What is the Elephant Chart?

Income inequality has been rising globally for several decades now. One does not need to be a rocket scientist or have a Ph.D. in economics to see that the rich is getting richer and the poor is getting poorer – especially in the developed world. Ocassionally we learn about how these people actually maintain and growth their wealth. Revelations in Paradise Papers, Panama Papers, etc. show how the global elite pull this off right under noses of governments and regulators alike around the world.

In this month’s edition of The Absolute Return Letter, Niels Clemen Jensen writes about “The Lost Decade” in which he discusses about wage growth or lack there of, global income inequality, British home prices, robots, etc. The entire article is fascinating to read as he ties together the various pieces to put a convincing argument. One thing that caught my attention was the Elephant Chart. This chart shows the loss of labor to capital over many years.

From the article:

The elephant in the room

Before I suggest how this could all pan out, allow me to make one further observation. The fact that labour has lost out to capital for several decades has led to what is frequently referred to as the elephant chart (exhibit 8). If you take a closer look, I am sure you can see the resemblance with an elephant.

Exhibit 8: Global income growth, 1988-2008 (%)
Exhibit 8: Global income growth, 1988-2008 (%)
Source: World Bank

As is evident when looking at the chart, the middle classes of the developed world have been the biggest losers over the past few decades. Their income growth in the 1988-2008 period was negative and, even more remarkably, it was lower than that of the world’s poorest.

The chart is admittedly a tad long in the tooth. That said, other information I have access to confirms that the trend continues to this very day, so don’t expect me to conclude any differently, had exhibit 8 been up-to-date.

Meanwhile, EM middle classes have done well, and so have the global elite. No wonder the man in the street in our part of the world is not particularly happy. Whether governments are prepared to address the problem is an altogether different question.

Source: The Lost Decade by Niels Clemen Jensen, The Absolute Return Letter – November 2017, Absolute Return Partners

Interested readers may want to read the complete piece here.

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