Nicholas Kristof writes:
The truth is that Latin America has matured and become more equal in recent decades, even as the distribution in the United States has become steadily more unequal.
The best data series I could find is for Argentina. In the 1940s, the top 1 percent there controlled more than 20 percent of incomes. That was roughly double the share at that time in the United States.
Since then, we’ve reversed places. The share controlled by the top 1 percent in Argentina has fallen to a bit more than 15 percent. Meanwhile, inequality in the United States has soared to levels comparable to those in Argentina six decades ago — with 1 percent controlling 24 percent of American income in 2007.
As I’m sure Kristof understands, Argentina has gone through a period of wrenching economic change over the last 20 years. In 1989, at the start of Carlos Menem’s presidency, the country embraced a series of controversial structural reforms, including bungled privatizations, and a decidedly problematic currency peg that nevertheless prompted a boom in foreign direct investment and, for a time, economic growth. But then, after the 1995 peso crisis in Mexico and the international contagion that hit emerging economies in 1998, Argentina went into a pronounced slump. This was followed by a severe economic crisis from 1999 to 2003 that led to a sharp contraction and emigration of many of the country’s most skilled and productive workers, with large numbers heading to North America and Europe.
How bad was this sharp contraction? The Economist offered a glimpse in 2004:
The economic slump of 2001-02, which followed three years of recession, left the social fabric torn. Much of the growth of the 1990s was wiped out (see chart 1). In 2002, income per head was 22% below its level of 1998. Unemployment soared: at its peak it reached 18% (or 21% if those on an emergency welfare programme are included), though it has now fallen to around 15%. More than half of all Argentines dropped below the national poverty line.
I’m sorry, but it is an embarrassment that Nicholas Kristof, clearly an accomplished reporter, hasn’t bothered to think through how this history might have impacted Argentina’s inequality landscape. Does this sound like the kind of stable political environment in which closely held firms would flourish by offering generous compensation, would-be international financiers would settle in or remain in Buenos Aires and amass wealth, and entrepreneurs would build and scale up new firms?
Argentina then experienced what appeared to be a robust recovery from 2003 to 2007, driven by public interventions that at least some critics have described as unsustainable. The leaders of this populist revival, the Kirchner family, have been criticized for their authoritarian style, for rewarding cronies with lucrative government contracts, for seizing private retirement funds, and for sparking double-digit inflation that has helped erode the wealth of many of Argentina’s households. The result was an extraordinary political repudiation in 2009. Confiscatory policies certainly didn’t instill much confidence in Argentina’s economic elite, which, by the way, wasn’t always playing by income tax rules in a way that’s susceptible to sound data analysis.
So: would Nicholas Kristof like the United States to embrace ruinous economic policies that cause growth to tank and large numbers of U.S. citizens to emigrate so that the income share of the top 1% and top 0.01% will markedly decline?
And does he understand that the taxable income landscape changed over the 20th century more than we fully understand, i.e., that far more compensation for high earners at midcentury came in the form of fringe benefits?
And does he understand the excess burden of the tax cuts he’s criticizing, and the northern European insight that steeply progressive income taxes are not the best way to fund high-quality public services?
I’m glad to see that Nicholas Kristof has found a cause he is excited about. But this is egregious.
I should note that Brazil tells us a different story: the taming of inflation, relatively balanced growth, and generous — some would argue overly generous, on grounds of discouraging work effort in regions like the poverty-stricken Northeast — conditional transfers really have made a difference in the lives of the country’s poor. As inequality has increased in South Africa, it has steadily declined in Brazil. More important is the fact that the poverty rate in Brazil has fallen at a fast clip. Of course, Brazil is at a different stage in its economic history, which has many implications for the inequality landscape, e.g., more educated populations tend to experience a higher degree of wage dispersion, and older U.S. cohorts are among the most educated in the world while younger U.S. cohorts are in a crowded field.
P.S. Will Wilkinson has done a much better job of explaining where Kristof goes wrong than I have in this post:
There are many possible causes of a high level of income inequality. The historically most typical cause is the concentration of political power in the hands of a predatory elite. This is the main explanation for the typically high levels of Latin American income inequality. This is not the main explanation for the high levels of income inequality in the United States and Great Britain. The main explanation for widening income gaps in wealthy, advanced liberal democracies is a complicated combination of (1) increasing economic returns to the acquisition of high levels of skill; (2) low supply of highly-skilled workers relative to demand; (3) changes in the way executives are paid, and in the norms governing executive pay; (4) technology-driven magnification of top rewards in “winner-take-all” or “superstar” markets; and (5) relatively low political demand for higher levels of progressive redistribution. Unlike expropriation and monopolisation by ruling elites, none of these causes of rising inequality are particularly objectionable in their own right. In a plutocratic California, it bears pointing out, the state’s fourth wealthiest person wouldn’t have become such by running a company that creates immense consumer surplus by dramatically lowering the transaction costs of selling goods to a large market.
Mr Krisof is right to applaud declinining inequality in Latin America not because this is good in itself, but because it is driven by desirable trends. Latin America’s decline in inequality is mainly due to the expansion of basic education (ie, due to a decrease in the proportion of the population with no or little education), and to some degree due to improvements in the availability and quality of democratic institutions, which has likely increased the responsiveness of policy to the preferences of poorer voters. Much of Latin America is travelling up a path the United States trod long, long ago. The political economy of inequality here and there is so different that it really doesn’t make sense to compare levels out of developmental and institutional context.
I hope that Nicholas Kristof reads Will’s post.