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

 

 

 

How long is the Long Run Mr Keynes?

It is not a course for debate that markets will not clear but rather how best to facilitate this clearing.  It is erroneous to conclude that all demand-side enthusiasts are against all forms of supply-side policies and vice versa.  In fact there is a consensus today that supply-side policies indeed increase the LRAS, however, it is in the choice of policy that the disagreements can be found.  What do you favour; the policy based on free market and incentives such as lower taxes and privatisation or the interventionist type of  policy such as government funding of education and re-training centres? You know the drill – pen and paper at the ready and start your engines!

wear the cap      private sector involvement          shifting AS        a supermodel       it’s only a dyson      trade union reform?        playschool      pointless    don’t laff               get to work     more competition

Germany and the Minimum Wage

Until November 2013, a minimum wage in Germany did not exist yet unemployment was low, the economy strong; and German workers were renowned for strong job protection- perhaps this could mean a minimum wage is not entirely necessary. However the non-existence of a minimum wage led to some employees being paid terribly low wages; and this surely is a sign of inequality and hence market failure. Also, if a minimum wage did exist to prevent this, should wages be negotiated between workers and their industries or should one wage be set to cover all workers? If trade union bargaining power is deemed limited, maybe a national wage would be most effective.

europe

minimum wage