reversing globalization possible or even desirable? Could you bring manufacturing back here, with protectionist policies?
Every force can be reversed. You can have OECD [Organisation for Economic Co-operation and Development] go against World Trade Organization rules and erect new walls. But I don’t think it’s likely, and I don’t think it’s desirable. The problem is, these forces have losers and winners all over. To believe you can have all winners is not really possible. 

Is part of the solution just managing the transition better for the losers?
It’s been forgotten by the Establishment in the rich countries that you have to pay attention to the losers. The approach was “if we are getting better off, somehow it would trickle down to the others and they should be patient and eventually things will be okay.” Greater attention has to be paid to that.

What does that mean? It means a higher minimum wage, which we know reduces poverty and reduced inequality. Education. And retraining. Education is more important in the longer term; retraining is important now.

Sanders wants to push us toward a more Nordic approach.
I’m quite sympathetic, [but] I have a little bit of doubt when he talks about the Nordic model. One problem is obvious: The U.S. is not similar to the countries we’re talking about. [But also] the old-fashioned large welfare states, of which Scandinavians were the most dramatic example, are under huge pressure from globalization and also from migration. I’m not talking about what is happening with Syrian refugees, because it could be a unique event due to the civil war, but [migrants] from Eastern Europe and Africa. Even if it can be shown that migrants aren’t disproportionately using the benefits of those welfare systems, the perception that they are actually exploiting the system is very strong. 

Meanwhile, the U.K. actually has a position called “mobility czar.”
I think people here would deride that as a bureaucratic joke.

In your book you argue that inequality in the U.S. probably hasn’t yet peaked. What keeps pushing it higher?
It’s a perfect storm. One is a very high concentration of capital incomes [returns on assets such as stocks or property]. That will continue [particularly since] the share of total income going to capital compared to labor has been increasing. 

Number two is that more and more people in the top one percent are rich, both in terms of the capital they receive a return on and their labor. It’s very new. You don’t have the old-fashioned thing with only capitalists and workers. Now the richest people have both kinds of income. It makes inequality greater while giving it a more meritocratic garb. That makes policy measures [to reduce it] more difficult.

The third element is homogamy — people marrying others with similar levels of income. This is a result of women becoming a lot more educated. 

The fourth is the functioning of the U.S. political system. It has now become much more clear that money is playing a very important role. In the past, I think people maybe had the myth of “participatory democracy” … now we see it’s really much more one-dollar-one-vote than one-person-one-vote.

Even so, you predict that at some point, inequality in the U.S. will “cycle down.”
What are the ultimate forces that would bring this down? The first one, which we’re witnessing, is the political backlash. 

The second is called “dissipation of the rents.” [Note: A “rent” in the economic sense is a market flaw. It’s often used to mean unearned income or profits in excess of what a perfect market of supply and demand would allow. “Rent seeking” — anathema to free-market enthusiasts — can happen when a business seeks a monopoly or benefits through lobbying.] If the technological revolution has led to all these new rents, gradually, as the patents or this technological progress peters out, these rents will be dissipated. People who are receiving high rents would start losing them, and that would reduce inequality.

With increases in the high-scale wages of the very educated, there’s an incentive to replace such workers, so we might see technological change that has so far been replacing lower-educated workers, in favor of robots and others, also beginning to replace the tasks performed by highly skilled people because they’re too expensive.

This doesn’t sound terribly positive.
When you look back historically, to the 15
th century, you’ll see the waxing and waning of inequality. That leads me to be a little bit optimistic that inequality does have a natural limit. It just cannot — in rich societies, in democratic societies — keep on going up forever.

The interview has been edited and condensed.

Milanovic: ‘It’s a Perfect Storm’ of Inequality