Did Income Inequality Rise or Fall in the Bush Administration?

Most people would regard this question as either rhetorical or dumb. After all, many commentators have bemoaned the fact that rich people got richer and the rich-poor gap grew wider during the Bush Administration.  The Business Section of the New York Times on November 10 featured articles by luminaries like Robert Shiller, Alan Blinder about the need to correct this inequality in America.

But really, our question is serious and your answer to this question will show you your frame of reference. How President Elect Barak Obama and other World leaders answer our question may decide the fate of global economies over the next several years.

Prior to 2002, the emerging markets or the developing countries suffered far lower level of income than United States and Europe. Post 2002, the incomes of developing countries in Asia, Latin America and East Europe rose dramatically while incomes in US and Europe remained relatively stagnant.

The rapid rise of incomes of the developing countries led to higher growth around the world. Tens of millions of people came out of poverty in China, India, Vietnam, Indonesia, Brazil, Mexico, Latin America as well as in East European countries. The total number of people who benefited from the steep rise in income may be greater than 300 million, the entire population of the USA.

The Bush Era,without major speeches or addresses at United Nations or other Global Development Conferences, succeeded in reducing the World’s Income Inequality dramatically.

In our opinion, this was probably the greatest single achievement of the Bush Era and may be his true legacy to the world. We do realize that this was probably NOT his objective and it certainly was NOT his stated purpose. Nonetheless, his monetary and trade policies achieved the goal desired by most liberal thinkers around the world – a significant decrease of income inequality between the rich Western Countries and the poor Developing Countries.

While it is true that incomes in China, India and other developing countries rose dramatically, it is also true that the gap between the rich and the poor in every country. The incomes of the wealthy in China and India rose much faster than the incomes of the middle class and the poor in these countries. In other words, while the total income of each developing country increased, the income gap within each country increased.

While economics might be global, politics is totally local. In every country, the rise in income inequality led to  rising discontent and frustration.  Politicians in every country have been quick to address this frustration. The campaign of President-elect Obama stressed the income inequality theme very effectively. He has promised to work for Main street and not for (rich) Wall Street.  He is not alone. The left-leaning parties in India are basing their campaigns on this issue arguing that the economic reforms of Prime Minister Singh’s Government are responsible for the rise in income inequality. The Chinese government is equally sensitive to this issue and has begun taking steps to “protect” the interests of the less fortunate.

Barak Obama and the Democratic Congress have promised substantial changes to ensure reduction of income inequality in the USA. China will take similar actions because of fear of social unrest.  India, at heart still a socialist country, will follow in these footsteps.

The key question is whether the steps taken to increase income fairness domestically in each country end up changing the global trade and capital-movement dynamics that created the global prosperity of the 2002-2007 years.

We are not sanguine. Just think back a few months to the “global food crisis” of the first half of 2008. We saw countries practice ridiculously protectionist policies with rice exporting countries banning exports to first feed their own populations. These steps made the food crisis far worse than it needed to be. After all, the global inventories of rice were more than sufficient but the “protect your home even if it beggars thy neighbor” policies turned a problem in to a major crisis.

We are concerned that the natural tendencies of Obama-Pelosi-Reed, combined with the unrelenting pressure of  American trade unions, will lead to policies that may create the illusion of income fairness while causing serious harm to that engine of global income generation – free movement of capital and trade.

We believe that such steps will be matched by China and the Chinese Government will use its massive reserves to provide relief for its population at the expense of its neighbors. India does not have China’s reserves, but it has a hyperactive political system that will curtail or roll back the reforms that allowed India to participate in global trade.

Through out history, governments have demonstrated their lack of ability to reduce poverty or to raise incomes of the less fortunate. However, governments of every type, democratic, oligarchic, dictatorial and communist have proven, without any shade of doubt, that they know how to make the rich less rich and the poor even more poor.

Making every one poorer would be the time honored governmental way to reduce income inequality. It is our fear that governments around the world may end up following this path.

What  would be the consequences? While income inequality within each country might go down, the income inequality between US- Europe and the Developing world might rise again, perhaps to levels  that create global political and strategic tensions.

To answer our own question, we  say that global income inequality was dramatically reduced in the Bush Era and that reduction was the single most important reason for global stability and prosperity during the past 5 years.

Therefore, we ask President elect Obama to:

  • talk a great game to please his left-leaning supporters but

  • maintain the policies of free trade & global capital policies of the Bush Administration.
This was what President Bill Clinton did after the midterm election of 1994 and it worked wonders for him, the country and the world.

Mr. Obama has shown that he is a better speaker than Mr. Clinton. It remains to be seen whether Mr. Obama is as mentally flexible and as clever an obfuscater as Mr. Clinton was. That may determine the course of global prosperity.

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