Subdued inflation––attributable to the ability to access cheaper workers outside domestic borders––also ensured that monetary policy did not get too restrictive. This was conducive to asset price appreciation. The wealthiest segment of the populace own the vast majority of financial assets, and saw the value of their portfolios rise at a rate far faster than wages at the lowest end of the scale. This exacerbated income and wealth inequality within advanced economies.
And if demographics can explain two-thirds of these phenomena, then the particular policy mix instituted by China's authorities surely explains the remainder.
“China’s economic markets joined the global economy but its financial markets did not,” writes Goodhart. “When China’s labor force joined the global economy with a capital/labor ratio that was well below global standards, the relatively closed financial markets allowed China’s domestic real interest rate to remain very low in order to drive capital accumulation at home."
The ensuing savings glut in China was recycled back into U.S. Treasuries, and put downward pressure on real interest rates. As such, the abundance of cheaper labor was only one avenue by which the world's second-largest economy contributed to these global trends.
So what now, as the conditions that fostered these long-decades-defining demographic trends dissipate?
As dependency ratios rise, with a greater share of retirees relative to workers, "all three trends could reverse," argues Goodhart.
One implication, elucidated by FT Alphaville's David Keohane, is that intergenerational warfare, rather than battles drawn between class lines, is poised to rear its ugly head.
And as for French economist Thomas Piketty? Well, his thesis may have reached its best-before date––if it was even on the mark to begin with.
"So, we believe that demographic trends were one of the main causes of rising (within country) inequality in recent decades; and it was nothing to do with some innate tendency for returns to capital to exceed growth," wrote Goodhart's team in a direct challenge to Piketty's tome, “Capital in the Twenty-First Century.”
The anatomy of income inequality over the past few decades has been increasing within countries, and decreasing between countries. Goodhart sees income inequality falling in both cases going forward.