Income, welfare, convergence

by Chris Bertram on January 27, 2011

Doug Saunders has a blog post about Branko Milanovic’s new book The Haves and the Have-nots . I haven’t read the book, but, according to Saunders, it denies that there is a convergence in living standards between Western workers and the Chinese. Here’s the reasoning:

“If the U.S. GDP per capita grows by 1 per cent, India’s will need to grow by 17 per cent, an almost impossible rate, and China’s by 8.6 per cent, just to keep absolute income differences from rising,” he observes. “As the saying goes, you have to run very, very fast just to stay in the same place. It is therefore not surprising that despite China’s (and India’s) remarkable success, the absolute income differences between the rich and poor countries have widened.”
And they have: Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000, and, he notes, “of course so has the absolute gap in welfare between the average American and the average Chinese.”

Spot the non-sequitur. Even if the dollar income gap has widened in absolute terms there’s no reason to believe that the welfare gap has similarly widened, for the simple, and obvious reason of the declining marginal utility of income. On any plausible picture, the $525 to $5,000 transition is life-changing, whereas the $25,000 to $38,000 change is merely nice (especially if enough other people get the same increase and much of the increase goes on bidding up the price of inherently scarce goods).

Saunders continues:

You may think of the United States as a place of extremes of wealth and poverty, and it is. Nevertheless, at the moment, the very poorest people in America, the 5 per cent with the lowest incomes, have better lives and more purchasing power than the top 5 per cent of income earners in India and the top 10 per cent in China.

Well I won’t quibble with the “more purchasing power” point, but “better lives” is really pretty dubious, since we know that by many objective measures poor black men in the US do worse than even some poor people in India.

{ 86 comments }

1

JLR 01.27.11 at 6:52 pm

have better lives and more purchasing power than the top 5 per cent of income earners in India and the top 10 per cent in China.

Presumably, “…than all but the top 5 percent…” is what was meant.

2

Chris Bertram 01.27.11 at 7:01 pm

Well the same phrase appears in the version printed in Canada’s Globe&Mail

http://www.theglobeandmail.com/news/world/doug-saunders/international-inequality-is-alive-and-well/article1879263/

3

matt wilbert 01.27.11 at 7:08 pm

Of course you are correct that the increment from 500 to 5000 is more significant than the increase from 25K to 38K, but the underlying idea is misleading anyway. If the rates of the past two decades cited in the article continued, in another two decades the Chinese income would be at 47600 and the US income would be at 74650, so the absolute dollar gap would have dropped.

Logarithms rule.

4

Random 01.27.11 at 7:09 pm

poor black men in the US do worse than even some poor people in India.

The linked blog post appears to limit the Indians to people from Kerala, which, if I recall some half-read reading properly, is a very weird place on precisely these sorts of social health grounds. That is, the aberration might be the other guys.

5

Doug Saunders 01.27.11 at 7:14 pm

Hi Chris – – Good post. Yes, I did mean the top 5 per cent rather than “all but the top 5 per cent.” What Milanovic looks at is income divided into population ventiles – – that is, into 20 slices each representing a 5 per cent share of the income spread.

The bottom ventile of American income-earners – – that is, the 5 per cent of the population who earn the least money – – make more money, on average, than the top ventile of Indian income earners – – that is, the average earnings of the top 5 per cent of Indian income earners.

You do get a group of people in India, of course, who make more money than the poorest 5 per cent of Americans, but they are far smaller than 5 per cent. I believe that if you divide income into 1 per cent categories, you’ll find that the top 2 or 3 per cent of Indian income earners make more money on average than the bottom 5 per cent of US.

Hope that helps.

As for your quite legitimate point about declining marginal utility of income and the incongruence of livelihood improvements with income improvements, I’ll have to throw that to Branko Milanovic himself, as gauging it is beyond my ken – – but certainly his point about a non-narrowing of income gaps is valid, and is the main point I was focusing upon.

6

Zvi Wolf 01.27.11 at 7:21 pm

PPP adjusted income should be used to compare societies at different income levels. The wage level of non-traded goods reflects the overall society’s wage level. Chinese incomes would not go far in the US, but the money income differential way overstates the differential in purchasing power, because Chinese buy local goods and services. The absolute welfare gap has gone down a lot. Milanovic is comparing apples & kumquats.

7

Zvi Wolf 01.27.11 at 7:22 pm

Oops, mean the price of non-traded goods reflects the overall society’s wage level.

8

John Quiggin 01.27.11 at 7:25 pm

A more clear-cut problem with the case is that the calculations only work for one year, but are presented, in the quoted passage, as if they are true for ever.

Let’s suppose that US has 8 times China’s income at the beginning of Year 1. For that year, if the US grows at 1 per cent, and China grows at 8 per cent, the absolute difference remains unchanged. But, if those growth rates continue, then, every year after that, the absolute gap declines. After 9 years, China’s income has doubled (rule of 72) while the US has risen 8 per cent. After 10 years, China has one-quarter of the (now 9 per cent higher) US income. Lather, rinse and repeat and, after thirty years, the gap has been closed.

9

Billikin 01.27.11 at 7:28 pm

“And they have: Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000, and, he notes, “of course so has the absolute gap in welfare between the average American and the average Chinese.”

Err, are these figures not adjusted for inflation?

Also, what about the fact that the Chinese are not letting their exchange rate float?

Thanks.

10

Barry 01.27.11 at 7:35 pm

‘…average American worker…’?

Does anybody spot the error there, especially when talking about growth?

11

Dong Haotian 01.27.11 at 7:59 pm

@7: exactly. The USA and PRC are massively unequal societies, and are both continually becoming more unequal. Wages have in fact not increased for US workers over the period in question. The picture in China is complicated; urban workers with the right residency status have seen rising incomes, as have a rapidly growing elite, whereas rural incomes have not increased by all that much (for many, they have declined if you correctly account for the value of various discounted or free services previously provided under the old economic system which cannot be mentioned here for spam filter reasons).

As for the claim that America’s bottom 5% are somehow better off than China’s top 10%, well, I’d say it’s pretty self-evident how absurdly false this is. China’s top 10% has huge inequality within that category, but China’s top 5% is really fucking rich by Third World standards, and America’s bottom 5% are really fucking poor by First World standards.

The general point that China should be understood as a “poor country” in its economic conflicts with the US is definitely correct, tho.

12

Tom Smith 01.27.11 at 8:23 pm

JQ has already made my point, but I’ll repeat it anyway: the arithmetic in the quoted passage is just completely wrong. If A and B grow at constant rates and A grows faster than B then A must overtake B regardless of how far behind it starts. This doesn’t really inspire confidence in the quality of the book.

13

Omega Centauri 01.27.11 at 8:53 pm

As Matt says logarithms rule. Doug is being highly innumerate in his reasoning. Lets apply his logic to a comparison between myself and Bill Gates. Someone proposes to give me a $100,000 per year raise, but I have to agree to Bill Gates getting a $150,000 per year raise. By, his logic I’d want to turn it down because it means Bill is getting even further ahead of me!

And indeed, studies of utility, have shown a logarithmic effect. The more stuff you have, the more stuff it takes to incrementally improve your wellbeing.

14

Steve LaBonne 01.27.11 at 9:00 pm

I’m just in awe of the fact that this guy can’t even draw two non-parallel lines on a graph and see that they will eventually intersect. Bless me, what do they teach them in these schools?

15

zamfir 01.27.11 at 9:10 pm

Isn’t he roughly talking about the income level where indian households start having servants?

16

mpowell 01.27.11 at 9:15 pm


If the U.S. GDP per capita grows by 1 per cent, India’s will need to grow by 17 per cent, an almost impossible rate, and China’s by 8.6 per cent, just to keep absolute income differences from rising,” he observes. “As the saying goes, you have to run very, very fast just to stay in the same place.

This statement is incredibly stupid. Others have already pointed out the various problems with it. How can I take anyone seriously who would write this in a book?

17

Henri Vieuxtemps 01.27.11 at 9:25 pm

I’m just in awe of the fact that this guy can’t even draw two non-parallel lines on a graph and see that they will eventually intersect.

Ah, but you see, because the earth is round the fifth postulate doesn’t hold.

18

chris 01.27.11 at 9:39 pm

Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000

This is a completely nonsensical way of calculating an income gap. The *ratio* of a US worker’s income to a Chinese worker’s has gone from roughly 50:1 to 8.5:1 — which would tell you all you need to know, if not for the notoriously deceptive nature of “average incomes” and the different price levels between the two countries. But even after you adjust for those things, I think you find that the median Chinese worker has gotten closer to the median US worker, not further.

19

Steve LaBonne 01.27.11 at 9:59 pm

Ah, but you see, because the earth is round the fifth postulate doesn’t hold.

But I have it on good authority- Tommy Airmiles- that the world is flat!

20

Henri Vieuxtemps 01.27.11 at 10:01 pm

Nah, they’ll never catch up. Imagine China as Achilles and the US as the Tortoise, and then it all makes perfect sense.

21

Walt 01.27.11 at 10:30 pm

It’s an artifact of using “absolute difference” as a measure. If you’re familiar with calculus, it’s easy to check that in this case, the “absolute distance” measure first increases with time, but at some point it begins to decrease, and then decreases without limit.

22

Colin Reid 01.27.11 at 11:07 pm

It seems the typical economic models are built around an exponential model of growth, which would make ratios the natural form of comparison as to whether an economy is ‘catching up’ or not.

If the US grows at 1% and China at 8.6% indefinitely, then China would catch up per capita (in nominal, not PPP terms) in about 35 years’ time.

23

Robert Waldmann 01.28.11 at 12:03 am

Ah Milankovic. I recall hearing him argue that, back when the government listened to him, Yugoslavia had the fastest GDP growth rate in the OECD. He didn’t discuss absolute income differences then.

Consistency is the hobgoblin of small minds.

24

Doug Saunders 01.28.11 at 12:04 am

Zvi: The figures cited in the column are all PPP inflation-adjusted figures (as I wrote). Non-PPP Chinese average wages are much lower and would make the widening of the gap appear to be even more dramatic. But we’re strictly talking constant-dollar purchasing-power here.

25

L2P 01.28.11 at 12:43 am

“You may think of the United States as a place of extremes of wealth and poverty, and it is. Nevertheless, at the moment, the very poorest people in America, the 5 per cent with the lowest incomes, have better lives and more purchasing power than the top 5 per cent of income earners in India and the top 10 per cent in China.”

That’s very, very difficult to believe.

Per the 2009 census, it looks like the bottom 5% of households in American earn less than $7,500. The AVERAGE Chinese worker makes roughly $5,000. Ignoring price differences and etc., it looks like the poorest 5% of households (not workers, households) can barely out-purchase the AVERAGE Chinese worker, let alone “the top 10 percent.” (Let’s ignore that those slices include Americans making literally nothing, and Chinese earning billions.)

What gives here? Do the top 10% of Chinese workers make barely more than the average?

26

Sev 01.28.11 at 1:32 am

“Better lives” also ignores the social status/social relations aspects of being on the top or bottom of the heap, which are pretty important, or so Satan informs me. Of course, conservatives in developed societies habitually make these arguments against any meliorist measures for their have-nots.

27

Peter Whiteford 01.28.11 at 1:34 am

Interesting points made here when not so long ago others were arguing here that it it is absolute money differences that count when looking at trends in income inequality in the United Kingdom.:
http://crookedtimber.org/2010/10/01/fun-with-gini-coefficients/

I think that the statement that the poorest 5% of US households are better-off than the richest 5% of Chinese households while possibly correct “on average” is potentially misleading. Within the richest 5% of Chinese households there are likely to be a subset of very rich people who are much better-off than anyone in the poorest 5% in the US. There are also very poor people in the US who won’t actually appear in the income surveys because they don’t live in households – people in prisons or gaols, nursing homes and the homeless.

Having said this, it is worthwhile pointing out that GDP per capita dramatically overestimates the average wellbeing of Chinese households. Household disposable income is a much lower share of GDP in China than it is in most OECD countries and household consumption is even lower. The IMF paper below shows that adjusted household consumption (taking into account government consumption of health and education) is 80% of GDP in the USA but 44% of GDP in China.

http://www.imf.org/external/pubs/ft/wp/2007/wp07181.pdf

28

Ken Lovell 01.28.11 at 6:02 am

So the poorest 5% of Americans can own their own homes, drive late-model cars and send their kids to study at offshore universities?

Sometimes a little empirical observation provides much greater insight than any amount of armchair deductions from statistics.

29

Peter Whiteford 01.28.11 at 7:13 am

Ken

The point probably is that it is not the richest 5% of the Chinese population who are doing this – there are after all about 75 million people in the richest 5% of the Chinese population.

While lots of them own their own houses and drive late model cars (probably fewer than own their own flat), the proportion who send their kids to offshore universities or come on foreign holidays is likely to be much smaller than this. If it is the richest 5-10 million Chinese who are doing this, then we are only talking about one-third to two-thirds of one per cent of the Chinese population. If it is the richest 1 million, then it is less than one-tenth of 1% of the Chinese population.

So it is possible that the average cash income of the poorest 5% of Americans is higher then the average of the top 5% of Chinese, but as the statisticians say: averages mislead.

30

The Creator 01.28.11 at 7:27 am

The comparison between the United States and the PRC is also quite difficult to make because in the PRC a large number of services are state-subsidised and therefore do not come out of personal income, where in the US they are privately owned and therefore come out of personal income.

Therefore, a person earning $5,000 per annum in the United States is potentially less able to access healthcare, education, etc. than a person earning the same amount in China. Furthermore, although inflation-adjustment may be valid (though, as someone pointed out above, the actual earnings of US workers are reputed to have fallen even before the depression began, making the claim that they have risen rather suspicious) the purchasing power of a dollar is far more in China than in the United States.

It does seem that this is a farrago of nonsense intended to reassure Americans that their relative decline is not real; I’m sure similar things were being written in Rome around 430 AD.

31

Peter Whiteford 01.28.11 at 7:54 am

Health and education services are far less state subsidised in China than in the USA – the costs of health care in China are in fact more likely to lead to financial catastrophe than in any developed country, since they mainly rely on personal accounts in urban areas and the rural health care system has been dismantled since 1979. This is likely to be one of the main reasons why China has such a high household savings rate.

32

Tim Worstall 01.28.11 at 9:49 am

“Per the 2009 census, it looks like the bottom 5% of households in American earn less than $7,500.”

I’m not entirely sure that’s even possible. The value of government supplied services (Medicare, Medicaid, education free at the point of use, food stamps, whatever) is higher than that. And yes, it is one of the known errors of US poverty and income figures that benefits in kind are not counted as income.

33

Barry 01.28.11 at 1:17 pm

Tim, this assumes that they are getting those services to which they are legally entitled to. I have repeatedly heard the disability payments, for one example, are extremely hard to get, that one *will* be denied the first time, no matter how disabled one is.

When there are a lot of very difficult hoops to jump through, those least capable of negotiating those hoops will be out of luck.

34

Henri Vieuxtemps 01.28.11 at 1:45 pm

The point probably is that it is not the richest 5% of the Chinese population who are doing this – there are after all about 75 million people in the richest 5% of the Chinese population.

According to this piece in China Post (Taiwan newspaper):

In other words, some 310 million people in China have an income that is on a par with that of people in France or the United States, but there are also hundreds of millions living at the bottom of society in abject poverty. “Don’t forget, China’s current success is built on 300 million people taking advantage of 1 billion cheap laborers. And the unfair judicial system and the unfair distribution of wealth are making the challenges even greater,” Zhou [Xiaozheng] says with a tone of stern reproach.

35

Zamfir 01.28.11 at 2:32 pm

That 310 million sounds way to high. Even in the richest parts of China, most people live in conditions you don’t really encounter at all in France or the US.

Not grinding poverty or starvation or so, but definitely lacking lots of things Westerners take for granted, and many of the material goods they do have are of a very low quality.

Shanghai might be the closest to a large area with sort-of developed country standards of living (outside of Hong Kong of course), but even there you don’t have to look very hard to find deep poverty by the standards of France or the US.

36

Jaybird 01.28.11 at 3:42 pm

(especially if enough other people get the same increase and much of the increase goes on bidding up the price of inherently scarce goods).

Perhaps the government could help by passing a law guaranteeing access to inherently scarce goods.

37

someguy 01.28.11 at 4:02 pm

The Creator,

I am skeptical. Maybe, I am sure a lot was written. But Rome had already been sacked by the Visigoths in 410 AD.

Also the income’s in question are based on purchasing power not absolute income comparisions. Which has already been noted on the thread.

Based on that track record I am going to say I will also go with what Peter Whiteford said.

38

Tim Worstall 01.28.11 at 4:07 pm

Barry @ 33@

“Income. ‘‘Total income’’ is the sum of the amounts reported separately for wage or salary
income; net self-employment income; interest, dividends, or net rental or royalty income, or
income from estates and trusts; social security or railroad retirement income; Supplemental
Security Income; public assistance or welfare payments; retirement, survivor, or disability pensions;
and all other income. The estimates are inflation-adjusted using the Consumer Price
Index.”

http://www.census.gov/acs/www/Downloads/survey_methodology/acs_design_methodology_ch06.pdf

Doesn’t look like it includes goods or benefits in kind to me.

39

someguy 01.28.11 at 4:07 pm

‘Well I won’t quibble with the “more purchasing power” point, but “better lives” is really pretty dubious, since we know that by many objective measures poor black men in the US do worse than even some poor people in India.”

But presumablely with just a little more income redistribution we can fix that problem.

Right?

40

someguy 01.28.11 at 4:18 pm

Barry,

Impossible for all but 8.3 million.

http://www.statehealthfacts.org/comparemaptable.jsp?ind=344&cat=6

41

More Dogs, Less Crime 01.28.11 at 4:38 pm

Chris, could you provide Sen’s cite for the claim that lifespan differences remain within America even after adjusting for income? Or is that original research on his part?

42

Chris Bertram 01.28.11 at 6:25 pm

MDLC: good question. That blog post was back in 2003 …. I’ve just had a look at the pages of _Development as Freedom_ where I’d expect to find it and didn’t. Googling around, I wouldn’t be surprised if the source is Murray CJL et al. US patterns of mortality by county and race 1965-1994. Cambridge, MA, Harvard Center for Population and
Development Studies, 1998. As to the likelihood that the claim is true …. well there might some reason to believe that from Eric Klinenberg’s study of the Chicago heatwave … see http://www.press.uchicago.edu/Misc/Chicago/443213in.html

43

piglet 01.28.11 at 9:30 pm

As an aside, comparing incomes based on PPP (purchasing power parities) is highly problematic for many reasons. A top income in India certainly buys more than a low income in the US even if PPP would come out similar, because many of the services that a rich person would want to buy depend on the wage differential with poorer people.

44

Peter Whiteford 01.28.11 at 9:30 pm

According to the IMF the Chinese economy is a bit more than twice as large as the French economy (population 65 million), whereas if there were 310 million Chinese as well off as the average French person the economy would be more than five times as large (including what the remaining 1 billion get). Following the same logic, the Chinese economy would be bigger than the US economy (population 311 million), whereas according to the IMF it is a bit more than one third the size.

So I think the China Post has it wrong.

As I said above, I think it is technically possible that the average income of the top 5% in China is as high as the average income of the bottom 5% in the USA, but this is still not a meaningful comparison of wellbeing. The bottom 5% in the USA have a low cap, while the richest 5% in China have an extemely high cap, so this is comparing positions where the average might be similar but the distributions are wildly different. In addition the social position of the rich in China will be very different from that of the poor in the USA.

45

chris 01.28.11 at 10:18 pm

@43: Doesn’t PPP take into account local costs of services? It would seem practically worthless if it didn’t.

But then, the relative weight of goods vs. services may depend on who is doing the purchasing; it’s possible that the poor may buy a lot fewer services, even relative to their total income, simply because they can’t afford them, so they have to do whatever it is themselves or do without.

46

piglet 01.28.11 at 11:34 pm

“Doesn’t PPP take into account local costs of services? It would seem practically worthless if it didn’t.”

Well it tries, but there are many problems and pitfalls. PPP really pretends that an average Indian would buy the same goods and services than an average American. That is obviously not the case. (As an aside, even between Americans and Europeans I think there is considerable distortion from applying a standard PPP conversion which makes European incomes appear lower.)

Also, as you point out, it depends on who is doing the purchasing. A rich person in any country buys a different basket of goods than an average or a poor person. A perverse effect of PPP comparisons that has been debated years ago – and I wish I could locate the reference to it – is that the PPP of poor people in poor countries may be inflated in the following way. Personal services such as hair-cutting, manicure, pedicure, etc. are much more expensive in rich countries than in poor. But the poor spend most of their income on food. So using an average PPP conversion would overestimate the purchasing power of the poor in poor countries, and probably underestimate the PP of the rich.

47

Stuart 01.28.11 at 11:45 pm

but certainly his point about a non-narrowing of income gaps is valid, and is the main point I was focusing upon.

I guess it is valid if you don’t believe in compounding (of growth, instead of interest as is the most common occurence).

48

piglet 01.29.11 at 9:24 am

“the average American worker has gone from $25,000 to $43,200”

Of course Barry is right, GDP per capita is not the average income. Real income has stagnated for many American workers.

And Billikin is right: these figures are not inflation adjusted. It is quite annoying that non-adjusted figures are so frequently being cited.

For the record, here are the US GDP figures in 2005 billion chained $, census population counts in million, and per capita GDP:

1990 — 8,033.9 — 248.7 — 32,304
2000 — 11,226.0 — 281.4 — 39,893
2010 — 13,248.7 — 308.7 — 42,918

Per capita GDP increased 2.1% p.a. during the 1990s and 0.7% during the naughts.

49

John Quiggin 01.29.11 at 9:35 am

@Piglet on PPP. Broadly speaking, the base prices are those of rich countries (mostly in Europe). The more different a given country’s relative prices are from those of the base, the better that country will look.

To spell out your example more precisely: because wages are low in poor countries, personal services are cheap and people buy lots of them. But since these services are expensive in rich countries, the estimated value of the poor country average consumption bundle looks better than it would if the poor country’s prices were taken as the base.

So, for example, people in poor countries whose general living standards are well below those of the median European may nevertheless have live-in servants, something which few Europeans can afford. A PPP comparison will make those people look rich, and thereby drag up the average for the poorer country.

50

Henri Vieuxtemps 01.29.11 at 9:46 am

According to the IMF the Chinese economy is a bit more than twice as large as the French economy (population 65 million), whereas if there were 310 million Chinese as well off as the average French person the economy would be more than five times as large (including what the remaining 1 billion get). … So I think the China Post has it wrong.

Well, it seems to me that if we accept (for the sake of argument) that the above mentioned Taiwanese sociologist is right that 300 million people in China are robbing blind the rest 1 billion Chinese, then, accepting (for the sake of argument) your numbers, it should be quite possible that the top 300 million in China have a standard of living comparable with, say, the third or fourth quintile of the income earners in the French society. Certainly well above the bottom 5%.

51

Linca 01.29.11 at 9:55 am

One thing I don’t really understand is that the bottom 5% of the US population is going in and out of jail quite regularly, or is spending its life there ; is often dependent on the State for food and housing ; is unemployed or holds temporary, partial time jobs with no job security… I don’t see how those people are better off than anyone in the top 5% of the Chinese population ; they don’t go hungry, they can easily afford to eat out for 3 meals a day !

52

someguy 01.29.11 at 2:15 pm

piglet ,

‘And Billikin is right: these figures are not inflation adjusted. It is quite annoying that non-adjusted figures are so frequently being cited.

For the record, here are the US GDP figures in 2005 billion chained $, census population counts in million, and per capita GDP:

1990—- 8,033.9—248.7—32,304
2000—11,226.0 —281.4—39,893
2010—13,248.7—308.7—42,918′

From Milanovic

‘n 1980, the purchasing power of the average Chinese citizen’s income was the equivalent of $525 per year; it now stands somewhere between $5,000 and $6,000.’

‘Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000’

It very much looks like he is using the same set of numbers as you.

You get an increase of 32 to 42 from 1990 to 2010. He gets an increase of 25 to 43 from 1980 to some where just short of now.

53

someguy 01.29.11 at 2:56 pm

Here

http://www.tradingeconomics.com/china/income-share-held-by-lowest-20percent-wb-data.html

http://www.census.gov/hhes/www/income/data/historical/household/index.html

All very rough but 1.3 trillion x 5k = 6.5 trillion x .314/130 billion = 15K in PPP adjusted average income for the top 10% of earners in China. Since the distribution at the top is probably pretty skewed it would be a bit less in median terms.

I hope I got that right.

Where are as the mean income for the bottom 20% on the US looks to be 11K.

So I am pretty sure 310 million Chinese don’t enjoy a lifestyle on par with the median French household.

Not sure about the bottom 5% in the US having a higher PPP adjusted income than all but the top 10% in China but it looks like it would be close.

The 4 Quintile in China takes .22. So .22 * 6.5 = 1.4 /260 = 5.3K vs 11K for the bottom 20% in the US.

So it would be very close.

54

Billikin 01.29.11 at 8:38 pm

someguy:

“From Milanovic

‘n 1980, the purchasing power of the average Chinese citizen’s income was the equivalent of $525 per year; it now stands somewhere between $5,000 and $6,000.’

‘Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000’

It very much looks like he is using the same set of numbers as you.

You get an increase of 32 to 42 from 1990 to 2010. He gets an increase of 25 to 43 from 1980 to some where just short of now.”

Then Milanovich is getting it wrong in a couple of ways. First, 1980 to 2010 is three decades, not two. Second, per capita GDP is not the same figure as the income of the “average American worker” or Chinese worker. The figure for that is the median, not the mean. Because of the skew in both countries income distributions, the average worker makes less than the per capita GDP.

55

someguy 01.30.11 at 5:27 pm

Billikin,

‘The figure for that is the median, not the mean. Because of the skew in both countries income distributions, the average worker makes less than the per capita GDP.”

Right and because China has a higher Gini the gap between China and the US is understated.

It looks like 5K would be the income for the 4th quintile in China while 43K would be close to the US median.

56

hartal 01.30.11 at 11:19 pm

Well yes but China will probably not continue growing at 8%, and the US probably won’t be stuck at a 1% growth rate. Quiggin says at those rates it would take 30 years for the income gap to close; well it will probably take longer than that. So Milanovic seems quite correct that income convergence is a very distant prospect.
*
Kerala has benefitted, unlike most of India, from remittances. Its development trajectory has been singular, so for most of India–to say nothing of most of the third world–it turns out that first world poor are privileged vis-a-vis even the well-off abroad. For most of the world the prospect of income convergence is a most distant, if not receding, goal.
*
There seems to be a lot of bad faith on this list in confronting the central moral question
of our time, which is what Milanovic, following Ayelet Shachar, calls the international birthright lottery.
Shame on you!

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piglet 01.31.11 at 12:26 am

John Quiggin 49: My point, which I am not sure you were agreeing with or not, is that PPP based on a Western middle class basket may overstate the purchasing power of poor people in poor countries because even when services are cheap by Western standards, they (the poor) won’t be able to afford them. It may also understate the PP of the poor country’s upper class. One standard measure of poverty is the number of people with less than 1$ (PPP) per day income. In my view, because PPP is so unreliable especially when applied to extremely poor (or extremely rich) people, I wouldn’t place much confidence on the 1$ PPP metric and its fluctuations

someguy 52: US GDP 1980 was 5,839.0 billion, with a population of 226.5 m we get about $26,000 per capita. So maybe that’s the data Milanovic used but it would be three decades.

hartal: “There seems to be a lot of bad faith on this list in confronting the central moral question of our time, which is what Milanovic, following Ayelet Shachar, calls the international birthright lottery.”

I agree that global inequality is one of the central moral and political questions of our time. I also agree that, while there may be a certain level of convergence, it is unlikely that global inequality will substantially flatten anytime soon. To expect economic growth to lift billions of poor people up to Western middle class standards on the scale of decades is wishful thinking, especially as long as Western economies insist on continuing to gobble up a hugely disproportionate share of the world’s scarce resources to fuel their perpetual overconsumption.

I haven’t read Milanovic’s book. I take issue with the Saunders quote above because it seems to minimize inequality in the US. There is real, existential poverty in the US. To suggest that American poor live like the upper class of other countries is flat out wrong and it is a dubious way of drawing attention to global inequality.

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hartal 01.31.11 at 1:09 am

But the numbers are what they are. And do compare the quality and number of shoes the First World poor buy for their kids with what the relatively well-off can afford for their children in Central America, Africa and India; or the medical services available to the First World poor as compared to the so called rich in the post-colonies; or the creaminess of the ice cream, to say nothing of the quality of the water, that the first world poor can afford compared to the third world “rich”. But yes I overspoke: the international birthright lottery is not the central moral question of our time; it shares that centrality with the question of our intergenerational responsibility to leave an inhabitable earth. But of course the First World has already stolen the global environmental commons.

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someguy 01.31.11 at 1:34 am

I think piglet stumbles onto the issue.

Relatively speaking to the rest of the world and history the US provides an extremely high level of materially prosperity to all of it’s citizens. Even when comparing poverty in the US to Europe, if you use some absolute measure of income and adjust for PPP, the US does much better than you might think.

Milanovic despite being a centrist or left of center by even CT commentators standards unwisely provides these facts.

This explains the slagging.

60

hartal 01.31.11 at 1:58 am

I am sure you know this, “someguy”; but Milanovic is not engaged in Euro-American bashing or playing on white guilt. In his brilliant and poignant discussion of the harraga, he shows how inconvenient their very existence is for the governing classes of their countries of origin which are–as recent events show–trying to sweep problems under the rug! Also the dehumanization of the harraga/trajadores sin papeles creates an environment in which any and all political opponents can be dehumanized in the first world countries, as recent events show in Arizona. Milanovic’s book is a most important contribution to contemporary political economy. I would read it with Ha-Joon Chang’s Twenty Three Things They Don’t Tell You About Capitalism, Ayelet Shachar’s Birthright Lottery, Duncan Green’s Oxfam work and Amartya Sen’s Idea of Justice. Undergraduates should not be allowed to graduate without having these texts under their belt, in my humble opinion. It seems that some of the people who blog here haven’t read such books. What a shame.

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hartal 01.31.11 at 2:00 am

And Milanovic is a fairly conservative guy. For example, he supports Bairoch’s arguments that colonialism did not play an important role in the enrichment of the first world. But I don’t think he actually grapples with the arguments of a Joseph Inikori, Kenneth Pomeranz or Amiya Kumar Bagchi

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John Quiggin 01.31.11 at 2:07 am

“But the numbers are what they are.”

So, we should start by getting them right. I have written quite a few papers on international inequality, convergence etc, and I don’t appreciate amateur psychoanalyis from hartal (even if in good faith) let alone from “someguy” (clearly not in good faith). The point is that it helps nobody to advance a claim that rests on an obvious arithmetic error.

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hartal 01.31.11 at 2:12 am

But Dr. Quiggin you said that if China grew at a rate 8x higher than the US, then absolute $PPP income gap would be eliminated in…only…thirty years. But of course that is Milanovic’s point–we can’t expect China to maintain a growth rate that many times higher for decades. So–putting aside the psychological questions–what is your criticism of Milanovic?

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John Quiggin 01.31.11 at 5:07 am

What Milanovic says is that China needs to maintain 8 per cent growth just to stop absolute income differences from rising. That is incorrect, as I pointed out.

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zosima 01.31.11 at 10:11 am

I think that maybe the quoted author fails at math. For any numbers, a,b,c,d greater than 1. c greater than d implies that there exists some t_i such that a^ct > b^dt for all t>t_i

Put into English, the country with the larger growth rate will eventually have a larger economy, higher average incomes etc…Even if the other country started with a big lead.

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hartal 01.31.11 at 3:39 pm

As I pointed out, you are taking Milanovic out of context, and trying to make him appear like a fool so that the smug first world people here have an excuse not to confront his uncomfortable facts. Look at the comments here. The point he is making is quite correct: just to keep the absolute income gap where it is, China has to grow at a higher rate than the US and that for China to achieve convergence in just a couple of decades, China would have to maintain an very unlikely higher relative growth rate. Moreover, for most of the world, convergence in $PPP is not on the table.
Smug and disappointing.

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Walt 01.31.11 at 4:08 pm

We’re smug about the fact that we understand exponentials. You got us there.

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hartal 01.31.11 at 4:23 pm

Smug even though you can’t get yourself to recognize that in spite of China’s higher growth rate over the last 20 years, the absolute income gap actually did grow. But you go ahead and be smug about your impressive mathematical knowledge.

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piglet 01.31.11 at 4:25 pm

hartal, I mostly agree with your message and maybe Bertram’s criticism of Saunder’s blog isn’t fair to Milanovic. But the quotes given above – maybe taken out of context – seem to overstate the case and thus needlessly damage the author. Hopefully somebody at CT who has actually read the book will follow up on this.

“the medical services available to the First World poor as compared to the so called rich in the post-colonies”

We know that life expectancy in the US correlates strongly with SES and that poor American’s life expectancy is lower than the average of many poorer countries. We also know that GDP is a poor indicator of welfare for many reasons. We know that GDP doesn’t count non-market economic activity and the informal or shadow economy, which represents a relatively larger share of poor countries’ economies.

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hartal 01.31.11 at 4:42 pm

Yes the US would benefit from gun control laws–is that your point? Even though African-American men are more likely to survive the first five years of life than average third worlders–that is what Bertram quotes Sen saying– they still live shorter lives on average. But that is probably the consequence of unregulated gun use and the stressful effects of racism as spatially expressed in ghettoization. The Sen quote that Betram cited is clear that infant mortality is less of a problem for the most oppressed of Americans than it is for an average third worlder!

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Walt 01.31.11 at 4:47 pm

Hartal, the absolute difference grows and then shrinks for purely mathematical reasons, as I explained way up-thread. Obviously, you don’t give a shit, because you’re here to patronize us about whatever imaginary flaws we have as First Worlders, and the fact that you’re defending a nonsensical statement doesn’t give you the tiniest of pauses.

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hartal 01.31.11 at 4:50 pm

But will China c0ntinue to grow at the relatively higher rate that is required for the absolute income gap to close in, say, two or three decades? Milanovic gives us reason to doubt *even in the case of China* this is likely. And then there is the question of the absolute income gap between the first world and third world in general and the related question of the future of global emigration patterns.

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hartal 01.31.11 at 4:53 pm

And I do think people should be criticized for taking swipes at an important book that they have not read (in even condensed article form–Bertram based this blog on a blog on the book!) and to which they have not applied any charity. That reveals smugness.

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Zamfir 01.31.11 at 5:07 pm

Hartal, besides telling us to shame ourselves, you don’t give us much reason why we should consider this an important book.

Thing is, the “absolute gap” isn’t in itself that deeply relevant. It’s just a number, and not one that translate very easily to actual differences in living standards. The absolute gap between 500/year and 50,000/y is smaller than between 50,000/y and 150,000/y. Yet no one would claim that the second of those is the wider gap.

Milanovic knows that, of course. That he still chooses to give the not-so relevant figure if it fits his story is a mark against him. perhaps it is the only mark in an otherwise excellent book, but for that we need to hear about those excellent parts.

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chris 01.31.11 at 5:08 pm

Smug even though you can’t get yourself to recognize that in spite of China’s higher growth rate over the last 20 years, the absolute income gap actually did grow.

“Absolute income gap” in the subtractive sense has no relationship to the actual quality of life of different people. Expressed as a ratio, the income gap shrunk. Mathematical artifacts of no practical significance have no practical significance and it is not “smug” to dismiss them, it is sensible.

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hartal 01.31.11 at 5:13 pm

They are $PPP numbers, so I don’t know what point you are making, Zamfir. Interesting that Chris just waves away an absolute $PPP gap as a mathematical artfifact while asking us to take seriously the metaphysical world of welfare comparisons. You go, boys!

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someguy 01.31.11 at 5:26 pm

I apologize. I shouldn’t have speculated about motive.

And at 1% and 8.6% growth rates the median Chinese worker will catch up to median US worker in just under 30 years. And I hope they do.

But the current gap is unfortunately enoromous and if the growth rate differential drops below 8%, and there are reasons to think it will, it will take longer than 30 years, which is a fairly long time, to catch up.

310 million Chinese don’t enjoy incomes equivalent to the median French income.

If this is true

“So, for example, people in poor countries whose general living standards are well below those of the median European may nevertheless have live-in servants, something which few Europeans can afford. A PPP comparison will make those people look rich, and thereby drag up the average for the poorer country.”

I would think the PPP comparison under states the gap.

It looks like China has a Gini that is slightly higher than the US so comparing average to average probably understates the gap.

It really looks like the bottom 5% of the US earns a PPP adjusted income higher than all but the top 10% of China.

I would also note that we should be some what careful of making claims about what Milanovic claims. We are relying on Saunders presentation. I am sure it was a good faith presentation but

“If the U.S. GDP per capita grows by 1 per cent, India’s will need to grow by 17 per cent, an almost impossible rate, and China’s by 8.6 per cent, just to keep absolute income differences from rising,”

anything could have come after the comma. Like , over the next X years.

Here are some links

An interview-

http://www.thirdworldtraveler.com/Third_World/Inequality_By_Numbers.html

Some of his work –

http://ideas.repec.org/e/pmi44.html

And brief blurb about his book –

http://ocsid.politics.ox.ac.uk/events/haves_have_nots.pdf

It really doesn’t seem to me that he is some incompetent that cannot understand exponentials or some hack who deliberately misrepresents the data.

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John Quiggin 01.31.11 at 7:35 pm

Milankovic has done some excellent work on international income distribution (I’ve cited it myself quite a few times), and it’s possible he has been misquoted/quoted out of context in the passage above. But that doesn’t change the fact that the quoted passage is wrong. I don’t think it’s unreasonable for bloggers/commenters to respond to something published in a newspaper as a direct quote without first reading the entire source.

More importantly, I think the discussion indicates that Milankovic is on the wrong track with his focus on absolute income differences. They are relevant in some limited contexts, but as Chris says in the original post, most of the time, they mislead.

To give the most relevant example, it would be a huge achievement, in terms of human welfare, to double the incomes of the billion or so people currently getting less than $1/day, or better still the 2 billion getting less than $2/day. But the impact on absolute income differences would be tiny.

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chris 01.31.11 at 9:03 pm

Subtraction is just not well suited to comparing numbers that are not of the same approximate magnitude. Changes in the subtractive difference almost entirely reflect changes in the number with the larger magnitude because that’s just how subtraction of very unequal numbers works. When the outcome is foreordained by the methodology, you are not discovering anything of importance.

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hartal 01.31.11 at 9:35 pm

So now we are assuming that Milanovic would pooh-pooh absolute income gains among the poorest because they would have minimal impact absolute income inequality? I can’t believe that you have read Milanovic. The question of absolute income inequality is interesting for at at least three reasons:
(1) it raises questions about the justice of distribution, which we can’t assume is getting more equal in all relevant ways over time. Especially for non-China!
(2) it raises questions about national differences in carbon footprints in a world where the global environmental commons has already been stolen by the wealthy countries
(3) it could be an important variable in determining emigration patterns in societies that have in fact become more equal in some ways.

Would people rather have had Milanovic suppress his findings about the movement of absolute income inequality?

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someguy 01.31.11 at 10:01 pm

I strongly agree that getting some portion of the world’s poorest over some minimum threashold is probably more important than shrinking the income gap between say 10K and 40K. But the absolute gap is still important. I probably should have mentioned that first thing.

Going thru the comments I see complaints of

log
ppp not used
log
not adjusted for inflation
use of average income
log
log
log
log
log
use of average income, ppp not used
log
log
us of average income
ppp not used
nobody in the US can get DI
310 million Chinese as well off as average French household
ppp complaint
use of average income
could be totally true that 310 million Chinese are well off as average French household

I just wanted to and want to point out that Milanovic just might understand exponents. It is possible that unintentionally some context was left out of the quote.

310 million Chinese are not as well off as the average French household the bottom 5% of US earners probably earn more than all but the top 10% of Chinese earners. I was really interested in and a bit dubious of this claim. Looking up the data and confirming it was fun.

PPP was used and might understate the gap.

Since China has a slightly higher Gini comparing averages probably understates the gap. Again looking at this was fun.

At least 8.3 million Americans collect DI.

If the growth rate differential shrinks just a bit it will take longer than 30 years for the Chinese to catch up and 30 years is a fairly long time and the absolute income gap while not as important is important.

I was also intrested in exploring the implications of

‘Well I won’t quibble with the “more purchasing power” point, but “better lives” is really pretty dubious, since we know that by many objective measures poor black men in the US do worse than even some poor people in India.’

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John Quiggin 01.31.11 at 10:02 pm

Hartal, on point (iii) my understanding is that most models in which wage/income differentials drive migration use wage ratios (or, equivalently) differences in log wages.

But this is an empirical question. If absolute differences in wages/incomes drive migration, then absolute differences are the right thing to look at. Does Milanovic have some evidence on this?

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zosima 02.01.11 at 3:49 am

If US GDP grows at 5% and Chinese GDP grows at 10%, Chinese GDP will be larger than US in 20 years. This isn’t specific to GDP, any variable being continuously compounded at a constant rate will have the same properties.

To focus on the absolute difference is misleading. The properties of the time series make a Chinese advantage inevitable if its growth rate is larger.

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Chris Bertram 02.01.11 at 8:57 am

There’s something very odd about hartal’s comments here. First of all, there isn’t anything shameful about blogging in reaction to an article in a major Canadian newspaper. I made it very clear that I was doing so, put everything in context, disclosed that I hadn’t read the book Saunders is quoting from, etc.

Second, there’s the weirdness of lecturing everyone that undergraduates (in all subjects?) shouldn’t graduate until they have read the rather idiosyncratic list of books that hartal recommends. This includes, for example, Sen’s _Idea of Justice_ which, imho, no-one has good reason to read if they are already familiar with Sen’s earlier and better work. Schachar’s _The Birthright Lottery_ (currently #446,392 at Amazon) appears to be an important book (a copy has been sitting on my mantelpiece, as yet unread, for a month or so now) but not having read it yet (published 2009) hardly qualifies as a crime that disqualifies a person from expressing an opinion.

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hartal 02.01.11 at 3:49 pm

The more I think I about it, the more I agree with Chris B that there was something odd about my reading list without including Marx’s Capital, Grossman’s Law of Accumulation and the Breakdown of the Capitalist System, Kenneth Pomeranz and Steve Topik’s The World That Trade Made, Kaushik Basu’s Beyond the Invisible Hand, and Donna Jones The Racial Discourses of Life Philosophy. Those texts would round out a good undergraduate education.

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Zamfir 02.01.11 at 4:51 pm

If we’re making lists, can I add “A Civil Campaign” by Lois McMaster Bujold? It’s really good and everyone should read it.

Also, you can’t expect people to read Das Kapital in the few years of an undergraduate study, if they have to study too in the same time.

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