Wealth and inequality - an introduction

As we enter the 2020s, rising inequality across the developed world will be a theme that will run through the public discourse. In particular its effects on society - and the correct policy responses to it - will be much discussed by politicians and policy makers.

French economist Thomas Picketty's book, Capital in the Twenty-First Century, has been hugely influential since it came out in 2013, maybe one of the most influential books of the past decade. I suspect, however, that much like Marx's Das Kapital, it has been more talked about than read. I have heard that it is a boring and plodding read. "If you can't write using short words in short sentences, you can't write." [That's my quote, there.] Picketty's essential argument is that you make more money by making your wealth work for you than you do from working. This, he claims, is why rich people are getting richer and the gap between rich and poor is widening.

Looking at the rise of the phenomenon of the family office, suggests that Picketty may have a point. After the financial crisis of 2009, many wealthy families with $100m or more to look after are no longer entrusting the money to third parties such as private banking, but rather hiring their own fund manager(s) to make their assets work for them. Often these are the same people that once looked after their account at the bank, but now they've been made a tempting offer to leave the bank, cut out the middleman, and work for the family directly.

The media is full of stories about how the top 1% of humanity owned 80% or 90% or more of the world's wealth, and how that's been rising, while the just-about-managing class are finding life ever-harder. Here's a sample: In an era of hyper-wealth, economy-class rich starts at $25 million. (This just popped up in my Facebook feed as I'm going over this post prior to publishing.)

What's the real picture? How does all this affect our daily lives?

An excellent antidote to Picketty is Douglas McWilliams' book The Inequality Paradox. The book's central point is that indeed, the gap between rich and poor has grown bigger - though at the same time billions of people lifted out of abject poverty over the past half-century. Globalisation and new technologies have been the main drivers.

Reading The Inequality Paradox has sparked off so many trains of thought that I have decided to review it over the course of several blog posts, each one an essay based on one of the book's four parts, plus a summary.

But first, I need to start with a personal reflection about wealth. It is from this basis that I shall be commenting on the book, on issues of wealth and inequality. The Polish saying 'punkt widzenia zależy od punktu siedzenia' (your personal circumstances shape your point of view) is all important in this debate. You must understand this to see where I'm coming from...

After the war, my parents ended up in the UK in 1947 with literally nothing - no money, no language, no homeland to return to. Yet within eight years, they had moved into a three-bedroom end-terrace house, which cost £600 at the time, with a very manageable mortgage. By 1955, they were earning good money by postwar UK standards, my father as a civil engineer, my mother even more as a comptometer operator. She gave up her job for a ten-year maternity gap when I was born two years later. In 1970, we moved into a detached house in a posher area. My parents raised two sons, both of whom went on to university and postgraduate studies; they lived a comfortable though frugal life (no fancy foreign holidays, no flash cars, no extravagance). My father worked until he was nearly 70, quitting his job to become a grandfather, and died at 96. 

Thinking back on their lives, one thought eclipses all others - they found themselves in the right place in the right time. Britain was rebuilding, and for hard-working people with the determination to get on, the odds were on their side - regardless of provenance. As I wrote the other day, my parents' first house cost slightly less than one year's net salary of my father, just four years into his professional career. Their second house, bought in 1970, cost five times my father's after-tax salary; house-price inflation was just beginning to kick in. That same house now costs a multiple of 26 times what a senior civil engineer with 19 years' experience earns today after tax. (Housing's not the only cost that's rocketed. Not only was my entire education paid for by the state, I also got a student grant. Compare that with the child of today's senior civil engineer going to a UK university and typically ending up with £45,000 of student debt.)

My own wealth is based on the purchase and sale of a house in London. I bought it in 1982, a little more than a year after I'd started my first job. At the time, the terraced house cost £28,500. This was by now a multiple of eight times my net salary. With the 10% deposit paid for by the Bank of Mum and Dad, I was onto a winner. Less lucky were my friends who didn't rush to get a first foot on the housing ladder. By the late 1980s, at the top of the boom, house prices had risen far faster than earnings, and paying off the mortgage became much easier after I'd got married in 1988. Still, there was a correction in the early 1990s, with the end of double mortgage interest relief at source (MIRAS), and the coining of the term 'negative equity' (people owing their mortgage lender more than the property was worth).  But London property prices kept on rising...

In 1997, with a young family and an interesting job offer in Poland, I decided to jack in a stable career at the CBI (I'd been there for 16 years by then) and emigrate. The house in London proved to be a huge asset - we paid off the remaining mortgage with savings (having made some money on Thatcher's mass privatisations and on unit-trust investments), and it was rented out.

My first five years in Poland were spent working on typical expat director's packages - incredibly generous in hindsight, with children's schooling and family healthcare included. In this respect, I too was in the right place in the right time, though out of choice. Polish speakers with Western managerial experience that could be trusted by foreign investors were at a premium in the 1990s. And when things went wrong (a merger, then the dot-com bubble bursting) there were handsome payouts.

That money went straight into property. In late 1999, we bought land, by 2002 we moved into our own home after five years' renting. Our brand new detached house was vastly better than anything we could have dreamed of in London. The same distance from the centre of the capital, and yet much bigger, on a vastly bigger plot. New, warm, insulated, all mod cons, sauna, walk-in wardrobe, big garage. All for the same money as a studio flat in Ruislip, 25km from the centre of London. (Yes! £250,000 vs 1,250,000 zlotys.)

A small mortgage (paid off in 14 years) covered the cost of finishing the house. Our children went to a posh Polish private primary and junior-high school (in hindsight, a mistake, they say) that cost about three times less in fees than expat schools in Warsaw. Their senior-highs were both state schools with better university admission results than the private senior-high.

The car I bought in 1993, a one-litre Nissan Micra, served for all the school runs, and was finally sold for scrap at the age of 20, not to be replaced. My three custom motorbikes are a nod to the vintage years, albeit with modern underpinnings, and do not serve as a mode of transport, rather a fine-weather summer mode of exploring the Polish countryside.

Back in the UK, chancellor George Osborne imposed capital gains tax on proceeds of sales of property owned by non-residents. This measure was announced in the Autumn Statement of 2013 and came into force at the beginning of the 2014-2015 tax year. Time to cash in; a price of £380,000 was agreed and the house was sold in early 2014. We split that money 50/50; I invested my half in a flat in Łódź and a place in the country with an acre of land - and bought some motorbikes and had them done up. The rest is rainy-day money with instant access.

After moving to Poland, I was advised to keep paying my UK National Insurance contributions. In 2014, 40 years after starting my first summer job (working in a canteen kitchen for £18 a week net), I got a letter from National Insurance. It said I'd paid enough contributions to be eligible for the basic UK state pension on reaching my retirement age of 66 (in just under four years' time). Great! I shall also be getting a meagre Polish state pension, plus my UK private pension built up over my 16 years at the CBI. As you can imagine, with so much of my savings in sterling, I keep a constant eye on the pound/zloty exchange rate. [Disclosure - there's also my parents' house, currently in probate, valued at £900,000. It is to be inhabited by my son and used as a London base by my brother's son, so intergenerational wealth gives our boys an immediate advantage over out-of-towners trying to start their careers in London.]

Why all this transparency about my personal financial situation?  Tot this all up, it's hardly an impressive sum by UK standards, where many of my British-born friends have seen money cascading down to them from more than just one previous generation, and whose careers in high-paying London jobs have brought in far more money than mine has. But I'm not in the UK, I'm in Poland. And it's here that my wealth is judged.

This brings me to the famous 1995 survey by the Harvard School of Public Health (cited here), asking staff and students if they'd rather earn $50,000 a year where their friends and neighbours earn $25,000, or if they'd rather earn $100,000 a year where the others earn $200,000. The result was a near 50/50 split, with one half preferring to have the additional purchasing power, whilst the other preferred to have more relative to others, even if than meant having less in absolute terms. Positional vs. absolute wealth. Here in Poland, I found positional wealth.

Money buys options, it give you the ability to choose. It also buys you comfort - and here is the key.  For most people, in most cultures, there is a 'comfort level' above which the striving stops. "I have all that I need, plus a substantial safety-net in reserve, so I no longer need to push myself to acquire more." This happens at an individual level. And here I shall get controversial. I also believe it can happen at a national level. Just as you can measure the average, mean or median height, weight or demographic age of a population, so, I believe, you should be able to compare the drive of its people. I believe that the dramatic slow-down in economic growth witnessed in Japan post-1992 was due in part to its people feeling sufficiently well-off after 45 years of graft to, well, slow down. What more can you buy or own?

The drive, the determination in Polish society is great. Some of this is down to being a nation in the fast lane to catch up with its Western neighbours. Some of it is down to demographics. The largest group of Poles today by age are the 37-year-olds, born in 1983. There's nearly 700,000 of them. [By contrast, the smallest by age of the younger group are the 17-year-olds, born in 2003. There's only 350,000 of them.] The 1983 cohort was entering the labour market at the time when unemployment was over 20%. Sharp elbows were needed to survive and thrive. Today's young enter the labour market when registered unemployment is 5.1% nationally and around 2% in most big cities.

Wealth and inequality are not just about the rich and the poor. These measures affect a broad spectrum of drivers. At one end are the poor, who need to toil and sweat to keep body and soul together. As they escape the grinding burden of absolute poverty - if they can see the sense of hard work and focus on investing in oneself - they can begin to build a life around higher needs. Maslow's pyramid. But once they get comfortable, many will question the need for further striving. Not so the super-rich. The super-rich have more than enough but want more.

During the dot-com boom of the early 2000s, there emerged the notion of 'fuck-you money', said to be around $10m, a level at which the entrepreneur who's just sold their start-up can literally say 'fuck you' to anyone, be it a rival entrepreneur, the bank or the taxman. OK, so you've made $10m. More money than can be spent in a lifetime, even if just left on deposit or invested in government bonds.

Not so! Today there are houses in London costing £20m, £40m! But you need another property - Swiss Alps, maybe, the Caribbean. Swanky places, to impress, you understand. And private jet to get you there. Staff. Loyal people - well-paid. A family office costs around $1m a year to function; you need $100m, and you count on your fund manager to get a yield of 8%, 9% on those investments each year.

So what drives people who've got that and more to push themselves all-out (and often at the expense of people around them) to strive for a billion? Or to go from that billion to five or six or more billion dollars? Few have the motivation to push themselves that hard.

I don't know. I don't have the motivation - I'm comfortable. I don't want to buy political power, I'm not driven by any great sense of exploring the world or buying more property or motorbikes (well, maybe one or two more. Small ones.) I am an ascetic; my material needs are few. Joy I seek rather than pleasure; sustainability is all-important to me.

So all this is by way of a personal preamble; now to go into the Inequality Paradox.

This time last year:
Gratitude for a peaceful 2018
[Yet another one in 2019. Fingers crossed for 2020!]

This time two years ago:
Fighting laziness - a perennial resolution

This time three years ago:
A Year of Round Anniversaries

This time four years ago:
Walking on frozen water

This time five years ago:
Fireworks herald 2015 in Jeziorki

This time six years ago
Jeziorki welcomes 2014

This time seven years ago:
LOT's second Dreamliner over Jeziorki

This time nine years ago:
New Year's coal train 

This time 11 years ago:
Welcome to 2009!

This time 12 years ago:
Happy 2008!