Tuesday, 3 February 2015

Demand and inequality in the global economy

If mankind has learned anything last year, it's that the rich get richer, no matter what. Thomas Piketty's book Capital in the 21st Century, makes the point that you make more money investing wealth than you do from working for someone. Of course, you need to have that wealth before you can invest it. Once a portion of society does - inherited from generations that have assiduously garnered that wealth and passed it down to their scions - that portion's wealth will continue to grow and the gap between rich and poor will increase.

We have also learned, via the Economist, that inequality has been boosted in the last half-century or so by the not unsurprising phenomenon of university-educated men marrying university-educated women, and such couples spend far more on educating their offspring than couples who have not had the benefit of tertiary education. Given that today's economy places a huge value on education, the scions of the educated - who also happen to be the beneficiaries of inherited wealth - will continue to pile on the money, passing it onto their offspring, thus increasing the gap between rich and poor.

We read that the wealthiest 1% of the world's population owns 80% (or some other staggering figure, depending on which charity or think-tank did the maths). The middle classes of the developed world, whose mission in life is to rescue those less fortunate than themselves gnash their teeth in simulated woe, while the poor of the developed world (who are far, far wealthier and healthier than their grandparents' generation) threaten to rise up to smash the system (again).

From Greece's SYRIZA to Spain's Podemos, the populist redistributionist left is on the march, allied with the radical right in a struggle to bring down The System, which has left them poor while a shadowy conspiracy maintains and multiplies its obscene wealth.

It's easy to knock this way of thinking, but there is a point in here somewhere. The developed world seems to have run out of puff; the economy lacks the drive, the vigour, the need - to develop further. The only people, as the Schumpeter column in this week's Economist points out, who are working flat out to drive the economy forward, are the owners of technology companies, bringing us apps that will change the way we live, work, shop, etc, while turning them into multi-billionaires. The rest of the middle classes - in the developed world at least - seems to have lost that fire in the belly, that animal passion to win - because we have all the material things that we need. In fact we're drowning in them (google 'stuffocation').

Why bust a gut working harder, to earn money that could go on yet another flashy car, exotic holiday or fashionable clothes? Why buy that second home in the Caribbean when it can be rented for the season? What's the use of a second million when all it's going to do is to be left to the children?

We saw this in Japan in the early 1990s. An economy that grew faster than any on earth in the 45 years from 1945 to 1990, suddenly hit a plateau and just stopped growing. Young Japanese men today seem to lack any kind of drive, and are content to live with their parents reading comics.

When the basic needs on Maslow's hierarchy have been sated, the ones that require money - being fed, clothed and housed, and basic comforts are sated, the higher order human needs such as love, belonging and self-actualisation can be met without necessarily spending money on them.

Self-esteem can be achieved by spending big bucks on a grand house with a huge lawn and a black SUV with a V8 motor and darkened windows - but it can also be achieved by contributing to society in less cash-intensive but more laudable ways. And if you've inherited (rather than worked for) that grand house with a huge lawn - why strive to buy a second one?

The developing world - and I'd still include Poland here - is playing catch-up with the West. When in catch-up mode, people are prepared to work harder, because they still have basic needs that need to be met. Poles in the UK will work harder than indigenous Brits, with their ingrained sense of entitlement from the Well-Fair State (to quote Ali G).

Is increasing inequality a biological rather than historical (to quote Karl M) inevitability? I believe it is. The answer is certainly enlightened regulation by the rulers that the we the people choose to govern us. Smart policy solutions, based on empirical  study and implementation of best practice rather then knee-jerk populist slogans. Incremental change rather than radical change. And yes, self-regulation and leadership from the wealthiest.

But in the short-term, where is that demand going to come from in the developed world, where few are genuinely needy? Where 27" flatscreen TVs and all mod-con kitchens, and one-child per bedroom are the state-sanctioned norm? When London rioted in 2011, the youths involved were intent on helping themselves to the latest trainers and mobile devices than Making A Political Point.

Yes, there are still pockets of relative deprivation - but it is relative. Disease and starvation no longer stalk the Western World. The rich - or rather the middle class - are paying for an extensive safety net that ensures that the poorest do not get dangerous.

It is good to see a rise in philanthropy - money spent in improving the health of the developing world, or educating those who could benefit from it but cannot afford it will bring about a continued betterment of mankind. (Interestingly philanthropists are generally those who earned the wealth rather than stole it, but that's another story.)

Yet my central question remains. The developed world will only pull itself out of the doldrums if it can find the drive which triggers some brand new demand. Perceived rising inequality is a sideshow - albeit an extremely serious one that needs a robust policy response. Where will the next wave of demand come from? I'd put my money on life-sciences and healthcare - we all want to remain youthful and vigorous into our 90s and beyond.

This time last year:
Sorry, takie mamy koleje
[One of the most famous quotes from the Tusk years]

This time two years ago:
Visit to Warsaw's Jewish Cemetery

This time three years ago:
Under Rondo Dmowskiego

This time four years ago:
My Most favourite bridge

This time five years ago:
Street lighting under the snow

This time six years ago:
Ul. Poloneza - archival video before the S2 was built

This time seven years ago:
Aerial juxtaposition over Jeziorki


AndrzejK said...

Your point about having reached a glass ceiling of consumerism is very valid. The nonsense is that a typical professional family in the UK today requires both partners to work in order to be able to enjoy the lifestyle (servants, large house etc etc) of their late 19th early 20th Century equivalent.

What makes the problem worse in the UK is that households spend more and more on housing which in a never ending spiral keeps on increasing in value. For our children to get on the property ladder is nigh on impossible until such time as either grandparents or ourselves pass on. The other growing item of expenditure are mobile phone tarrifs and other internet based time killers.
As you say once Maslows basic higene factors are sated where next?
With less and less labour needed to produce goodies we are entering the phase (actually already there) where a decreasing percentage of the populations works its nuts off to pay taxes to redistribute to those on benefits. Whether better education of the under class will lead to them taking up emloyment is a moot point.

Michael Dembinski said...

@ Andrzej K:

The middle classes are paying high taxes to keep the lower classes from rising up against them. The rich, meanwhile, are not so affected by taxation; their invested wealth earns them more than the middle classes earn by working.

Your question about the effects on education upon the poor depends entirely on whether they want to be educated. The learned dependence of the British white working class (from 18th C. mill-owner to 21st C. welfare state) has blunted its desire to educate its "kids" as they call them.

student SGH said...

I've just noticed a considerable rise in creativity. Good you're back on the right track!

Reading prompts the question on legitimacy of inheritance tax on inequality. In most developed countries it is in place (although with several credit and allowances or loopholes allowing to get around it), while in Poland inheritances from the closest relatives are not taxed at all (we owe in to PiS government), but maybe it wouldn't hurt to levy it again?

AndrzejK said...

In the UK the bulk of inheritance tax is assessed on relatively small estates the bulk of which are the result of retained earned income of the testator (the super rich can afford schemes to evade/ avoid the tax). Taxing the estate is taking a second bite at the cherry and is inequitable and a tax on prudence.

Inheritance tax is a leftover of socialist mentality from the early 20th Century designed to tax landed gentry. It hits however the hard working.

Sigismundo said...

History will continue to repeat itself:

Gibbon put down the 'Decline and Fall of the Roman Empire' as much to the degeneracy and 'effeminacy' of the increasingly lazy (and wealthy) ruling tranche of the Roman citizen class as to invasions from hordes of barbarian migrants in search of the good life.

student SGH said...

Yoy can look at inheritance tax from at least two angles. The point on double taxation is surely valid. Yet is it equitable one man has to work hard to amass assets worth let's say one million pounds and in the meantime pay hundreds of pounds in income taxes, while another man might be bequathed assets worth one million pounds and should pay no taxes at all, despite not lifting a finger to earn that money. I would be more cautious in calling specific regime equitable or inequitable. This tax hits those hard working who leave bequests, but not necessarily their heirs who might come into possession of wealth without hard work.

AndrzejK said...

@student SGH.

OK re your comments however in reality the only estates taxed in the UK are thise massed through the hard work of the testator. If I work hard I hope that I can pass on the benefit to my children (or a charity looking after cats for that matter) and not subsidise the great unwashed and those who spent all their income in their lifetime. The government has already had its share by way of income tax. And what is the difference between subsidising children whilst one is alive and leaving them something in a will.

Michael Dembinski said...

@ student SGH, @ Andrzej K.

The issue of inheritance tax is thorny; policy makers have to balance the demands for and equitable society with factors that drive the economy onward. I'd argue that there's more of a need for high inheritance tax in developed economies, where wealth created within families for generations can lead to glaring absurdities. But in countries 'na zarobku' like Poland, one or two generations of inheritance tax-free hand-downs of capital to the next generation are needed to create some 'żelazny kapitał'.