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U.S. vs. China: Whose income inequality is worse?

Income inequality problem
Does China or the U.S. have a bigger income inequality problem? 01:04

Income inequality has become a hallmark of the modern economic era, and it’s not only U.S. citizens who are experiencing the trend. 

Widening inequality has been called “one of the key challenges of our time” by the World Economic Forum. It cites the negatives associated with a growing gap between rich and poor: weaker social networks, rising crime and weaker democracies. The ratings agency S&P Global Ratings has cited the income gap as a long-term trend that threatens America’s economic growth

While the rich have gotten richer, many Americans have been left behind, especially those who lack college degrees. On the campaign trail, President Donald Trump vowed to help revitalize the careers of many of those workers, pointing to what he claimed are trade and labor imbalances with foreign countries such as China and Mexico. To combat such imbalances, Mr. Trump has raised the possibility of enacting tariffs on Chinese-made goods, which would likely decrease demand for Chinese-made products by raising the costs for American consumers. 

Does China or the U.S. have a bigger income inequality problem? 01:04

As the two countries stand on the edge of a trade war, it’s worth asking how their citizens compare economically. In one respect, both China and the U.S. are similar: Both have witnessed an extreme rise in income inequality since the 1970s, according to a new paper from economists including Thomas Piketty of the Paris School of Economics and Emmanuel Saez and Gabriel Zucman of University of California-Berkeley. 

The top 1 percent of earners in America now take home about 20 percent of the country’s pretax national income, compared with less than 12 percent in 1978, according to the research the economists published at the National Bureau of Economic Research. Over the same time in China, the top 1 percent doubled their share of income, rising from about 6 percent to 12 percent. 

While that suggests that China and the U.S. are experiencing growth of inequality in tandem, there’s one major difference, which suggests the problem may be more dire on American soil. That regards how the bottom 50 percent of income earners are taking part in -- or in the case of the U.S., losing out on -- the country’s economic growth. 

America has experienced “a complete collapse of the bottom 50 percent income share in the U.S. between 1978 to 2015,” the authors wrote. “In contrast, and in spite of a similar qualitative trend, the bottom 50 percent share remains higher than the top 1 percent share in 2015 in China.”

About 117 million American adults are living on income that has stagnated at about $16,200 per year before taxes and transfer payments, Piketty, Saez and Zucman found in research published last year. 

Millions will ring in the new year with a raise 01:58

Meanwhile, economic growth in China has been so strong that -- despite widening inequality -- the incomes of the bottom 50 percent have also “grown markedly,” the economists wrote. Their analysis found that the poorest half of Chinese workers saw their average income grow more than 400 percent from 1978 to 20015. For their American counterparts, income decreased 1 percent.

“This is likely to make rising inequality much more acceptable” in China, they noted. “In contrast, in the U.S.. there was no growth left at all for the bottom 50 percent (-1 percent).”

Given that the bottom 50 percent of American workers are already feeling strapped, a trade war with China could pinch their wallets rather than provide immediate relief. Cheap imports from China and other countries have helped lower the price of many consumer staples, from clothing to appliances, which might spike if the Trump administration applies steep tariffs to imports.

Some U.S. economists have signaled concerns about a trade war with China

“Tens of millions of Walmart, Costco and Dollar General customers -- heck, all U.S. consumers -- are going to see the prices of almost all the stuff they buy go up,” Carl B. Weinberg, chief economist for High Frequency Economics, wrote in a report late last year. “That will not make them happy, and almost all of them will not get a new or better job because of it.” 

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