Posts Tagged ‘wealth inequality’

Capital in the Twenty-First Century

Thursday, July 16th, 2015 | Books

How has wealth inequality changed over the previous few centuries and what does that tell us about the present? That is the rather large question that French economist Thomas Piketty attempts to answer in this book.

No doubt his writing is in a far more coherant and structured format than my description of it, but here goes.

H begins with a global outlook. Poor countries are gradually catching up with rich countries, and he notes that wealth inequality is primarily within a country. China is making rapid progress in catching up with Europe for example, while the working class of Europe are not making the same gains on the upper class.

Nevertheless, it is a long and hard struggle. Once one country has an advantage, it can essentially own another. This is how European nations managed to maintain colonial domination while running a trade deficit. We could simply put our colonies into debt and then force them to work for us to pay it off.

Once they do grow, they are unlikely to overtake us because as they become a first world country the growth levels off. They are also a long way behind. Europe has 2000% the wealth of China for example, so even growing at 8% a year, once you factor in that Europe is also growing, that is a long way to catch up.

The oil countries could see huge growth though because of their sovereign wealth funds.

Europe itself remains incredibly rich. Richer than anyone else in the world. Though admittedly the United States are the only real competition. However this wealth is all in private hands. European governments themselves are heavily in debt, mostly to their own citizens, and typically have a capital of 0, because their public assets only just cover said debts.

It is traditionally highly unequal wealth. Far from being the land of the financially free, it was the United States that pioneered high tax of the wealthiest and it is only in recent decades that America’s wealth inequality has become greater than Europe’s.

This wealth is very concentrated. One way is labour inequality. Some people are paid far more than others. Though this is not always the close. In 1970s Scandinavia the top 10% of earners claimed 20% of the earnings. This seems a reasonable level of inequality to me.

A much more pressing issue though is capital inequality. Even in the most equal societies the bottom 50% will typically own nothing. Before the World Wars 1% typically owned 50% and 10% owned another 40%. The Wars changed this, but only as far as to allow the next 40% to buy their own home, which is not much by comparison, and still leaving 50% without assets.

Capital inequality is typically inherited. Thus it is not a useful form of inequality because it does not provide motivation for people to earn money. The point of inequality is to motivate people to work hard and earn money, but there is no utility in allowing people to merely inherit large amounts of capital – in fact this encourages them to do nothing.

It is also worth noting that labour inequality does not necessarily provide this motivation either. This is because the differences in “super manager” compensation cannot be directly related to a persons output but rather by industry and non-talent based conditions (luck).

Once people are rich the problem of wealth inequality perpetuates itself. Inflation, which many assume would reduce wealth, actually makes the situation worse. This is because poor people see their savings eroded by inflation while large amounts of capital is able to better protect itself.

It does this in a number of ways. By being larger, the capital of American university endowments when compared to individual savers for example, can afford to spend far more on management. Harvard has around $30 billion, so can spend $100 million a year on management with that only being 0.3% of their capital, which will be more than made up for in growth.

Secondly, with a bigger fund you can diversity into more risky assets. This produces a less predictable short term but a more profitable long term. Thirdly, many options that Harvard invest in may simply be entirely unavailable to small amounts of capital, such as products which require a large minimum investment.

Thus the rich get richer and the poor get poorer with no relation to the work, productivity or utility of the individual. There is no self-correcting mechanism for this.

What can we do about this?

Free university could be one way. It seems to have reduced inequality in the Nordics, though this has not been entirely proven. Picketty also suggests minimum wage will not help in the long run.

He suggests a global tax on capital. This would be low, initially at 0.1% of total capital, progressively rising to 0.5% for the largest fortunes.

This would have to be done in a global level, or at least a European level and require cooperation from banks. Otherwise people would just hide their assets. Indeed, it should be noted that the balance of payments for Earth is currently negative! More wealth flows out that comes in. This is of course theoretically impossible, but could be accounted for by tax heavens not being transparent.

A global tax on capital would encourage people to generate money and become rich, which ensuring that these fortunes cannot be used by future generations to unfairly dominate the economic landscape.

In summary, the following points:

  • Capital inequality is the biggest form of inequality
  • The twentieth century saw some reduction in the importance of inheritance, but this is now returning
  • Large inherited fortunes serve no utility to society
  • Large fortunes are able to perpetuate themselves and thus the rich get richer and the poor get poorer
  • There is no natural self-correcting mechanism for this
  • The best way to tackle this would be with a global tax on capital

Capital in the 21st century

Income inequality around the world

Wednesday, March 25th, 2015 | Religion & Politics

Michael Shermer recently tweeted a link about income inequality in different countries. One of the most interesting graphs can be seen here.

This shows the share of income that the top 1% have. In the UK this peaked (technically it troughed) in 1977 when the level reached 6%, the lowest on record. This suggests we had the lowest levels of income inequality at this time.

From here on it goes up. The data only goes as far as 1988, but other sources shows that it has continued to increase.

Notably, 1977 is two years before Margaret Thatcher came to power. “Ah ha!” I hear you yell, “I know it all along”. To some extend, it probably is Thatcher’s fault, as the UK income equality gap has grown more than most. However, it is unfair to lay all the blame at her door (or grave) because this has been a global trend. Almost all countries in the developed world peaked in the late 70s and have since become less equal.

Country 70’s low 2010
United States 8% 15%
Canada 8% 12%
Australia 5% 9%
France 7% 8%
Italy 6% 9%
Sweden 4% 7%
Finland 3% 7%

According to an article on the BBC, the UK has reached 16% by 2005. This means that despite a decade under Labour, the income equality in the UK did not stop growing after Thatcher was gone.

Ultimately, what this tells us is that we should definitely vote Loony.

Income inequality

Wednesday, July 11th, 2012 | Religion & Politics

John Rentoul recently published an article on The Independent’s website, pointing to a report by the Institute for Fiscal Studies showing that the recession had actually reduced income inequality.

Key findings in the report highlight that the turn of the decade marked the biggest drop in income inequality since 1962 based upon the Gini coefficient (one of the many ways you can measure income inequality). Contrary to popular belief, it is actually the wealth that have seen the biggest percentage slashed off their income, at least according to the report.

If it is the case, then while income fails are never a good thing, it is positive that we are moving towards a more equal society – of course there is no guarantee such a trend will remain when economic times are brighter.

Doctors’ pensions

Friday, June 1st, 2012 | Religion & Politics, Thoughts

Recently, Nicola said this…

Wow doctors are selfish or stupid. The rising life expectancy and massive deficit means they need to work longer and get a reduction in pension.
£68,000 on top of probably huge savings isn’t too shabby, but they’re striking!

I really rather wish she hadn’t, because it lead to a huge amount of comments, some of which were nonsense and as such, I am now unable to sleep because people are wrong on the internet and I can’t just let that be.

I don’t really have a problem with the strikes. They’re not putting people at much risk and they have a right to strike if they want to. But I don’t think they should expect a great deal of public sympathy for their cause.

While Nicola quoted £68,000. The BBC News article I read put the figure at £58,000. But that is still a huge amount of money. To retire on! That is more money than I earn while I’m still working. That is more money than my mum earns having spent twenty years tirelessly working as a teacher at an inner city school – surely an equally noble profession?

Ashwin chipped in…

Seriously though, speak to other Doctors and Medical students, and find out just how hard and long (that’s what she said!) a Doctor works and then you’ll appreciate our perspective much more.

But I probably won’t. Why? Because we don’t live in a society where hard work equals more money. You want to know about hard work? Go to my friend Eric who works 60 hours at week scrubbing floors at McDonald’s for a pitance. I’m sure a lot of doctors do more hours than that. But with the average GP earning a six figure salary, do they do ten times more hours than that? Of course not, because that is more hours than exist.

Paul I think you’re grossly confusing Doctors with Footballers. Also, this may be news to you, but Doctors do have loans and mortgages to pay off!

Which is probably true, as doctors are probably the only people who can afford to get on the property ladder these days. The rest of us have to rent.

Moz adds some good points…

I think the difficulty in debates like this is the gross inequality that people see between salaries across the various sectors. At the end of the day there are people in each sector who work just as hard as each other and do very difficult jobs, but receive vastly different salaries/pensions. In the private sector (e.g. bankers) you get people earning obscene salaries doing non-specialist jobs that don’t even benefit society that much. In the health sector you have people also earning obscene salaries, but at least doing a highly-skilled job that greatly benefits society (I wouldn’t include dentists in this – how they demand the salaries they receive is beyond me). Whereas in academia you have people earning very little to do a very difficult highly-skilled job. As an academic, I don’t moan about not being paid enough (well not much at least). But tbh I would love to see other people who have easier jobs than me earning less than I do. Its selfish but it would make me feel a lot better and more valued. Overall I think there should be a salary/pension cap that applies to everyone including doctors. Afterall no one person can be *that* much value to society.

But this just reinforces the point that you’re not paid in proportion to how much work you do, it’s how much value you are to society. In Moz’s case, that isn’t that much value. Not because Moz doesn’t do important stuff, he does. But because it would be fairly easy to replace him, because lots of people would like an academic research drop, which drives wages down.

But the important point here is that we live in a free market economy where you enjoy a choice of careers. If you don’t think you’re getting a fair deal, go do something else. If people vote with their feet, the government will be forced to offer higher wages. But actually almost nobody does, because people are actually still quite happy with the sweet deal they get as a doctor, so the government can cut their pensions.

No they are different points. How about going to a cornershop and buy a packet of sweets worth 50p and offer 45p. It’s only 5p difference. But you’ll probably be told to bugger off. Principles at stake

No, there isn’t a principle here. If everyone turned round and said “I’m only paying 45p” any half intelligent businessman would drop their prices. Similarly, if they were constantly selling out at 50p, they would put their prices up to 55p. That is how supply and demand works.

If doctors aren’t happy with their pay they need to vote with their feet – don’t work for the NHS (you can practice privately in the UK), go work in a different country (you have the right to work in any other EU country and as a doctor will get a visa for almost any other country too) or change career entirely (why not become a banker, for example).

In the IT industry we offer some really high wages (though not as high as doctors, I might add) because you simply can’t get the staff. They’re like gold dust, there just aren’t enough of them. That drives up wages. We can get the doctors (say what you want about the shortage, we still have a world class healthcare system and the government is so confident in our ability to retain them it’s even slashing pensions), but if there is some point where we can’t, we will have to start offering more money and benefits.

Strikers always make out they are the victim. But you’re never a victim in the free market unless you choose to be.