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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‘GNP measures everything except that which makes life worthwhile’ RFK

It is frequently concluded that GDP is the most consummate indicator there is for measuring standard of living.  It is the simplest to calculate and the most internationally recognised form of  gauging our economic well being.  We realise the limitations of this measure such as income distribution and negative externatilities and have therefore developed alternative indicators that give a more reflective measure of well being such as the HDI.  Compared with GDP, HDI is more informative, and it is interesting reading to note the top 10 economies of each. However, even though this index builds on the GDP indicator its omissions (eg gender equality) are amongst its evaluation points.  Economics is striving to build on existing models that reflect a more realistic view of the world so that, ultimately social and economic welfare can be maximised through policy.  The HDI is a start but before real progress can be made indicators must begin to fully take into account what ‘really makes life worthwhile’.  Before you read the links or watch the video make a list the five most important variables that make your life ‘worthwhile’.

happy planet          gnh

 

Don’t want to be unemployed in 10 to 20 years? Become a priest.

We are all very familiar with the term ‘technological unemployment’ – the substitution of human labour for more efficient machines. This is an estimated sneak peek into the future. If you guys are really interested in reading the article it’s below but the table is what I wanted to show you.  Choose your careers wisely!

Future technological unemployment

technology to the rescue

Inflation and energy prices.

Subject to this morning’s lesson about why inflation is difficult to forecast.  Volatility in UK energy prices may arise due to obvious external or internal shocks along the supply chain.  This is a bitter pill for the consumer to swallow due to the low PED value of energy.  This adds to the unanticipated increases in inflation and thus the consequences of this ,(a higher opportunity cost for the consumer when deciding about energy use and consumption elsewhere; a shift in of AD and the SRAS).  Basically higher rates of inflation and lower economic activity.  This makes policy decisions at the best of times hard.  However, the article below highlights that there might be an alternative rationale behind these increases and highlights how producers, in an oligopoly market structure, often behave and work against the common good.

Profiteering?

With reference to how inflation can be regressive and how this is manifested with lower income groups.

Heating or food.

Economic Growth, Unemployment and The iPhone!

Producers outsource as a means of reducing average costs and gaining a competitive advantage. Abnormal profit and time saved can be reinvested on increasing innovation. Consumers gain through better quality products at more affordable prices .  However, what is the opportunity cost, of this action, on the macro economy?  Below is a video explaining the concept of the ‘jobs multiplier’ and it intimates how some major economies might benefit from rebalancing.