Causes of inequality according to Paul Krugman

I listen to a lot of podcasts, and one is Capitalisn’t, which is two economists talking about economics, sometimes with a third. The most recent podcast was with Paul Krugman, arguably the most famous economist in the US, maybe the world.

Source: Pew Research Center

In it they talk about a lot of things, but I was most interested to hear about why Krugman thinks the US economy has become more unequal over time. You can see in this chart by the Pew Research Center that income by the Top 1% has grown in the US.

So Krugman’s current view is that this has mainly been caused by political changes. Specifically he says that globalization is responsible for 5% of the increasing inequality, 10% from automation and the rest from other, mostly political changes. These include thing like changing regulations, declining unionization, etc.

That’s very different from the sense I get from other economists. I think economists would put much more weight on globalization and automation. Silicon Valley puts the majority of the blame on automation - that’s why so many of them have been proponents of Universal Basic Income (UBI), because they expect future automation will mean less work overall

Source: World Bank

Anyway, what does this have to do with Vietnam. I wasn’t really sure, because I thought that Vietnam is actually a place where people are being lifted out of poverty. And they are!

Looking at the data, the poverty figures have been falling steadily. I particularly like the one that shows the percentage of people living on $5.50 a day or less. This seems a more realistic or common-sense way of thinking about poverty. That’s just $2,000 a year, which is something that would be hard to live on but is doable. Now less than a quarter of Vietnam’s population lives under that level. Great news! In terms of abject poverty ($1.90 a day), that has fallen to just 1.9%, which is even better.

So the country is doing a good job getting people out of poverty. But are rich people getting a bigger share of the pie? In some ways, not so much. Looking at the income share figures, the top 10% take in 27.5% of total income as of 2018. That’s up since 2014 (26.8%) but below 2010 (30.9%). Even back in 2002, it was higher at 29.8%. But the lowest 20% now only take in 6.7% of all income, compared to 7.8% in 1992 and 8.0% in 1994.

Source: Oxfam

It doesn’t seem like inequality is that bad, at least on this one measure. But Oxfam put out a report that contradicts it. It is from 2017, but these trends don’t change that quickly, or at least I don’t think so. You can see from the chart on the right that there has been tons of income growth per capiata at the rich end but not much at the poor end.

And of course there is a lot of regional inequality, with cities like Ho Chi Minh and Hanoi rich, but the Central Highlands and the Northern Mountain regions poor. We have seen the result: rising urbanization. This is just as true in the US as well and globally. Cities are getting richer and richer.

Source: Oxfam

And there are other stats that are just as important for society, besides just income. For example, the ability to jump from one income group to another. This has fallen in the US (and it was/is part of the American dream: anyone can become rich). Vietnam appears to be on same trend.

One hope is that with all of the manufacturing jobs moving to Vietnam, there will be more and more unskilled or semi-skilled work that pays well. That could be very helpful in raising income at the lower end.

But these are hard issues to deal with. The US has been unable to do anything to reverse the tide. Hopefully Vietnam does better.