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

 

 

 

Price floors & alcohol.

The introduction of a minimum price for alcohol is a contentious issue and allows for some great analysis and evaluation.

Here are some notable advantages and disadvantages to the plans:

Advantages:
* it is argued that the increase would dissuade consumption of cheap alcohol, thereby reducing the social costs associated with drunken anti-social behaviour amongst young people.
* it is argued the the policy is well targeted in tackling the types of alcohol that lie at the heart of the anti-social behaviour and demands upon emergency services, since these issues largely come about through younger people drinking cheap strong cider and lager.
* Ministers believe the policy could be good for pubs, by encouraging those who might otherwise buy cheaply priced alcohol from supermarkets to go to the pub to drink.

Disadvantages:
* Alcohol is clearly highly addictive and highly price and income inelastic. Therefore drinkers will still find a way to consume and this may lead to increased crime or less consumption of other goods (including merit goods perhaps) in order to pay for it. However, advocates of the policy may point to a wider range of measures being introduced including flexibility for local authorities to restrict licensing hours and use sobriety enforcement orders to police this problem.
* There is little prospect of tax revenue being raised from this policy to tackle the ongoing negative externalities of binge drinking, including health costs as well as social costs.
* Some argue this policy is unfair on responsible drinkers who will suffer through seeing prices rise when consumers have hard pressed budgets already. I wonder whether it would enable wine retailers to put up prices of their mid and top end products in order to continue to differentiate them in price from the cheapest products currently beneath the proposed 40p per unit threshold. On the other hand, others claim this policy does nothing to target middle-class people who have been identified as consuming in excess of the guidelines.
* There is concern that this will simply help to boost the profits of retailers, who will be forced to increase prices but will take the opportunity to increase the profits they make on the price they purchase the alcohol for from producers.

Here are some links that apply the theory to reality.

cheap booze       a nation of drunks

 

‘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

 

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

The Esoteric Science of Monetary Policy!

We are aware that monetary policy is a demand side policy that central banks use to manipulate interest rates and the money supply so as to influence AD and inflation.  It is important to realise that monetary policy is pro active due to the time lags experienced in the transmission mechanism and that the rule of ceteris paribus is often difficult to implement when considering the macro economy.  There are a couple of relatively new tools that monetary policy has begun to rely more on since the start of the GR  and it will be interesting to see how policies such as quantitative easing and forward guidance will transpire.  It is essential that you have a sound understanding of the relationship between R and the Dm as well as the Sm.  As always have your pens poised and happy reading.

one glove fits all?      chains of analysis paradise      what is forward guidance?                                                                      transmission mechanism and sterling

what is quantitative easing?     us asset purchases    do not trust qe      fourth paragraph     friend of foe?    history of the pound

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

Tax and Spending. Where do you stand?

It is not a question of whether fiscal policy is a tool used by government but rather by what degree is it used?  The unprecedented GR has seen the UK Coalition Government use fiscal policy in a number of guises and, it could be argued to some success.  This judgement in itself is normative and as the info graphic on the right, The Squeeze, shows your interpretation of ‘success’ is surely determined by how much your standard of living has been compromised.  As you read through the articles be aware of the fp transmission mechanism and concentrate on developing your chains of analysis, diagrams and evaluations.  There is a video included giving an explanation of the conciliatory AS curve as well.

are you better off?      who is feeling the pinch the most?       spending and the multiplier      truth or bluster     tim harford   unintended consequences    marginal tax rates                        tax and business     vat increase      institute of fiscal studies