Enlightenment Now: The Case for Reason, Science, Humanism, and Progress

Developing countries today, like developed countries a century ago, stint on social spending. Indonesia, for example, spends 2 percent of its GDP, India 2.5 percent, and China 7 percent. But as they get richer they become more munificent, a phenomenon called Wagner’s Law.³⁶ Between 1985 and 2012 Mexico quintupled its proportion of social spending, and Brazil’s now stands at 16 percent.³⁷ Wagner’s Law appears to be not a cautionary tale about overweening government and bureaucratic bloat but a manifestation of progress. The economist Leandro Prados de la Escosura found a strong correlation between the percentage of GDP that an OECD country allocated to social transfers as it developed between 1880 and 2000 and its score on a composite measure of prosperity, health, and education.³⁸ And tellingly, the number of libertarian paradises in the world—developed countries without substantial social spending—is zero.³⁹

The correlation between social spending and social well-being holds only up to a point: the curve levels off starting at around 25 percent and may even drop off at higher proportions. Social spending, like everything, has downsides. As with all insurance, it can create a “moral hazard” in which the insured slack off or take foolish risks, counting on the insurer to bail them out if they fail. And since the premiums have to cover the payouts, if the actuaries get the numbers wrong or the numbers change so that more money is taken out than put in, the system can collapse. In reality social spending is never exactly like insurance but is a combination of insurance, investment, and charity. Its success thus depends on the degree to which the citizens of a country sense they are part of one community, and that fellow feeling can be strained when the beneficiaries are disproportionately immigrants or ethnic minorities.⁴⁰ These tensions are inherent to social spending and will always be politically contentious. Though there is no “correct amount,” all developed states have decided that the benefits of social transfers outweigh the costs and have settled on moderately large amounts, cushioned by their massive wealth.

Let’s complete our tour of the history of inequality by turning to the final segment in figure 9-3, the rise of inequality in wealthy nations that began around 1980. This is the development that inspired the claim that life has gotten worse for everyone but the richest. The rebound defies the Kuznets curve, in which inequality was supposed to have settled into a low equilibrium. Many explanations have been proffered for this surprise.⁴¹ Wartime restrictions on economic competition may have been sticky, outlasting World War II, but they finally dissipated, freeing the rich to get richer from their investment income and opening up an arena of dynamic economic competition with winner-take-all payoffs. The ideological shift associated with Ronald Reagan and Margaret Thatcher slowed the movement toward greater social spending financed by taxes on the rich while eroding social norms against extravagant salaries and conspicuous wealth. As more people stayed single or got divorced, and at the same time more power couples pooled two fat paychecks, the variance in income from household to household was bound to increase, even if the paychecks had stayed the same. A “second industrial revolution” driven by electronic technologies replayed the Kuznets rise by creating a demand for highly skilled professionals, who pulled away from the less educated at the same time that the jobs requiring less education were eliminated by automation. Globalization allowed workers in China, India, and elsewhere to underbid their American competitors in a worldwide labor market, and the domestic companies that failed to take advantage of these offshoring opportunities were outcompeted on price. At the same time, the intellectual output of the most successful analysts, entrepreneurs, investors, and creators was increasingly available to a gargantuan worldwide market. The Pontiac worker is laid off, while J. K. Rowling becomes a billionaire.

Milanović has combined the two inequality trends of the past thirty years—declining inequality worldwide, increasing inequality within rich countries—into a single graph which pleasingly takes the shape of an elephant (figure 9-5). This “growth incidence curve” sorts the world’s population into twenty numerical bins or quantiles, from poorest to richest, and plots how much each bin gained or lost in real income per capita between 1988 (just before the fall of the Berlin Wall) and 2008 (just before the Great Recession).

Figure 9-5: Income gains, 1988–2008

Source: Milanović 2016, fig. 1.3.