This is the most entertaining part of the book - but then everyone enjoys peering into the lives (and in this case the spending) of the rich. Everyone has an opinion about rich people, and in The Inequality Paradox, Douglas McWilliams distinguishes the 'deserving rich' from the 'undeserving rich'. The former contribute to society, by setting up businesses, employing people and creating wealth. At the top of the pyramid of the deserving rich are those who create whole new industries - Bill Gates or Steve Jobs, for example, whose work has changed the way we live.
The undeserving rich are a broader cast ranging from the outright parasitical, born into wealth who merely run down the fortunes bestowed upon them by previous generations, to those who destroy value in society (protection rackets being the most egregious example). Bankers and their bonuses, CEOs who award themselves massive pay rises, rent-seekers who extract more money out of the system, while impoverishing it as a result. Russian privatisation is held up as a good example of how to create the wrong sort of wealthy. Finally politicians who steal money from their country.
Capturing and milking a state is the root cause of inequality in some countries, in others its remuneration committees who insist that their CEO be paid 'in the top quartile' and bankers awarding themselves bonuses so big that they effect entire regional economies. Bankers are of variable value to the societies they serve. Yes, they direct resources to entrepreneurs needing money for growth. But other bits of the financial system are "an enormous casino". This shocked me - did you know that the amount of money traded on Forex markets each day in 2016 was "almost exactly 100 times larger than world cross-border trade." The latter adds value to society - people trading food, furniture, clothes, tools, machines, utensils. The former - foreign currency dealers making money on a tiny spread on huge volumes of money by betting on which direction it's likely to go - adds no real value.
'Clogs to clogs in three generations', a Lancashire saying which suggests that wealth does not survive long in a family, is put to the test based on data. It turns out that it's not three generations - but five, on average. There is churn; there is a lack of drive and need in following generations to replicate the success of the original wealth-creator. But there's one extremely interesting longitudinal study carried out, looking at families from Florence from 1427 to 2011. If your ancestors found themselves in the top 10% of income-tax payers back in the 15th century, your were likely to be earning 5% more in 2011 than people whose ancestors were among the bottom 10% when it came to taxable income.
Wow! It's there - a slight but statistically significant link. A genetic component? Intelligence is hereditary - maybe drive is too?
But it also matters where you are. Italy has been a very static, homogeneous society over the centuries. Another survey conducted by the St Louis Federal Reserve suggested that in the US, it tales just 125 years (five generations) rather than the 700 years in Florence, "for the influence of your ancestry on your income to diminish to less than 5%."
The locational aspect of inequality often comes down to property prices. Carrying out a similar analysis of wealth in the UK shows "an extraordinary concentration of wealth on property". McWilliams adds" one of the causes of inequality in many countries is high and rising property values driven by tight planning regulations." In some respects, Poland is more like the Great Plains than South-East England. Over my 22 years in Warsaw, I've seen the city sprawling far out into new exurbs reachable only by car, ever further from the city centre, with no green belt to halt expansion.
McWilliams returns to the theme of 'superbabies', the result of homogamy, one of the four types of inequality. Homogamy has always been practised within aristocracies, dynastic arranged marriages ensuring the continuity and expansion of nobility and its wealth. The opening up of universities to women, then broadening access to tertiary education, has increased homogamy massively. When I was at university in the late 1970s, only 4% of British school leavers went on to study at one, another 4% going on to polytechnic, seen as an inferior form of tertiary education. Today in the UK and in Poland, it's approaching 50%. On this basis, I would predict that there will be more 'superbabies' in future, better nourished and nurtured than the kids of those without tertiary education. But will this result in more, or less inequality? I believe that part of the 'bubble' effect that social media exacerbates is the fact that those with and those without tertiary education tend to stick to their own.
And at this point it's time (in the next post) to look at the most important part of the book - fixing the problem of inequality - finding the correct policy response.
This time four years ago:
Globalisation and its part in PiS's return to power
This time five years ago:
UK overtakes France as the world's fifth-largest economy
This time nine years ago:
Wetlands winter meltdown
This time ten years ago:
Winter's walk to work
This time 11 years ago:
Winter drivetime, Jeziorki North
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3 comments:
When you write of bankers, good to mention sky-high bonuses, outrageous for ordinary people, have not reached Poland. Here, over a decade after the financial meltdown, real earnings in the banking sector have fallen in real terms, while most employees who have not changed their job in the meantime have seen their salaries flat or slightly rising over the last 10 years. An average CEO of a commercial bank earns in Poland less than EUR 500,000, while an average senior specialist with whose hands a bank makes huge money, earns less than EUR 100,000 a year... I'm somehow glad my bonus cannot affect the entire economy (it wouldn't even buy a brand-new compact car these days). Glad Polish banking has not advanced greatly beyond the traditional bank's role, i.e. has not become involved in speculative dealings.
Planning regulations are just one component of rising property prices (which indeed lead to greater inequality, hence it brings me no joy that the value of my flat is higher). The other primary reason, i.e. access to easy credit no longer plays such role. Today ultra-loose monetary policy has led to cicrulation of masses of hollow money which needs to be parked somewhere else than in zero-interest government bonds. Such money from big investors and small private individuals who shun 1% bank deposits flows to the property market and prices out of it those who want to buy a property to meet their housing needs, not to invest money.
Some time ago you compared purchasing power of senior specialists' wages in London over decades. This reminds your parents had a chance to accumulate wealth. Today several people do not stand such chance. Outcome - rising inequality.
@studentSGH
The fact that Poland's bankers were less greedy and less sophisticated (there was too much basic banking that needed providing before moving on to securitizing sub-prime hedge-fund derivative-denominated eurobond swaps) was a major factor in keeping Poland out of recession in 2009. God bless Poland's bankers!
Base rates - it's an utter scandal that Głapiński kept base rates at 1.5% after last week's shock news that inflation's shot up to 3.4%!
Has Sir forgotten about several companies which had gone under or had fallen into serious financial troubles in early 2009, due to toxic currency options foisted upon exporters in 2008?
Has Sir forgotten about systemic peril to the Polish banking system, had mortgage lending in CHF been more aggressive?
Interest rates - I wrote about it nearly 2 years ago, but nobody's listening to me!
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