Wealth: Having it all and wanting more

It is estimated that by 2016, more than half of the world’s wealth will be owned by the top 1%.  Is it bad? Depends on if you’re in that 1% or not *cough* Kritika *cough*. For the other 99%, it’s pretty unfair that the hardwork put in isn’t rewarded with fat paychecks, giving the rich more power and leaving the rest with voiceless and uncared for.

More detail can be drawn from the (poorly copied – couldn’t do much about that sorry) figures. The figures have % share of global wealth on the vertical axis, and the years as shown on the horizontal one. The top figure (to be referred to as figure 1) shows the projected changes in inequality (the black line represents the top 1% in both figures). The bottom figure (2) shows how the distribution of wealth has changed over the past recent years. What’s interesting to see is that inequality was generally falling up until The Great Recession. Why?

2-8f768068e2

One possible reason could be through derived demand theory (world demand was falling, so this has a knock-on effect to labour). This impacted severely on households (not only did the income streams stop, but companies weren’t looking to hire). Workers had to be willing to accept lower wages in order to find a job (to pay bills), or, as most did, sacrifice your own home. So as a result disposable income, and thus income available to be invested in ways of increasing one’s wealth, fell. In contrast, the 1% flourished during this time (see my other article on hedge fund managers earning $1 billion+ in 2009). The tax reforms by governments didn’t help – in the UK and US taxes on the richest 1% actually fell, pushing them further away from the rest.

Other reasons include exploitation of monopsony power over labour in 3rd world countries, monetary policy, inflation, poor tax policies etc.

 

Can anything be done?

Yes, surprisingly.

Oxfam, the publisher of this eye-opening report, called on governments to adopt a 7-point plan, including points such as:

  • Clamp down on tax dodging e.g. transfer pricing
  • Invest in free health care and education (yet the UK government is reducing this at the moment)
  • Shifting tax from labour and consumption to capital and wealth
  • Introduction of national minimum wages
  • Introduce equal pay legislation and promote policies to give women a fair deal
  • Safety nets for the poorest people e.g. minimum income guarantees

Whilst these policies look fair, they have major set-backs. E.g. tighter regulation on transfer pricing or changing the tax policies may see brain drains from countries. Minimum wages will reduce demand for labour. What if people getting these minimum income guarantees waste them? How can we be sure that legislation on equal pay and giving women a fair deal will implemented effectively? What about rising government debts – shouldn’t governments be cutting spending and adopting austerity measures first, before pursuing other objectives?

There are some major opportunity costs here – on one hand we can try and reduce inequality in the short-run, but it will come at a cost in the long-run as governments hit debt ceilings. If we adopt austerity measures in the short-run, it is likely that inequality will worsen, until debts are paid off.

 

Sources:

Wealth

Richest 1% to own more than half of world’s wealth – guardian

Tackling Inequality @ WEF -guardian

 

 

 

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Out of the frying pan… And into the fire!

6 years ago (around this time of year actually), the world economy entered what is now dubbed as “The Great Recession”. Banks were out of money and were on the bring of collapse and the Government stepped in to bail them out. Sadly, this left a lot of us “consumers” pretty skeptical about the future (rightly so), so we weren’t doing anyone any favours by saving all our money. The Governments answer to a recession with low-consumer confidence? Spending. Public spending in the UK has been rising constantly since 2000, but rose even more so after 2008 in a bid to jump-start the recovery (can be seen here). This required an awful lot of borrowing. However, there wasn’t enough revenue coming in from taxes and other public sector areas to cover this up (there still isn’t). What we have now is a Government that borrowed a lot of money with no way to pay it back (de ja vu. More detail on the Government’s activities can be found here)

This isn’t just limited to the UK government of course. This situation extends to the private sector, where people have been taking advantage of ultra-low interest rates (debt has fallen slowly in the UK, but it is rising rapidly in the Far East. The trend over there is that risky borrowing is reaching unsustainable levels – another de ja vu), and the Eurozone, which is on the brink of a triple-dip recession. (Fun fact: global debt rose from 180% of total GDP in 2008 to 212% last year). Now although the UK economy IS growing, we can argue that it’s not growing fast enough (it’s growth rate fell to 0.7% in Q4 of 2013, down from 0.8% from Q3). For the private sector, the only way to deter risky borrowing is to raise interest rates, however this may damage the prospects of a healthy recovery in the short-term. For the public sector – they need some more revenue through taxes and profits from corporations they own. So now we are left with a dilemma – should we make an effort to curb debt in the short-term, which will damage the recovery in the short-term, or keep the ball rolling and see what happens in the long-term?

One thing is for sure, Rising debts + slow growth = another crisis. China – the economy practically holding the world together, has seen a significant deceleration in growth over the past few years. So there is no guarantee this recovery will work out in the short-term with current policies anyway.

It seems pretty clear that in an attempt to save their respective economies, Governments have probably made a bad situation even worse. With governments closing in on bankruptcy because of their net debt, who will be there if the big banks were to fail again?

Record World Debt could trigger new financial crisis

This article is something I read precisely 1 and a half years ago – it’s regularly updated and has some scary yet interesting information about the UK economy (whilst also trying to sell you their service).

The End of Britain

(Sorry if this post is a bit all over the place – it’s been a while since I posted on here, still trying to get back in the swing of things!)

China to overtake ‘Murica

A while ago an article was posted on here talking about how China’s economic growth was unsustainable, and that in the long-run, the Chinese economy would run out of steam and fail to overtake the US of A, remember that?

Well, things changed.

According to some new calculations made by’ The Economist’ and the IMF, the size of the Chinese economy has been underestimated greatly. So much so, that the forecasts now suggest that China will be the world’s largest economy by the end of the 2014!

Crowning the dragon

Trust the French to start banning cars.

As you may or may not know, the pollution levels in Paris have been above safety levels for the past week now. The air pollution is a result of heavy industry and excessive usage of motor vehicles. This is a classic example of market failure where we’d have the Marginal Social Costs being greater than the Marginal Private Costs, creating a welfare loss to society, an undesirable equilibrium and therefore, market failure.

What does the Parisian government do? That’s right, they ban cars. The policy states that on one day of the week, if the car driven has its licence plate ending with an even number, it will be allowed to drive on the road. On the other day (the next day), they won’t be allowed and it will be time for the ones with odd numbers to go out on the roads. At the same time the Parisian government has cut the price to consumers of public transport to 0 (yes, it was free of charge). An interesting move by the government, as economic theory would suggest that the ban, and a reduced price of a close substitute should lower the demand for people wanting use motor travel, and the government would pat themselves on the back for a job well done.

You’ve probably realized by now that it’s a pretty stupid policy, and if you haven’t, here are a few reasons why it’s bad:

1) The fine for those who break the law is 18 euros. Since behavioral economics is on the spec, this seems like a good time to consider it. Some drivers do not want to opt for the free public transport offered by the government, and are prepared to pay the 18 euro fine because they value the solitude and comfort of their car to be worth the fine. (I’m also curious as to how the government can actually track which people are in violation of this law. It would require a lot of police officers and street cameras that’s for sure, and it wouldn’t be cheap to supply them)

2) Many companies heavily rely on delivering items via motor travel. By only allowing people to drive on alternate days, the businesses are losing revenue and therefore losing profits every day this policy is in effect, since they won’t be able to make as many deliveries per day as usual.

3) From a political point of view, to implement such a policy (which annoyed the majority of the Parisian population), with mayoral elections only a week away, is not a wise way to try to get voters on your side.

This is isn’t the first time this has happened though in Paris. The BBC article below mentions that the policy was tried before in 1997. So perhaps the Parisian government should consider focusing on reducing long-term air pollution levels, as opposed to the quick fixes it’s opting for now:

1) The government could pass regulatory laws on pollution from heavy industry since they also contributed to this mess. The laws would have to push the companies down a green-energy path, and reduce the levels of pollution they emit,

2) They could opt for the ‘London’ approach. London has a slightly different policy with cars, in the sense only heavy vehicles are banned during certain time periods of the day (last I heard, I’m not sure if this is still enforced or has been altered slightly). It keeps the average population happy, whilst it encourages people who drive these massive lorries to find better environmentally-friendly ways to transport their goods/services. The city also has tight laws on the roads, and heavy fines to back them up (not just pollution violations of course, it covers all types of road violations like passing red lights). This has significantly reduced congestion on the roads as consumers have switched to the more appealing London Underground system which is a highly efficient and relatively cheap way of getting around the city.

3) An official mentioned that a day of rain would be a better quick fix than a day of banning cars (Of all policies that could have been suggested, waiting for it to rain is what’s recommended (Y) . In all seriousness, the government should focus on long-run investment rather than short-term. Not only will it reduce pollution levels in the future, but it will keep the population happy, and improve standards of living).

That’s all I have to say on that really, it’s no surprise that the ban was stopped after 1 day lol. Both are excellent articles as they highlight market failure and government intervention.

Paris start car ban

Paris end car ban

What went wrong with Democracy?

Democracy is a form of government in which all eligible citizens participate equally—either directly or indirectly through elected representatives—in the proposal, development, and creation of laws.  It encompasses social, economic and cultural conditions that enable the free and equal practice of political self-determination. It allows parents to shape their children’s futures. It was the most successful political idea of the 20th century. But its rate of increase of nations adopting democracy is beginning to slow down dramatically, and may even be headed in the opposite direction.

What could have caused this?

The crash of the world economy in 2007-08 is the main reason. It exposed the West’s weaknesses, such as debt-led economy growth. The governments in the West ran themselves into debt for short-term success, and neglected long-term investments. Confidence in Western countries has fallen significantly, with people starting to turn their attention to China.

As a communist nation, China is arguably operating far more efficiently than the US of A. An extension on pension plans took 2 years to pass in China. The same thing could take decades to pass through Congress. China have displayed to the world that you don’t need democracy and freedom to achieve sustainable, high-economic growth.

Corruption in governments is another reason. I mean, you only have to be clever with your speeches and debates to win an election, even though your intentions are ‘pure evil’. How many times have people said they ‘do not believe in governments’ and refuse to vote? Conspiracy theorists (and possibly enemies of the US) argue that democracy is America’s way of establishing its imperialism over the world.

What can be done to fix it?

The essay (yes, essay) from The Economist goes into these reasons in a lot more detail, and presents more reasons to why democracy has gone wrong. It presents possible solutions to bring back democracy. It’s long (about 6 pages in the print edition), but it’s something worthwhile having a go at. Economic concepts are also in here, try and find them 🙂

Democracy gone wrong

Masters of the Universe

After watching “The Wolf of Wall Street”, I thought that the pay stock brokers and bankers made was astronomical. I mean, even in 2014 bankers still get paid a lot; Jamie Dimon (CEO, President and Chairman of JP Morgan Chase) made $20 million for his work in 2013. Not too shabby huh? But are there people out there who make more than that (excluding the likes of Slim, Gates and Buffet etc.)? One career in particular, has one person earning more than 10 times the amount Jamie Dimon got paid in one month. It’s time to meet the real masters of the universe…

The world’s best-paid men

Has Economics failed?

Back in the early 20th century, everyone around the world was suffering from the Great Depression. Thanks to Economics and Keynes, politicians were able to implement policies and lift their countries out of the depression. When you come to think about it, without Economics, we’d probably still be living in the depression. Time and time again Economics has saved countries, but on how many occasions has it gotten countries into trouble? Could it be that without Economics, the majority of these events such as the crash in ’08, we’d be better off?

the failure of economics            the next keynes

The link below highlights the output gaps for developing countries in 2010,2013 and 2014. I don’t think there’s a better indicator out there highlighting the deceleration in Chinese economics growth.

output gaps

Finally, the last link takes a look at how the Bank of England. The unemployment rate in the UK has fallen to 7.1% since May last year, and with IMF forecasting UK growth for the year at 2.4%, will Mark Carney decide to raise interest rates?

uk labour market