Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
This week is – Anti Poverty Week 2015 – in Australia and there are many events and happenings on to mark the time and to highlight the issue of poverty. I will be appearing on a panel on Wednesday afternoon in Newcastle (see below). I was thinking about what I might say in my short presentation next week as I read a report in the UK Guardian (October 17, 2015) – Wealth therapy tackles woes of the rich: ‘It’s really isolating to have lots of money’ – that appealed for sympathy from the rest of us for the top-end-of-town, who have to undergo psychological counselling because they are stressed out being wealthy. Apparently, they also have to engage in “stealth wealth” which means they “are hiding their wealth because they are concerned about negative judgment”. I immediately felt bad for them. Oh, the pain the top 1 per cent feel owning around 50 per cent of all the assets in the world! What a shocking plight they face. In the context of this week’s focus on Anti-Poverty, I couldn’t quite rouse the sympathy the story was seeking to elicit. Sorry!
When we talk about inequality it is important to differentiate between income and wealth inequality.
Together they constitute one of the clearest examples of how the neo-liberal policy structures that have been in place over the last 30 odd years are failing and are pushing the world toward an unsustainable reckoning where it is anybody’s guess what the manifestation will look like – but I predict it will be destructive and ugly and drawn out and may not resolve itself into anything we would like.
Income is a flow of cash that is received over time. For most of us, our incomes come from work. For some, it is the absence of work that generates income flow – as a result of wealth holdings.
Incomes are distributed in a skewed fashion with inequality rising.
High incomes which allow for high rates of saving tend to spawn growing stocks of wealth. The flow of saving feeds into the stock of wealth.
Low income earners tend to have low to zero saving ratios and hence never accumulate any wealth over their life time.
Wealth is a stock of owned assets (real and financial) which may or may not generate a flow of income. A person can be income rich and asset poor (say a young educated professional worker) or, conversely, asset rich and income poor (an older person who has retired or a wealthy person employing tax minimisation strategies.
Income inequality is typically much smaller than it is for wealth, which is why we have to consider both aspects.
Inequality matters. Why? First, it undermines the notion of a collective in society which is necessary for social sstablity and cohesion.
Second, rising inequality undermines the growth potential of a nation and introduces greater propensity to economic crisis.
Third, taken together, these factors tend to meant that nations will higher levels of income and wealth inequality endure more social violence and higher crime rates, higher rates of suicide, poorer mental and physical health standards, shorter life expectancies, and other pathologies.
Fourth, human potential is stifled in nations with higher inequality. Access to education, health and other services are improved when there is less inequality.
You may ask why? The answer lies in how the resources of the nation are made available to the people. Nations with high levels of income and wealth inequality have systems in place which restrict the capacity of a significant portion of the population to access the nation’s resources.
In this blog I am considering wealth inequality only.
The Credit Suisse – Global Wealth Report 2015 – is now in its 6th edition (first published in 2010).
I won’t discuss the methodology that they use to estimate wealth in each nation and its distribution but it is an heroic task.
The first point to note is that household wealth between 2014-15 fell in Africa (-10.3 per cent per adult), Asia-Pacific (-12 per cent per adult), Europe (-12.9 per cent per adult), India (-3.1 per cent per adult) and Latin America (-18.5 per cent per adult).
Household wealth rose only in China (+5.9 per cent per adult) and in North America (+3.2 per cent per adult).
These losses are largely due to exchange rate movements (against the US dollar) in the year. The Report says that “the underlying wealth trends have been generally positive, but the gains valued in domestic currencies have been more than offset by adverse exchange rate movements against the US dollar”.
Overall, despite the financial crisis which arguably was centred in the US and provoked by the poor and criminal behaviour of the American banking system (and its regulatory structures):
… the United States again led the world with a substantial rise in household wealth of USD 4.6 trillion. This continues a remarkable streak since the financial crisis, which has seen seven successive years of wealth gains and new record levels of household net worth for the past three years.
Further, financial assets are now increasingly “important” in determining a person’s total wealth and the gains in the last few years are driven by rising share prices
The following graph (reproduction of Figure 5 from the Wealth Report) shows the gains and losses by nation. The Report says that in terms of losses “only those exceeding 15% are displayed”.
Note the concentration of Eurozone nations among the loss nations.
But the really striking results emerge when we consider the distribution of wealth across individuals and wealth inequality.
1. “Once debts have been subtracted, a person needs only USD 3,210 to be among the wealthiest half of world citizens in mid-2015”.
2. “USD 68,800 is required to be a member of the top 10% of global wealth holders, and USD 759,900 to belong to the top 1%.”
3. “While the bottom half of adults collectively own less than 1% of total wealth, the richest decile holds 87.7% of assets, and the top percentile alone accounts for half of total household wealth.”
May I type that again in bold characters – the top percentile alone accounts for half of total household wealth.
I put together a time series of these trends from past data and incorporated it with the latest Global Wealth Report information.
The following graphs show the proportion of total wealth held by the top 10 per cent of the distribution (blue bars) and the top 1 per cent (red line) for the World, then Europe, then the US and finally China.
Wealth inequality is rising despite the GFC and there is an increasing concentration among the top 1 per cent. That pattern is noted in Europe and particularly China, but the top 1 per cent have seen a small decline in their share between 2014 and 2015 while the top 10 per cent gained share.
There has been a marked concentration of wealth at the top end of the distribution in Europe despite the prolonged crisis that has caused millions to lose their jobs.
When anyone wonders what all the austerity is about it pays to think of these distributional processes that have further cemented the power of the wealthy and expanded their opportunities to entrench their interests further.
When the IMF talks about ‘structural reforms’ I think about these distributional outcomes that result from the typical IMF programs that are inflicted on nations.
Earlier this year, OXFAM released a briefing report on inequality (January 2015) – Wealth: Having it all and wanting more – which anticipated the trends reported in the recent Global Wealth Report 2015.
They produced the following graph (Figure 2 in their Report), which compares the top 1 per cent and the bottom 99 per cent of the global wealth distribution and extrapolated it out to 2020.
They actually underestimated the rate at which the top 1 per cent are accumulating wealth relative to the rest. They predicted that it would be 2016 before “the top 1% will have more wealth than the remaining 99% of people”. That outcome happened in 2015.
I updated the exercise given the latest wealth distribution estimates. If the current trends are maintained then the top 1 per cent will own around 58 per cent of the total global wealth by 2020.
Here is the graph.
OXFAM point out that in 2014 the wealth of the richest 80 people in the world “is now the same as that owned by the bottom 50% of the global population … 3.5 billion people”.
So how should we think about an economic system and its supporting polity that reallocates increasing share of wealth to fewer and fewer people.
Also do not forget that there must be income flows that reinforce this increasing wealth inequality.
Quite apart from the moral issues, there are two major and interlinked issues are: (a) economic; and (b) political.
OXFAM talk about the “morally questionable” nature of rising economic inequality. See – Working for the Few: Political capture and economic inequality – published January 20, 2014.
But even if you don’t buy into that value system, it is now clear that the trickle down claims made at the outset of the neo-liberal period are lies. Please read my blogs – Trickle down economics – the evidence is damning and Inequality and growth and well-being – revolutions have occurred for less – for more discussion on this point.
Rising economic inequality is bad for economic growth. It undermines the capacity for individuals to invest in education, which is the most reliable source of economic development (skill development).
In the 2014 paper, OXFAM also highlight the political ramifications. They say that:
In many countries, extreme economic inequality is worrying because of the pernicious impact that wealth concentrations can have on equal political representation. When wealth captures government policymaking, the rules bend to favor the rich, often to the detriment of everyone else. The consequences include the erosion of democratic governance, the pulling apart of social cohesion, and the vanishing of equal opportunities for all.
In its 2015 Report, OXFAM further note that the sectors which generate the largesse that goes to the most wealthy also spent “millions of dollars” lobbying governments to pressure them to introduce policy structures that perpetuate the inequality.
For example, the “financial sector is … the largest source of campaign contributions to federal candidates and parties”. Further, in 2013, “the pharmaceutical and healthcare sectors spent more than … any other sector in the US” on lobbying. Similar trends occur in the EU.
During a period that the Ebola outbreak threatened a world crisis, pharmaceutical companies spent 6 times more on lobbying than on assistance to Ebola prevention.
OXFAM notes that the “largest increase in wealth between 2013 and 2014 by a single pharma-related billionaire could pay the entire” losses in output that the Ebola crisis will cause in “Guinea, Liberia and Sierra Leone”.
OXFAM also enlighten us on where this lobbying cash goes – mostly to manipulate government spending and tax changes which are designed to favour the donors.
They note that:
Lobbying on tax issues in particular can directly undermine public interests, where a reduction in the tax burden to companies results in less money for delivering essential public services.
Which is a statement that buys into the neo-liberal logic itself. The lobbyists come from sectors that lead the charge when it comes to berating governments about fiscal deficits and spending on income support for the most disadvantaged people in society etc.
But at the same time they are calling for welfare cuts to the poor, they are also manipulating governments to hand out as much public spending in the form of corporate welfare that goes largely into their own pockets.
It is an audacious hypocrisy that abounds. And the rest of are largely silent because we have bought the myth that regulation is bad, that welfare for the poor erodes incentives and all the rest of the nonsense.
I even read comments on my own blog from so-called progressives that it is outrageous and unfair to criticise politicians that aspire to national leadership who claim that fiscal deficits have to be cut and maintained in balance.
The deficit mania is part of the myth that free market allocations are the most efficient because they respond to the preferences of all consumers.
But it is obvious that a system of allocation that responds to spending will distort the allocations in favour of those who spend the most.
The market is driven by dollar votes. The more one spends the more power one has. So even at the most elementary level the concept of a free market is flawed. There is no such thing. It is preferences backed by cash rather than the latent desires that the market responds to, even in the abstract theoretical models.
But then once the inequality reality is overlaid onto that narrative and we recognise the massive spending that is designed to lobby for particular policy environments, which further distort the market allocations, we realise that the concept of the free market that is taught in economics programs throughout the world is a myth.
It is a convenient metaphor to give the impression that we all have a chance and the market will deliver outcomes according to our efforts.
Marx long ago recognised that crises occur when those that had overproduced were unable to access any of that production. Unemployment occurs when there is not enough spending to absorb the production (so output is overproduced relative to spending) and it also denies those who had been part of the productive output teams an income.
In the 1940s, Kalecki talked about the “captains of industry” who had a vested interest in opposing government policies aimed at creating full employment. Please read my blog – Michal Kalecki – The Political Aspects of Full Employment – for more discussion on this point.
Now these “captains” do not engage in much industry even. They dominate the financial sectors.
Remember the most obvious cases of Enron or the rating agencies being paid to give the top ratings to financial products that were never able to justify that sort of quality rating nor the conflict of interest being disclosed. Remember the shameless behaviour of Goldman Sachs deliberately conniving with the Greek government to deceive the European Commission during its transition into the common currency?
And the countless other examples of corruption that combined to create the GFC and its aftermath? We only know about the tip of the iceberg.
If the extrapolations that I produced in the last graph above then these levels of corruption and chaos will worsen.
One of the consequences of the rising inequality in income and wealth is that the bastion of social stability – the middle-class – is being eroded.
It is a trend that is occuring in all nations.
An April 2014 report from the Federal Reserve Bank of St. Louis – The Middle Class May Be Under More Pressure Than You Think – considered income inequality trends.
It found that once we consider “the characteristics of individual families in the middle class or how families with different characteristics fare over time” it becomes clear that income rankings along do not explain the full story of what has been happening in the US over the last 30 years.
To some extent it is the difference between what an economist chooses to focus on – “rankings of income or wealth” which are “relatively easy to measure” abnd what sociologists consider important – “demographic dimensions like race, education, occupation and status”.
Their study considers both.
They defined three types of households in the income distribution:
1. “Thrivers … Families likely to have income and wealth significantly above average in most years”.
2. “Middle class … Families likely to have income and wealth near average in most years”.
3. “Stragglers … Families likely to have income and wealth significantly below average in most years”.
Each of these groups have particular demographic characteristics, which define sets of characteristics which are associated with whether the family is persistently poor, average or rich.
They find that between 1989 and 2013, the median income of the middle class decreased by 16 per cent whereas for the other groups it rose by 2 per cent for thrivers and 8 per cent for stragglers.
The median wealth of thrivers was 22 per cent higher in 2013 compared to 1989 while the middle class lost 27 per cent and the stragglers 54 per cent of their wealth over the same time period.
The income of the median family ranked as ‘middle class’ in 1989:
… based on age, education and race or ethnicity ranked at about the 55th percentile of the overall distribution … by 2013 the median middle-class family had dropped to about the 45th percentile in the overall distribution.
The same family “was slightly worse in terms of wealth”.
The point is that the middle class is being eroded by the same changes that are driving these increased disparities in income and wealth.
Marx said that religion was the opiate of the masses. In the neo-liberal era it is mass consumption driven by credit. Both doping strategies are unsustainable especially when the latter also systematically undermines the prosperity of those that the system relies on for mass consumption.
I wrote about the OXFAM report when it was released in this blog – Rising inequality – fundamental changes required.
In that blog I outlined the sort of changes that would be required to redress the trend towards higher inequality.
In Australia, the inequality problem is getting worse.
ACOSS reports that (Source)
1. “The share of both income and wealth for to the highest group has risen while the share going to the
lowest (and in the case of wealth also the middle) groups has decreased over the past 20 years.”
2. “The wealth of the highest 20% wealth group increased by 28% over the period from 2004 to 2012. By comparison the wealth of the lowest increased by just 3%.”
3. “Over the 25 years to 2010, real wages increased by 50% on average, but by 14% for those on lower incomes (10th percentile), compared with 72% for those on higher incomes (90th percentile)”.
At some point, ‘we’ the people will fight back. It would be better if it was through the ballot box and we pushed out governments that were ‘pro business’ and elected governments that were keen to advance general public welfare initiatives.
But when so-called progressives support the socialist parties and labour-type parties that denounce so-called deficit deniers and when in power manage and implement pernicious austerity programs there is little hope in the foreseeable future of such enlightened politicians getting their hands on power.
Something ugly is the alternative and human history tells us that it happens.
I am thinking about these issues as I craft my presentation for the Wednesday event.
Video Promoting Anti-Poverty Week in Australia
Anti Poverty Week Event – Newcastle, NSW
There will be a special Anti Poverty Week event in Newcastle – Pushed to the Margins: Poverty in our Region – on Wednesday, October 21, 2015.
The event will take place between 17:30 and 19.30 at the Newcastle City Hall, 290 King St, Newcastle 2300.
ABC Lateline’s Emma Alberici will be hosting a panel of distinguished local and national speakers as they explore the realities of poverty and inequality in our community, its causes, impacts and how collectively we can bring change.
A conversation guaranteed to enlighten, engage and stimulate – A rare opportunity not to be missed!
Panelists include Dr John Falzon (CEO St Vincent de Paul), Professor Bill Mitchell (CofFEE), Dr Clare Hogue (HRF), Kelly Hansen (Nova), Jody Broun (NSW Executive Director, Red Cross) and Sue Cripps (CEO Homelessness NSW).
Organised by: Nova for Women and Children and the St Vincent de Paul Society
The event is free and you can register at http://pushedantipoverty.floktu.com/
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.