We Would Have Eliminated Poverty Entirely by Now if Inequality Hadn't Skyrocketed

This post originally appeared at Demos’ PolicyShop blog.

Jared Bernstein at The New York Times and then Elise Gould at EPI produced counterfactual poverty estimates showing that, had inequality not shot up in the last forty years, poverty as we measure it in the United States would have been eliminated.

The way these graphs work is that the researchers first take a snapshot of the relationship between GDP growth and poverty reduction prior to 1979. That is, they determined how much of the nation’s GDP growth was flowing to the poor and thereby reducing impoverishment. They then determined what the poverty rate would be like if that relationship had held. If we had not seen the gains of growth flow almost exclusively to the top, but instead had seen them flow in the same pattern as they did prior to 1979, what would the poverty rate have looked like over time? And as you can see, both on the official and supplemental poverty measure, the rate would have fallen to 0 percent over 10 to 20 years ago respectively.

Although it has become the contrarian thing to do to argue that inequality is not so bad, these inequality trends, if they hold, may present some serious historical troubles down the line. Inequality in industrial capitalism has undertaken two, and maybe now a third, distinct stages. As initial capital accumulation ramps up, inequality shoots up. This was the world Marx was living in. This was the world socialist revolution took off in as well as labor unrest, unionization, and so on.

But then, at some point of development, this trend moderates and actually reverses (in many countries). This is what the United States saw in the middle of the 20th century and other countries saw at similar points in their development. From this fairly widespread trend, we got the Kuznetz curve and the corresponding hypothesis that capitalist development starts out with a rapid explosion of inequality only to have that inequality decrease after average incomes reach a certain level. This was a neat and comforting hypothesis that even fit with the data in some countries for some time.

The Kuznetz curve has not proven however to be the end of history. We are seeing now, across developed countries, a new third move in the development of capitalism in which inequality spikes up again. For decades and decades it could be and was said that this system was not only substantially lifting all people, but also that it was lifting those at the bottom at a faster rate than those at the top. That was used as a dominant line of justification for the system in the period in which it was true. It is no longer true and it has not been for nearly half a century.

Obviously we have no idea what the response to this new trend will eventually be, if anything. The initial stage of inequality acceleration in capitalist development is bloody and filled with conflict. We are much richer now than we were then, however, and so that may not come back. But it is hard to imagine that we can live in a world in which almost all of the gains of the system flow to the top into perpetuity without there being some eventual backlash. At some point, surely those for whom the system is delivering nothing but stagnation and even decline will get fed up and do something.