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Recession Recovery or He-cession She-covery?

November 2, 2017 Leave a comment

Radio NZLast Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.

“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”

Boosting the minimum wage is stimulatory

She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.

He-cession and She-covery

However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.

Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.

Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.

Veblen Goods and inconspicuous consumption?

August 27, 2017 Leave a comment

Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.

Economists and sociologists often cite the 1980’s as a time of extreme conspicuous consumption. The yuppie materialised as the key agent of conspicuous consumption in the US. Yuppies didn’t need to purchase BMWs or Mercedes’ cars for example; they did so in order to show off their wealth. This period had its origins in the 1930’s with Austrian economists Ludwig von Mises and Fredrick von Hayek – the latter being the author of “The Road to Serfdom”, in which he said that social spending rather than private consumption would lead inevitably to tyranny. Margaret Thatcher (UK Prime Minister 1979-1990) and Ronald Reagan (US President 1981-1989) believed in this ideology and cut taxes and privatised the commanding heights in a move to a free market environment.

VeblenSo-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph below

Over the last three decades conspicuous consumption has accelerated at a phenomenal level in the industrial world. Self-gratification could no longer be delayed and an ever-increasing variety of branded products became firmly ingrained within our individuality. The myth that the more we have the happier we become is self-perpetuating: the more we consume, the less able we are to tackle the myth.

However a recently published book The Sum of Small Things: A Theory of the Aspirational Class by Elizabeth Currid-Halkett looks at how the power of material goods as symbols of social position has diminished due to their accessibility. Although the lower income groups must dedicate a greater proportion of their income to basic necessities, they spend a higher share of their income to conspicuous consumption than the rich do. Between 1996 and 2014 the richest 1% fell further behind the national average in the percentage of their spending dedicated to bling. The middle income quintile went the other way: by 2014 they spent 35% more than the average as a percentage of their annual expenditure.

According to Elizabeth Currid-Halkett the higher income groups have moved away from buying stuff – materialism – to more subtle expenditures that reveal status and knowledge. The most common of them being education for their children.

Those in the top 10% of income earners now allocate four time as much of their spending to school and university compared to 1996, whereas for other income groups spending has remained fairly constant. However one could say that fees for both school and university have increased over that period of time. The upper class also invest heavily in domestic services such as housekeepers, freeing up time that the less fortunate must spend on chores.

Rather than frittering away that precious leisure time on frivolities, as Veblen’s leisure class did, they devote it to enriching experiences, like attending the opera, holidaying in far-off lands and working out at fancy gyms. Their children, by tagging along and thus absorbing this “cultural capital”, develop the sophistication needed to win admission to selective universities, vastly increasing the odds that they will form the next generation’s elite. The modern equivalent of Victorian worsted-stocking wearers are hipsters, who imitate the wealthy’s penchant for farmers’ markets and fair-trade lattes, even if they cannot afford a cruise to Antarctica.  Source: The Economist – August 5th 2017

 

 

DW Documentary – “The Money Deluge”

July 11, 2017 Leave a comment

Below is a recent documentary from Deutsche Welle (DW – Germany’s international broadcaster) on the impact of exploding real estate prices, zero interest rate (see graph below) and a rising stock market. The higher income groups are benefiting greatly from these conditions but how does it effect middle income earners especially those in retirement. The DW documentary addresses these issues and explains how money deals have become detached from the real economy. Worth a look.

For years, the world’s central banks have been pursuing a policy of cheap money. The first and foremost is the ECB (European Central Bank), which buys bad stocks and bonds to save banks, tries to fuel economic growth and props up states that are in debt. But what relieves state budgets to the tune of hundreds of billions annoys savers: interest rates are close to zero.

The fiscal policies of the central banks are causing an uncontrolled global deluge of money. Experts are warning of new bubbles. In real estate, for example: it’s not just in German cities that prices are shooting up. In London, a one-bed apartment can easily cost more than a million Euro. More and more money is moving away from the real economy and into the speculative field. Highly complex financial bets are taking place in the global casino – gambling without checks and balances. The winners are set from the start: in Germany and around the world, the rich just get richer. Professor Max Otte says: “This flood of money has caused a dangerous redistribution.

ECB Rates.png

Those who have, get more.” But with low interest rates, any money in savings accounts just melts away. Those with debts can be happy. But big companies that want to swallow up others are also happy: they can borrow cheap money for their acquisitions. Coupled with the liberalization of the financial markets, money deals have become detached from the real economy. But it’s not just the banks that need a constant source of new, cheap money today. So do states. They need it to keep a grip on their mountains of debt. It’s a kind of snowball system. What happens to our money? Is a new crisis looming? The film ‘The Money Deluge’ casts a new and surprising light on our money in these times of zero interest rates.

The Elephant Curve – Inequality and Populism

July 3, 2017 Leave a comment

I blogged on this topic late last year – Inequality and the Elephant Curve – but is it correct? – and see that Paul Solman of PBS news has done his own evaluation on the topic – see video and image below. The curve shows the % change in income on the vertical axis and on the horizontal axis is the entire world population, arranged by their incomes – poorest over to the left, the richest to the right. The time period is from 1988 to 2008.

We knew that people in China and large numbers of groups in Asia who were not rich, compared to Americans, have done very well. We knew that lower and middle class Americans and Japanese and Germans have not done well. And that’s exactly what the chart shows. And we also knew that the top 1 percent in the rich countries have done well.

elephant curve.jpeg

Everybody on that chart is above the point where we actually have zero growth. If you really were to be very cosmopolitan and look at the world as if it were one country, you would say, “Look, we have a situation that a large hunk of people — two and a half billion — have done extremely well. The level of global poverty has actually gone down. These people not only now have sewage and electricity, some have even become tourists. They have better jobs.” This is mainly resurgent Asia.

So then you say, “Well, what’s the big deal?”

The problem is that this is a very abstract view of the world, which doesn’t take any cognizance of the political reality. Because the political reality is there are all these people who have done poorly relative to the rest of the world. They feel poor people in Asia breathing down their necks because of outsourcing, because of imports and so on. And then they also see that the top 1 percent in their own countries have done very well.

They are feeling fear from both ends — from one end because the other people are catching up to them and from the other, as people from their own countries are moving further and further ahead.

Source: Branko Milanovic Author, “Global Inequality”:

 

 

Categories: Inequality Tags:

Strong case for a Universal Basic Income in India but is it realistic?

April 13, 2017 Leave a comment

UBI IndiaI have blogged about the UBI and read about how India would provide a strong case for its implementation. The rationale for this is the fact that India’s welfare programmes (950 that the central government run) are numerous, inefficiently run and encourage corruption. Add to those the programmes run by each state and you have a bureaucratic nightmare unfolding. However this has been part of Indian society and not so long ago it took businesses 6 months to acquire a permit to import computers. The UBI was raised as an alternative to the inefficiency of welfare handouts and this unconditional cash payment be disbursed not just to the poor but to everyone. In more advanced countries the case for UBI is based on technology making many jobs obsolete and no new jobs being created in their place. Although this is not the case in India and it warrants the UBI for other reasons:

1. UBI is easier to administer than India’s current antipoverty programmes which largely take the form of subsidies paid to sellers of grain, fuel, fertilizer and other essentials. Current programmes are plagued by waste, corruption and abuse. UBI would save 2.07% of GDP.

2. By making everyone eligible, a universal basic income removes the messy task of identifying who is and who isn’t in need of assistance.

3. By paying money directly into bank accounts, it would allow India to do away with the vast administrative machinery currently needed to supply the poor with cheap wheat, rice and other goods.

4. By one estimate, around one-third of the grain set aside for India’s food-welfare program never reached the intended beneficiaries in 2012, the most recent year for which comprehensive data are available. Payments under a giant rural-work program are regularly delayed, leaving families in the lurch.

5. paying a basic income directly into bank accounts would encourage more people to use formal financial services, which would then help banks invest in expanding access to banks and ATMs.

Concerns

1.  households—“especially male members”—may fritter away their basic income on liquor and tobacco

2. India’s underdeveloped financial infrastructure could make it hard for many people to access their entitlements. According to the World Bank, there are only around 20 ATMs for every 100,000 adults in India, compared with 70 in South Africa, 114 in Brazil and 132 in the U.K. Although the government says it has helped open 260 million bank accounts since 2014, one-third of Indian adults remain unbanked.

3. The government paper suggests that 25% of the population should be excluded in order to make it more affordable. However deciding who is poor and who isn’t an easy task especially when over 35% of the richest 1% of Indians benefit from subsidized food to which they are not entitled.

4. There is a risk that a UBI would just supplement the welfare programmes rather than replacing them.

Source: The Economist – Wall Street Journal

Global change in real income – 1988-2008

February 7, 2017 Leave a comment

Below is graphic from ANZ Bank showing the change in real income between 1988 and 2008 at various percentiles of global income distribution (calculated in 2005 international dollars). Global inequality has improved except for the upper middle class.

income-inequality

Some comparisons of income distribution:

  • An American having the average income of the bottom U.S. decile is better-off than 2/3 of world population.
  • The richest 1% of people in the world receive as much as the bottom 57%, or in other words, less than 50 million richest people receive as much as 2.7 billion poor.
  • The three richest people possess more financial assets than the poorest 10% of the world’s population, combined.
  • In 2005, the three richest people in the world have total assets that exceed the annual combined GDP of the 47 countries with the least GDP.
  • In 2005, the 125 richest people in the world have assets that exceed the annual combined GDP of all the least developed countries.
  • In January this year Oxfam calculated that the eight richest men in the world own the same wealth as the 3.6 billion people who make up the poorest half of humanity.

The world’s 8 richest people are, in order of net worth:

1. Bill Gates: America founder of Microsoft (net worth $75 billion)
2. Amancio Ortega: Spanish founder of Inditex which owns the Zara fashion chain (net worth $67 billion)
3. Warren Buffett: American CEO and largest shareholder in Berkshire Hathaway (net worth $60.8 billion)
4. Carlos Slim Helu: Mexican owner of Grupo Carso (net worth: $50 billion)
5. Jeff Bezos: American founder, chairman and chief executive of Amazon (net worth: $45.2 billion)
6. Mark Zuckerberg: American chairman, chief executive officer, and co-founder of Facebook (net worth $44.6 billion)
7. Larry Ellison: American co-founder and CEO of Oracle  (net worth $43.6 billion)
8. Michael Bloomberg: American founder, owner and CEO of Bloomberg LP (net worth: $40 billion)

Sources: ANZ Bank, Wikipedia, Oxfam International

Categories: Inequality Tags:

Economics – Holiday Reading.

December 23, 2016 Leave a comment

I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from amazon.com. I will be back again on 10th January – have a great xmas and new year.

makers-and-takersMakers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned—and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate ALL American businesses, putting us on a collision course for another cataclysmic meltdown.

 

 

Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup by Andrew Zimbalist

Circus Maximus.jpgThe numbers are staggering: China spent $40 billion to host the 2008 Summer Olympic Games in Beijing and Russia spent $50 billion for the 2014 Sochi Winter Games. Brazil’s total expenditures are thought to have been as much as $20 billion for the World Cup this summer and Qatar, which will be the site of the 2022 World Cup, is estimating that it will spend $200 billion. How did we get here? And is it worth it? Both the Olympics and the World Cup are touted as major economic boons for the countries that host them, and the competition is fierce to win hosting rights. Developing countries especially see the events as a chance to stand in the world’s spotlight. This book is also reviewed here by Michael Cameron on his blog Sex, Drugs and Economics.

 

 

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

Global Inequality.jpgThis is a scholarly book about global inequality, that is, ‘income inequality among citizens of the world’. It is, as Milanovic explains, ‘the sum of all national inequalities plus the sum of all gaps in mean incomes among countries’.

In his study, Milanovic focusses on the Kuznets hypothesis – that in industrialized countries, inequality will initially increase and then decrease, resulting in an inverted U-shaped curve. In recent times, inequality seems to be rising when all the factors indicate that it should have followed the Kuznets curve. Milanovic explains why the projected pattern did not materialise. One can point to ‘the hollowing of the middle class and the rising political importance of the rich’, but there are other factors. Milanovic explains the phenomenon through the historical data of the Kuznets curve in countries across the world.

This is a learned, but dry and technical treatise on a subject that seems to evade comprehension even by renowned economists and political scientists. That is not to say that Milanovic is a boring writer. This book will be appealing to economic and political science students, but the general reader may find Milanovic’s 2011 book, ‘The Haves and the Have-nots’ more interesting and palatable.

Categories: Financial Markets, Inequality, Sport Tags:

US needs a new direction

October 14, 2016 Leave a comment

Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:

  • 1.4% GDP between 2009-2015 when it was projected at 2.7%
  • 81% of Americans experienced flat or falling incomes between 2005-2014
  • 1980 – top 1% earn 10% of income
  • 2015 – top 1% earn 22% of income
  • 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
  • Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
  • US Treasury debt owed:
  • – 2007 = 35% of GDP
  • – 2015 = 75% of GDP
  • – 2026 = 86% of GDP – forecast
  • – 2036 = 110% of GDP – forecast

Issues with the US Economy

US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.

Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.

As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.

Sustainable Development 

Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:

  1. Promoting economic growth and decent jobs
  2. Promoting fairness to women, the poor, and minority groups
  3. Promoting environmental sustainability.

US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:

  1. Planning – need to overcome complex challenges for our future – e.g. energy
  2. Public investment  – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc

Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.

Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs

Facing up to income inequality

Sustainable Development Goals_E_Final sizes

Inequality and the Elephant Curve – but is it correct?

October 1, 2016 Leave a comment

Below is a very interesting video from the FT about the Globalisation and Income Inequality. Globalisation is often held responsible for the problems of inequality in the world today. The elephant chart seems to explain why globalization has been blamed – see below. The chart shows income growth across the globe from 1988-2008 and how middle income people across the world (e.g.China) have had a significant growth in income as have the super rich. However some income groups have suffered namely the lower middle classes who have experienced almost no growth over the last 30 years.

elephant-curve

However the Resolution Foundation in the UK produced a paper entitled “Examining an elephant: globalisation and the lower middle class of the rich world” which focused on whether and to what extent the conclusions from the graph are justifed, by digging into the data underpinning the elephant curve.

Policy makers and commentators looking to understand how income growth has actually been experienced risk drawing the wrong, or overly- strong, conclusions without a detailed understanding of what lies behind the elephant curve. Their analysis of the underlying data shows:

  1. Overall income growth is understated because of changing country selection. The chart is not about the income growth rates of particular people. For example, the globally poor in 1988 and those in 2008 are not necessarily the same groups of people – so growth doesn’t refer to individuals. But furthermore, different countries are included in the 1988 and 2008 datasets that underpin the elephant curve.
  2. Uneven population shifts suppress the recorded income growth of parts of the global distribution. Population changes, rather than just income changes, have driven the income growth distribution in the elephant curve. Because the population of poorer countries has grown disproportionately, and the population share of mature economies has shrunk, average incomes have been dragged down.
  3. The aggregate data hides big variation between developed economies. Further exploring the apparent losers of globalisation, the weak figures for the mature economies as a whole are driven by Japan (reflecting in part its two ‘lost decades’ of growth post-bubble, but primarily due to likely awed data) and by Eastern European states (with large falls in incomes following the collapse of the Soviet Union after 1988).

 

Categories: Growth, Inequality Tags:

The Birkin Handbag – is it a Veblen Good?

August 22, 2016 Leave a comment

Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.

Economists and sociologists often cite the 1980’s as a time of extreme conspicuous consumption. The yuppie materialised as the key agent of conspicuous consumption in the US. Yuppies didn’t need to purchase BMWs or Mercedes’ cars for example; they did so in order to show off their wealth. This period had its origins in the 1930’s with Austrian economists Ludwig von Mises and Fredrick von Hayek – the latter being the author of “The Road to Serfdom”, in which he said that social spending rather than private consumption would lead inevitably to tyranny. Margaret Thatcher (UK Prime Minister 1979-1990) and Ronald Reagan (US President 1981-1989) believed in this ideology and cut taxes and privatised the commanding heights in a move to a free market environment.

So-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph below

VeblenOver the last three decades conspicuous consumption has accelerated at a phenomenal level in the industrial world. Self-gratification could no longer be delayed and an ever-increasing variety of branded products became firmly ingrained within our individuality. The myth that the more we have the happier we become is self-perpetuating: the more we consume, the less able we are to tackle the myth.

The Economist 1843 bi-monthly magazine had a very good article on Hermès’s Birkin handbag (named after Jane Birkin, an Anglo-French actress who spilled the contents of a overfull straw bag in front of Jean-Louis Dumas, Hermès’s chief executive) and how it has become one of the world’s most expensive – prices start at $7,000; in June Christie’s Hong Kong sold a matte Himalayan crocodile-skin Birkin with a ten-carat diamond-studded white-gold clasp and lock for $300,168. The rationale for its expense is that it is hand crafted and can take up to 18 hours to complete although the production cost is estimated to be around $800.

Birkin Bag

One would think that this would be a Veblen Good – a good in which the higher the price the more demanded. However there are a couple of ways that the Birkin handbag is not.

1. The bag is not all that conspicuous as although most people can identify Gucci, Louis Vuitton or Chanel, a Birkin is not so easy to find. In fact it is an inconspicuous but expensive bag. This theory was explained in the article “Signalling status with luxury goods: the role of brand prominence” from the Journal of Marketing (2010). It divided the high income earners into two groups;

Parvenus – who want to associate themselves with other high income groups and distinguish themselves from those who do not have material wealth.

Patricians –  who want to signal to other people in their high income bracket and not to the masses. They are of the belief that more expensive luxury goods aimed at them will have less obvious branding than cheaper products made by the same company. This was achieved with smaller logos for more expensive items and larger ones for cheaper goods which are aimed at the masses. People who cannot afford the luxury items will buy the big logo items (louder products) and this is where the counterfeiters have a field day.

2. Normally producers of Veblen goods should raise the price till the point where the demand curve starts to follow it normal shape – downward sloping from left to right. However with Birkin they maintain its exclusivity not by raising the price but by limiting the supply. Unlike other Veblen goods you just can’t walk into a shop and buy a Birkin bag – you have to place an order and wait for it to arrive. But you would wonder why they don’t sell more and make more money? It is a supply constraint – limited availability of high-quality skins and craftspeople to make them – it takes two years training. Hermès suggests, Birkins are mined, not simply made.

Commercial Reasons to limit supply of Birkins

Rationing by supply rather than price does make good commercial sense for the following reasons:

1. It gives Hermès a buffer as if demand drops, sales will not.

2. It creates excess demand for the bags, which overflows into demand for other Hermès products – wallets, belts, beach towels etc.

3. Profitability in the short run would reduce its exclusiveness as the main buyers of the bags would eventually be those concerned with social climbing. Therefore the rich may lose interest in the bags and so will those that aspire to be like them.

However I not sure Hermès actually want you to buy their amazingly expensive bag.

Should we stop consumption?

Geoffrey Miller is his book – Spent: Sex, Evolution, and Consumer Behaviour – examines conspicuous consumption in order to rectify marketing’s poor understanding of human spending behaviour and consumerist culture. His thesis is that marketing influences people—particularly the young—that the most effectual means to show that status is through consumption choices, rather than conveying such traits as intelligence and personality through more natural means of communication, such as simple conversation. He argues that marketers still tend to use naive models of human nature that are uninformed by advances in evolutionary psychology and behavioural ecology. As a result, marketers “still believe that premium products are bought to display wealth, status, and taste, and they miss the deeper mental traits that people are actually wired to display—traits such as kindness, intelligence, and creativity.

The recent recession has sent out a few mixed messages. Firstly there has been the reduction in consumption as people’s credit lines have dried up but there are those that believe that you should spend more to maintain growth and employment in the economy. With household budgets being very tight smarter consumption rather than less consumption has been advocated by Geoffrey Miller. He refers to this as more ethical consumption where the production of produce does not involve the abuse of natural resources or the exploitation of people or animals.

Rural China making a more equal society

July 18, 2016 Leave a comment

The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.

Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.

The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line  ÷  Total area below the 45° line

The resulting number ranges between:Lorenz 2

0 = perfect equality where say, 1% of the population = 1% of income, and

1 = maximum inequality where all the income of the economy is acquired by a single recipient.

* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.

In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.

But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.

Categories: Inequality Tags: ,

A Level Revision: Comparing living standards over time and between countries

May 16, 2016 Leave a comment

National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below from The Economist showing the Gini coefficient of income inequality.

Gini Coef Nordic

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.

Inequality – ‘The Price We Pay’

February 5, 2016 Leave a comment

Below is a trailer to the documentary ‘The Price We Pay’. The present-day reality of big-business tax avoidance has been extremely prevalent in the news. Multinationals have been depriving governments of trillions of dollars in tax revenues by hiding profits in offshore havens. Tax havens, originally created by London bankers in the 50s, today put over half the world’s stock of money beyond reach of  public treasuries. Tax avoidance by big corporations and the wealthy are leading to historic levels of inequality and placing the tax burden on the middle class and the poor.

62 individuals have same wealth as 3.5 billion people

January 18, 2016 1 comment

An Oxfam report suggests that global inequality has reached levels not seen in over a century. The report stated that 62 individuals had the same wealth as the poorest 3.5 billion people. The wealth of those 62 people has risen 44 percent, or more than half a trillion dollars, over the past five years, while the wealth of the bottom half has fallen by over $1 trillion.

“Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate,” the report says.

It points to a “global spider’s web” of tax havens that ensures wealth stays out of reach of ordinary citizens and governments, citing a recent estimate that $7.6 trillion of individual wealth — more than the combined economies of Germany and the U.K. — is currently held offshore.

Lorenz Curve

The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. An example is shown rightLorenz 2.

The Gini Coefficient is derived from the same information used to create a
Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.

Area between the Lorenz Curve and the 45° line / Total area below the 45° line

The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.

* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.

* The Lorenz Curve itself shows actual distribution of income. The further the Lorenz Curve is away from the 45° line, the more unequal is the distribution of income. With the recent Oxfam report the inequality line has moved further to the right.

* Lorenz Curves are typically drawn from gross income. Once disposable income is taken into account, the Lorenz Curve will most likely move inwards. This is because, as we shall see, the net effect of taxes and other distributional measures of government is to bring everyone’s disposable incomes closer together.

* Those countries where the wealth is in the hands of a few, such as oil sheikdoms, will have Lorenz Curves extremely bowed.

Lorenz curves may also be drawn to show the extent of inequality in the distribution of wealth. Such curves are likely to be even further away from the line of complete equality than are those of the distribution of income. This is because most people have some disposable income while not everyone has assets.

Tools of Redistribution

If we are concerned with how well-off people are and how much inequality there is, looking only at individual or household disposable income is not enough. It is not simply a matter of how much cash income the government leaves us with. The use of taxes and transfers may be the main way of directly redistributing income, but this is not the only way by which government can influence well-being. A combination of approaches can better tackle the problem. In general we may consider that government influences the extent of inequality by:

• The way in which it raises taxes to pay for public goods that everyone has such as defence and parks. The tax system may be designed to take more from the higher income groups, while everyone gets similar benefits from the public goods. More importantly tax dodging by the super-rich is one of the main drivers of global income inequality and needs to be sharply curtailed.

• Giving transfers, such as family support and the sickness benefit, to those whose income is very low or who cannot earn.

• Providing collective goods mainly to the lower income groups.

• Providing targeted subsidies or subsidies received only by those with low incomes&emdash; e.g., housing loans and education grants.

• Providing general subsidies on basic goods such as bread, milk, GP services and electricity. These used to be far more important than they are today. Subsidies have the problem that they encourage waste.

• Ensuring that all employers pay a fair wage under minimum pay, equal pay and pay equity legislation.

• Ensuring that everyone has equality of opportunity. Those who wish to proceed to tertiary education, for example, should be given the opportunity.

• Encouraging training and acquisition of skills by all school leavers.

Categories: Inequality Tags:

Global Housing Affordability – Australia third least affordable

December 1, 2015 Leave a comment

The IMF’s Global Housing Watch recently ranked Australia as the third least affordable place in the world to buy a house. According to the IMF, the current ration of housing prices in Australia to average incomes is 31.6% above the historical average with New Zealand not far behind – see graph. The fact is that a significant number of the younger generation have been shut out of the property market and it doesn’t seem likely to change in the near future. The concentration of property ownership in the hands of the few will further increase global inequality which has it roots going back to the days of the classical economists.

Housing affordability

David Ricardo argues that when population and output begin to grow steadily land becomes scarce relative to other goods. This in turn will lead to ever-increasing property prices and rents. Ricardo’s fear was that without government intervention by taxation on land value landowners would inevitably claim a greater share of national income, as the share for everyone else dwindled. However, Ricardo’s beliefs didn’t eventuate as the Industrial Revolution led to the decline of agriculture, and consequently a decrease in the value of farmland. But todays urban real estate prices is the farmland of the 1800’s and Thomas Piketty sees the long-term future as one of ‘economic, social, and political disequilibria of considerable magnitude’. Locking young ambitious people out of the property market can lead to feelings of powerlessness, disconnectedness, and disengagement can take root. Rising social unrest from increased inequality undermines trust in government and young people are left frustrated as pay trends fail to match a general improvement in educational attainment.

For most of the developed world property inequality needs to be addressed as home ownership for the youth of today is looking like a common misconception.

Source: New Philosopher

Categories: Inequality Tags:

Inequality: What can be done? review by Thomas Piketty in NYR

October 31, 2015 Leave a comment

Inequality what can be doneI recently read another piece from the New York Review of Books – a review by Thomas Piketty (‘Capital in the Twenty-first Century’ fame) of the new book ‘Inequality: What can be done?’ by Anthony Atkinson. He is innovative in his ideas and shows that alternatives still exist. He proposes the following:

  • Universal family benefits by progressive taxation policies
  • Guaranteed public sector jobs as a minimum wage for the unemployed
  • Democratisation of access to property via an innovative national savings system with guaranteed returns for depositors
  • Inheritance for all with a capital endowment at age18 financed by an estate tax

1908’s – UK and US income tax rate reductions

Atkinson does mention the reduction in income tax rates that were instigated by the Thatcher government. The top marginal rate was reduced to 40% – the rate was 83% when Thatcher’s conservative government first came to power in 1979. A conservative MP got quite excited by this and is reported to have said ‘he did not have enough zeroes on his calculator’ to measure the size of his tax cut that he helped to endorse. This break with a half-century of progressive tax policy in the UK was Thatcherism’s distinctive accomplishment. Across the Atlantic US President Ronald Reagan was also in a tax cutting mood and reduced the top marginal tax rate to 28%. Succeeding governments in the UK under Tony Blair (Labour) and in the US under Bill Clinton (Democrats) didn’t change the tax policy that was left by both the Conservatives and the Republicans respectively. This lowering of the top marginal income tax rates contributed to the increase in inequality since the 1980’s.

A more progressive tax rate

Atkinson proposes top rates of income tax in the UK of 55% for annual income above 100,000  and 65% for annual income above £200,000, as well as a hike in the cap on contributions to national insurance. This will allow for a significant expansion of the UK social security and income redistribution system – family benefits and unemployment benefits. According to Atkinson if these taxes were implemented the level of inequality would be reduced significantly.

New rights for those with fewest rights

Atkinson proposes include guaranteed minimum-wage public jobs for the unemployed, new rights for organized labour, public regulation of technological change, and democratisation of access to capital. Piketty alludes to two of Atkinson’s innovative suggestions:

  1. The establishment of a national savings program allowing each depositor to receive a guaranteed return on her capital. Given the drastic inequality of access to fair financial returns, particularly as a consequence of the scale of the investment with which one begins (a situation that has in all likelihood been aggravated by the financial deregulation of the last few decades), this proposal is particularly sound
  1. The establishment an “inheritance for all” program. This would take the form of a capital endowment assigned to each young citizen as he or she reached adulthood, at the age of eighteen. All such endowments would be financed by estate taxes and a more progressive tax structure. He calls for a far-reaching reform of the system of inheritance taxation, and especially for greater progressivity with regard to the larger estates. (He proposes an upper rate of 65 percent, as with the income tax.) These reforms would make it possible to finance a capital endowment on the order of £10,000 per young adult.

A Wealth Tax

He also proposes a progressive tax system on real estate and eventually on net wealth. Stamp duty, which is a tax on real estate transactions, would be implemented as follows:

  • 0% tax if property worth less than 125,000
  • 1% tax if property worth between £125,000 and £250,000
  • 3% tax if property between £250,000 and £500,000
  • 5% tax between one and two million pounds (a new rate introduced in 2011)
  • 7% tax on properties worth more than two million pounds (introduced in 2012)

Many have called into question the financing of the British welfare state (especially the National Health Service) through taxes. This was seen as an unacceptable form of competition by those countries where the cost of the welfare state rested on employers. A substantial proportion of the British left at the time saw in Europe and its obsession with “pure and perfect” competition a force that was hostile to social justice and the politics of equality.

Categories: Inequality, Unemployment Tags: , ,

Wealth Accumulation vs Imagination and Creativity

October 28, 2015 Leave a comment

InnovationA recent piece by Edmund Phelps in the New York Review of Books argues that Western economies have generally failed at giving the labour force access to jobs that provide self-respect.

The classsical idea of political economy is to let wages rates fall to what the market determines and then provide everyone with a safety net of unemployment benefit, healthcare etc. Although this policy does assist those in need, it negates the desire for people to do something with their lives besides consuming goods and leisure time. A lot of people have a desire to participate in a community in which they can interact and develop new skills and self-esteem.

People need to ‘flourish’

He goes into the notion of “flourishing”( defined as “using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world”), and how current Western economies act to deter such human activity. Phelps refers to this as the good life which typically involves acquiring mastery in one’s work and using imagination, creativity and taking the journeys into the unknown. These benefits are in experience and not in material reward – he quotes Kabir Sehgal “Money is like blood. You need it to live but it isn’t the point of life.”

He argues that individuals prospered in the 19th Century when in Europe and America, economies emerged with the dynamism to generate their own innovation. Participants were constantly trying to think of new ways to produce things. What made innovating so powerful in these economies was that it was not limited to elites. It permeated society from the less advantaged parts of the population on up. People of ordinary background might be involved in innovations, large and small. George Stephenson was illiterate, John Deere a blacksmith, Isaac Singer a machinist, Thomas Edison of humble origins. People of ordinary ability could also have innovative ideas.

The Mechanical Model of Economics

Today most companies are highly efficient and labour that are reasonably well off, have gone on saving pushing up their wealth to very high levels. As a consequence the supply of labour contracts as does the labour force participation rate.  However many people although comparatively rich are poor in the conditions for the good life of flourishing and prospering. With the absence of innovation comes decreased investment and an underutilised labour force. This is especially prevalent in Europe where figures for levels of happiness are indicative of unemployment levels and job satisfaction – Spain (54), France (51), Italy (48), and Greece (37).

This is in contrast to nations which are labeled as ‘emerging’—Mexico (79), Venezuela (74), Brazil (73), Argentina (66), Vietnam (64), Colombia (64), China (59), Indonesia (58), Chile (58), and Malaysia (56).

The US has a similar syndrome with a productivity slowdown and the decline of job satisfaction but more significant is the loss of indigenous innovation in the established industries like traditional manufacturing and services that was not nearly offset by the innovation that flowered in a few new industries—digital, media, and financial. You may think that companies on Silicon Valley offer jobs that are very creative and forward thinking but companies like Google and Facebook account for only 3% of national income.

Causes of the narrowing of innovation?

Phelps looks at two possible causes of this narrowing of innovation.

  1. There has been a suppression of innovation by vested interests. Professions have had instituted regulation and licensing to curb experimentation and thus reducing innovation. He uses the example of the US car industry which was able to regain their positions in the market by government bailouts. This meant that companies like BMW and Toyota lose money in their attempts to be more innovative in order to acquire market share. Consequently companies would be skeptical of being innovative in the US car market. Furthermore stakeholders use lobbyists to regulate and implement patents which increases the barriers to entry for new entrants.
  2. Schools are doing less to expose the young to the great books of adventure and personal development. Parents teach their children from infancy to be careful and stay close to the family. There is discussion now of the overprotected child: the need for a return to “free range” children who are allowed to explore, to try things and take chances

The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.

Final thought

We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

Income v Exercise

October 15, 2015 Leave a comment

The Economist wrote an interesting piece on inequality and exercise in which they look at the correlation between income and the average time spent exercising each week. One industry that emerged intact from the recession of 2008 was exercise. Gym membership in the USA in 2009 numbered 45m but today it stands at 54m. However, although this might indicate a healthier population, between 2001 and 2012, the age-adjusted proportion of the population who are obese or extremely obese grew from 36% to 41%.

The explanation of this paradox lies in who is doing the exercising (see chart). Where once “prosperous” was a synonym for overweight, being fit (and thin with it) is a marker of status. Soul Cycle (a gym chain that run indoor cycling sessions) are to be found in the Hamptons and Westchester County in New York. In such places small gyms, yoga studios and the like, which make their money from hosting classes rather than through membership fees, proliferate. They advertise fitness as something close to religion. At CrossFit, which describes itself as a “word and a phenomenon”, though it mostly involves weightlifting, customers are described as “athletes”. Exercise is not quite yet a luxury good, but it may be getting that way. 

Source: The Economist
Ineq Ex

Categories: Inequality

Nobel Prize for Economics – Focus on ‘Wellbeing’ and ‘Inequality’

October 13, 2015 Leave a comment

Angus Deaton, has won the Nobel prize in economics for his work charting global developments in health, wellbeing and inequality. He is perhaps best known for the Deaton Paradox – that sharp shocks to income do not appear to cause equally large shocks to consumption.

In his most recent book, The Great Escape: Health, Wealth and the Origins of Inequality, Deaton argues that analysis of economic data shows that while most people in the world have gained in terms of health and wellbeing from higher national incomes, there are many groups that have missed out. See video interview below from the FT.

In the interview he discusses a number of charts including “Life Expectancy and GDP in 1960 and 2010” which shows the significant increase in Inequality in 2010. Another shows the “height of women against national income” – it stresses the importance of health care in the early years. One of Deaton’s main themes is that economic growth does not necessarily produce improved quality of life, especially when income is distributed very unequally – as is the case in today’s United States. So for example, in spite of lower economic growth in France than in the United States, because of a less unequal distribution of income, “all but the top 1 percent of the French population did better than all but the top 1 percent of the American population”.

Categories: Inequality Tags:

India to benefit from Chinese slowdown

August 30, 2015 Leave a comment

A HT to my good friend Kanchan Bandyopadhyay for this piece in ‘The Times of India’. Amid the global economic gloom, triggered by a slowing Chinese economy, most economists maintained that India’s growth prospects were brighter than those of other emerging markets. Here are a list of reasons:

1. GDP growth estimated at 8% in 2015-16. India considered a bright spot in global economy
2. Improving industrial output: Up 3.8% in June compared to 2.5% in May
3. Healthier government finances: Improved tax collections, led by indirect tax growth of 37.6% during April-July Lower subsidy bill due to falling oil prices; expected savings may be around Rs 1 lakh crore
4.Inflation, both retail and wholesale, under control. Retail inflation estimated at 3.8% in July; wholesale inflation at -4.1%, the ninth straight month of contraction
5. Better than expected monsoon rains; deficit of around 11% but distribution has been encouraging
6. Lower trade deficit due to a fall in import bill for crude petroleum, gold
7. Current account deficit appears more manageable at 1.3% of GDP in 2014-15 compared to 1.7% in 2013-14
8. Forex reserves at a record $355 billion
9. Early signs of increase in investment
10. Healthy demand in consumer sectors, uptick in consumption

Here is a very informative graphic – The Elephant v The Dragon.

elephant v Dragon

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