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Posts Tagged ‘distribution of wealth’

Keeping it in the family

An article in the February 2015 issue of the Economic Journal, ‘Intergenerational Wealth Mobility in England, 1858–2012: Surnames and Social Mobility’ by Gregory Clark and Neil Cummins, looks at the persistence of wealth within British families across the generations. The article shows, ‘using rare surnames to track families, that wealth is much more persistent than standard one-generation estimates would suggest. There is still a significant correlation between the wealth of families five generations apart’.

It concludes that down the generations the main determinant of wealth is inheritance, despite all efforts to improve social mobility. The intergenerational elasticity of wealth inheritance is found to be 0.70–0.75 throughout the years 1858–2012. In other words, people’s wealth on average will be between 70% and 75% of that of their parents. Thus a large proportion of each person’s wealth depends on the wealth of their parents and a relatively small amount depends on other factors. As Clark and Cummins conclude:

The implications of this model are that wealth will be surprisingly persistent in families across multiple generations. This is what allows rich rare surnames to still remain rich on average even four generations later. It also implies that wealth differences between racial, religious and ethnic groups will also be highly persistent across generations.

So it is just inherited wealth in terms of money or property that gets passed from generation to generation? Or are their other factors, such as education, social class and social contacts, that cause people’s wealth to depend heavily on that of their parents? Clark and Cummins consider this question.

What is the latent variable that underlies the inheritance of wealth? Evidence in other work we have done on the inheritance of education status in England suggests that families can be conceived of as having an underlying social competence, which is highly persistent across generations. This social competence generates their outcomes on all dimensions of social status but with random components on each one. In this case, social mobility between generations measured on any single aspect of status will be much greater than mobility on a more general ranking of families’ overall social status, that averages earnings, wealth, occupation, education, health and longevity.

So does this mean that attempts to create greater social mobility and greater equality are futile? The authors maintain that although it is difficult to achieve greater social mobility, income and wealth can nevertheless be redistributed through the tax and benefits system.

News articles
Inheritance: how Britain’s wealthy still keep it in the family The Observer, Jamie Doward (1/2/15)
How the rich stay rich: social status is more inheritable than height ZME Science (25/11/14)
This is the proof that the 1% have been running the show for 800 years Quartz (23/11/14)

Journal article
Intergenerational Wealth Mobility in England, 1858–2012: Surnames and Social Mobility The Economic Journal, Gregory Clark and Neil Cummins (February 2015) (To read this article you will need to log in via Shibboleth using your university username and password.)

Questions

  1. What would be the implication of an intergenerational wealth elasticity (a) of 1; (b) of 0; (c) >1; (d) <0?
  2. For what reasons might there be a high intergenerational wealth elasticity?
  3. What is the likely relationship between the intergenerational distribution of wealth and the intergenerational distribution of income?
  4. What difficulties are there is using rare surnames as a means of establishing the intergenerational distribution of wealth?
  5. Discuss the advantages and disadvantages of (a) a much higher rate of inheritance tax (in the UK it’s currently 40% on the value of a person’s estate above £325,000 when they die); (b) capping the amount that can be left to any individual from an estate, with anything above this taxed at 100%; (c) capping the total amount that can be left (other than to charity), with the rest taxed at 100%.
  6. What measures could be adopted to increase social mobility?
  7. What problems would arise from using the tax and benefit system to reduce inequality? (In 2012/13 the gini coefficient of original income was 0.52 and that of both gross income (i.e. income after benefits but before tax) and post-tax-and-benefit income in the UK was 0.37: see Table 27 of The Effects of Taxes and Benefits on Household Income, 2012/13.)
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The end of the American dream?

Growing inequality of income and wealth is a common pattern throughout the world. In the boom years up to 2008, the rich got a lot richer, but at least those on low incomes generally saw modest rises in their incomes. Since 2008, however, the continually widening gap between rich and poor has seen the poor and many on middle incomes getting absolutely poorer.

The problem is particularly acute in the USA. Indeed, in his 2012 State of the Union address, President Obama said that it was the ‘defining issue of our time.’

No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.

The good news for the poor in the USA is that at last their incomes have stopped falling, thanks to stronger economic growth. But their share of the growth in GDP is tiny. As The Economist article states:

The main message is a grim one. Most of the growth is going to an extraordinarily small share of the population: 95% of the gains from the recovery have gone to the richest 1% of people, whose share of overall income is once again close to its highest level in a century. The most unequal country in the rich world is thus becoming even more so.

Apart from the ethical question of whether it is desirable for a society, already highly unequal, to become even more so, there is the question of whether this growth in inequality threatens economic recovery. Joseph Stiglitz argues that the rich have a low marginal propensity to consume and that this is threatening recovery.

Then there is the question of investment. Because most Americans have not seen any significant rise in incomes, it is easy for them to believe that the country cannot afford to invest more. And certainly it is difficult to persuade people that higher taxes are warranted to fund education, infrastructure or research.

The following articles consider the problem and its implications and look at various policy alternatives.

Articles and videos
Inequality: Growing apart The Economist (21/9/13)
What is income inequality, anyway? CNN, John D. Sutter (29/10/13)
Inequality is literally killing America Press TV (22/11/13)
It’s Economic Inequality Stupid – What to Do About the Biggest Crisis Facing America Huffington Post, Robert Creamer (14/11/13)
US Inequality Now Literally Off the Chart Truthout, Salvatore Babones (8/6/13)
Inequality moves to the front line of US politics Financial Times, Richard McGregor (20/11/13)
Is wealth inequality slowing growth? BBC News, Linda Yueh (21/11/13)
American Inequality in Six Charts The New Yorker, John Cassidy (18/11/13)
Income Inequality ‘Profoundly Corrosive’ Wall Street Journal, Larry Summers (19/11/13)
21 Charts On US Inequality That Everyone Should See Business Insider, Gus Lubin (12/11/13)

Data, information and reports
Income inequality in the United States Wikipedia
Inequality Data & Statistics Inequality.org
Income Main United States Census Bureau
World of Work Report 2013: Snapshot of the United States ILO
World of Work Report 2013 ILO
StatExtracts OECD (Search for Gini)

Questions

  1. How may income inequality be measured?
  2. Comment on the Gini coefficients in the above link to the StatExtracts site.
  3. Why has inequality grown in the USA?
  4. The Swiss have just voted in a referendum to reject a proposal to limit executive pay to 12 times that of the lowest paid worker in the same company. What are the arguments for and against the proposal?
  5. What features of an unequal society tend to perpetuate or even deepen that inequality over time?
  6. What features of a well functioning market economy would help to reduce income inequality?
  7. Are higher marginal tax rates and higher welfare payments the best way of reducing inequality? What other policy options are there?
  8. Compare the views of Paul Krugman and Joseph Stiglitz on the effects of growing inequality on economic growth. How significant is the difference in the marginal propensity to consume of the rich and the poor in explaining the relatively low rate of US economic growth?
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Out of sight

According to the Sunday Times Rich List, the combined wealth of Britain’s 1000 richest people grew by nearly 4.7% last year to £414 billion (after growing by 18% in 2010).

This is in stark contrast to average households, who saw their real incomes decline by 1.9% in 2011. As the Guardian article below says:

The Rich Listers are not merely the 1%, but the 0.01%, and this fanfared celebration of their assets feels like a celebration of things that nobody feels like celebrating: bankers’ bonuses, complex corporate tax-avoidance structures, the stifling grip of aristocratic family wealth.

So why are the rich getting richer and what are the implications for society and the economy? Watch and read the following webcasts and articles and then see if you can answer the questions below.

Webcasts
Rich List shows how super-wealthy have dodged recession (or) Channel 4 News (29/4/12)
Sunday Times Rich List: Wealthy getting richer BBC News, Ben Thompson (29/4/12)

Articles
Britain’s richest see fortunes rise to record high Reuters, Tim Castle (29/4/12)
Sunday Times Rich List shows rich recover wealth twice as fast Myfinances.co.uk, Ben Salisbury (29/4/12)
Sunday Times Rich List suggests UK’s wealthiest defy recession BBC News (28/4/12)
Sunday Times Rich List 2012: Wealth of richest grows to record levels The Telegraph, Patrick Sawer (28/4/12)
The Not-So-Rich-Any-More List Guardian, Oliver Burkeman and Patrick Kingsley (27/4/12)
Sunday Times Rich List ITV News (29/4/12)

Data
Distribution of Personal Wealth HMRC
The effects of taxes and benefits on household income ONS (19/5/11)
Household Quarterly Release 2011 Q4 – Real household actual income and expenditure per head ONS

Questions

  1. Distinguish between stocks and flows. Which of the following are stocks and which are flows: income, wealth, savings, saving, expenditure, possessions?
  2. If the combined wealth of the 1000 wealthiest people increased in 2011, does this imply that their incomes rose? Explain.
  3. Why have the super rich got richer, while average incomes in the country have fallen?
  4. What are the costs and benefits to society (other than the super rich) of the super rich becoming richer?
  5. Distinguish between the income and substitution effects of an increase in income of the wealthy. Which is likely to be larger and why?
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