Tag Archives: inequality

Chart of the Day, 21 Jan 2015: Summer’s Secular Stagnation

I’m taking my charts today from the just-published Report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls. Summers, one of the highest profile economists in the world, was in London yesterday (on the way to Davos), promoting the report itself and describing the challenge of how to combat secular stagnation. Yesterday, I listened to Summers at a lecture held at the LSE, a podcast of which can be found here.

First, a restatement of the problem. Growth has slowed in almost all advanced countries (click for larger image):

Secular Stagnation Selected Countries jpeg

And what growth there has been has gone to the rich:

Bottom 90% Income Growth jpeg

In short, for the bottom 90%, productivity and income have diverged.

Productivity and Income Growth jpeg

While admitting there are supply side factors causing the economic slowdown (such as poor demographics), Summers places most emphasis on the demand side as the root cause of the problem, particularly with repsct to investment.

Critically, the relative price of investment goods has collapsed, making investment a meagre source of effective demand. By way of example, Summers points to the behemoth of the 1970s, IBM. The computer giant of its time had a repeated need to access capital markets in order to finance its investment plans and grow. Apple, however, generates more cash than it knows what to do with. Indeed, it is a source of liquidity in the capital markets through carrying out continued share buybacks.

Similarly, Summers notes that a company used to be partly valued on how much ‘stuff’ it had on its balance sheet, but now this is almost an irrelevance. So we have a situation where Whatsapp is worth $17 billion, with minimum assets and employees, but Sony, with an army of employees and a raft of factories, is only worth $16 billion. As a result, the price of money has fallen to zero.

US Natural Rate of Interest jpeg

Summer’s prescription: if the private sector doesn’t want to invest regardless of how low interest rates go, the state should step in, taking advantage of bargain basement borrowing rates to massively upgrade its infrastructure.

I am broadly sympathetic. However, I would point out that another state suffering secular stagnation, Japan, has tried the government-financed mega infrastructure investment strategy before. Indeed, for a time, academics dubbed Japan the ‘construction state’. This frenetic activity, however, did little to raise long-term growth rates. Sometimes, when growth has gone, it’s gone.

Chart of the Day, 19 Jan 2015: The 1% and the 0.1%

Forget the 1%–mere peasants–the real wealth lies with the 0.1%. From a study late last year by Emmanuel Saez and Gabriel Zucman (click for larger image):

Wealth and the 0.1% jpeg

Note we are talking about wealth. This is important because most studies of the 1% focus on income. Wealth is difficult to measure, especially for the uber-rich, which is why this is a landmark study. The authors backed out their wealth estimates using investment income tax return records. In the process, you can see that those poor 1% to 0.5% have been struggling. Forget the squeezed middle, next up is the squeezed upper middle class and then the squeezed lower upper class (click for larger image)?

Decomposing the 1% jpeg

Seriously, the charts suggest the precariousness of the game the super rich are playing. Immense wealth brings immense political power, at least in the United States. But as you eliminate more and more cohorts from the winners’ enclosure, even the most well-financed lobbying machine will start to struggle.

And the mechanism behind this wealth concentration? Saez is a long-term collaborator on inequality questions with Thomas Picketty of “Capital in the Twenty-First Century” fame. From a paper the two did together on income inequality (together with Anthony Atkinson):

Top 0.1% Income jpeg

So we have an ever-growing share of income by the 0.1%. But the income edge of the 0.1% then starts compounding away as return on investment, which then gets passed on to children and grandchildren if the tax regime permits (which it currently does). And– following Piketty’s iron law of inequality–when r (the return on investment) is larger than g (economic growth), wealth inequality explodes. What eventually stops this process is war, revolution, or, more prosaically, government redistribution. We shall see how this cycle ends.

One Percentism

Since the 2008 financial crisis, we have seen a flurry of interest over the issue of inequality. Most recently, Thomas Piketty’s book “Capital in the Twenty-First Century” has drawn  a lot of attention. Yet there are a number of other academics who have been writing on this topic for some time, not least Danny Dorling, a social geographer now at Oxford University.

Dorling’s output is prodigious, and encompasses not just academic articles but also books aimed at the general public. You can get an idea of the breadth of his work by looking at his personal web site here. Last week, my daughter and I had the good fortune to see Dorling introduce his latest book, “Inequality and the One Percent“, to a packed house at the London School of Economics (LSE).

The LSE has done an invaluable service to the intellectual life of London and beyond by hosting free and open public lectures by just about everyone who is anyone in the field of economics or politics today. Furthermore, you can access podcasts, videos and slides of the events if you are not able to attend in person. The one for Danny Dorling’s lecture is here.

Apart from being a gifted speaker, Dorling is noted for using innovative data visualisation techniques to communicate his arguments, so we can get a sense of London’s monopolisation of UK wealth through looking at a slides such as this one (click for a larger image):

London Wealth jpeg

A key driver of this wealth disparity is the value of property in London:

London Home Value jpeg

Actually, there are two categories of “one percenters”: income and wealth. To qualify as a one percenter by income, you need to be earning £160,000 a year. To get into the top one percent by wealth, you need £2.8 million. This is a chart taken from the work of the LSE academic John Hills (see here):

Total UK Wealth jpeg

And from such data, Dorling produces infographics for both the UK and US:

UK Land by Wealth jpeg

US Land by Wealth jpeg

Dorling is a proud left-winger: as such, a polemic against the super rich is to be expected. Nonetheless, I am surprised by how Dorling’s arguments are resonating across the political spectrum. In particular, he argues that the one percent has, in effect, detached itself from its natural allies the top 10% and the top 50%. Even the upper middle class is feeling the squeeze, with much of it going backwards in terms of financial security. In short, what economic growth there is is being monopolised by the super-rich.

The arch Tory Charles Moore, no friend of any socialist, has an article in The Daily Telegraph with this headline echoing Dorlng’s analysis:

Today’s political leaders don’t realise how vulnerable voters feel

Followed by this subhead:

Capitalism’s benefits are not felt by all, and the main parties are not talking about it

Moore goes on to argue that fewer and fewer are benefitting from the current political game:

Socialists love saying that the Tories are the party for the rich. If that were the case, they would never have won an election in the era of the universal franchise, since the rich are, by definition, a small minority. Labour’s underestimation of Margaret Thatcher in the Eighties arose from this error: it could not understand why she also appealed to many who were poor and to even more who were middling. So it lost. But now that the Conservatives have, as I say, not hit 40 per cent of the vote for 22 years, perhaps the criticism has greater validity. Perhaps they have got themselves on the wrong side of the divide between those who are comfortable and those who are struggling. And perhaps – stranger thought – the same problem applies even to the party which takes its name from the workers. For 13 years, Labour too has not hit 40 per cent. Those years have encompassed the crisis of capitalism, out of which it should have done well.

Moore finishes with an extraordinary paragraph that could have been written by Danny Dorling himself.

For six or seven years now, voters in the West have realised that capitalism was disastrously captured by those who operated it, so that it stopped benefiting the rest of us. No leader, of Left or Right, has yet worked out what to do about this. In Britain, both main parties have tacitly agreed not to discuss it at the next election.

The analysis here from someone of the political right is interchangeable with someone of the political left. Is a strange world we live in.

Technology, the One Percent and Happiness

One of the central themes of this blog is the pressure that low, zero or negative growth places on economic and social institutions. Technology, however, appears to be ramping up the pressure on these institutions through directing the fruits of whatever growth there is toward an ever-smaller pool of winners. As a result, trickle down appears to be dead, which ultimately means that the current market structure could be gradually undermining the post-war political consensus.

This sounds all very Marxist, but a recent paper by Emmanuel Saez of the University of California shows the amazing extent to which top earners in the U.S. are taking an accelerating share of total income. True, the Great Recession saw a short hiccup in this trend, but the bounce-back since then has been extraordinary: all the gain has been captured by the top one percent (click for larger image).

Real Income Growth jpeg

Saez also puts current income concentration in the context of the historical trends since 1917. As things stand, the rich (top 10%) are pulling away from their 1920s equivalents let alone the average household of the post-war period.

Top Decile Share jpeg

And even within the rich, there is a further level of concentration:

Top Decile Income Share jpeg

Further, even within the 1%, there are relative winners: the top 0.01% (households with earnings of just under $8 million a year) is taking close to 5% of total income.

The Top 0.01% jpeg

Given that there are around 120 million households in the U.S., we are talking about only 12,000 families in this category. Forget Russia, the U.S. has also become a society of plutocrats and oligarchs.

What is even more surprising to me is that despite the economic disruption of the Great Recession, increased unemployment and greater concentration of income (and wealth), indices of ‘happiness’ show no downward trend. The chart below taken from a paper by Graham, Chattopadhyay and Picon shows Gallup’s ‘Best Possible Life (blp) index (using data from a daily survey of 1,000 U.S. adults) plotted against the Dow Jones Industrial Average. At the height of the crisis, when Lehman Brothers went bankrupt, recorded happiness did slump but has since bounced back to levels even higher than those pre-recession; this is despite the fact that a slew of economic indicators show that many households are still struggling.

Best Possible Life jpeg

The ‘best possible life’ question is based on the Cantril Ladder that I blogged on previously here and is phrased in this way (source here):

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.

The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.

On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)

On which step do you think you will stand about five years from now? (ladder-future)

There is lots of evidence that ‘happiness’ reverts to previous levels when subject to either positive (for example a lottery win) or negative shocks, but I still find the resilience of the U.S. population very strange given the rise in unemployment, food stamp recipients and homeless families. For example, the chart below shows the number of recipients of the U.S. Supplemental Nutrition Assistance Programme (SNAP, data from here), better known as food stamps. As of January 2013, 47.8 million Americans (23.1 million households) were receiving benefitting from SNAP, up from 27.8 million individuals in December 2007, when the crisis was just commencing.

SNAP Recipients jpeg

Carol Graham, an economist who specializes in the field of happiness, postulates in her book “The Pursuit of Happiness: An Economy of Well-Being” that the less-than-expected correlation between poverty and happiness may be due to a phenomenon she calls ‘happy peasants, frustrated achievers’. In short, those who have less opportunity or ability to effect their surroundings reset their happiness within the constraints that control them. Further, she differentiates between current opportunity and future opportunity. Food stamp recipients may believe that their situation is temporary and that they will have an opportunity to achieve the American Dream at some point in the future. The fact that social mobility has been falling in recent decades is irrelevant according to her line of thinking: happiness is perception.

I am not entirely convinced. Indeed, I wonder if Gallup does actually capture those Americans really struggling at the bottom. Can they contact those whose place of residence is in a state of flux or are completely homeless? Do the very poor respond to surveys? I don’t know the answer to these questions, but would love to see some empirical work on the happiness of those receiving food stamps.

Which takes me back to the beginning of the post where I wondered whether falling growth and burgeoning inequality could set the scene for social instability. Perhaps Graham is showing us a version of Aldous Huxley’s “Brave New World” where the masses are kept quiescent and content through the use of the drug soma. But in our case, soma is replaced with Jim Kunstler‘s Nascar, junk food, internet porn, tatoos, piercings, and day-time TV (oh, and of course, belief in the American Dream). Or perhaps not.