The Economist is probably not the kind of newspaper that you will read more than once per issue – certainly not two years after its publication date. That is because, by definition, financial news articles are ephemeral: they have greater value, the more recent they are – especially in the modern financial world, where change can be strikingly fast. To my surprise, however, I found myself reading again an article on inequality that I had first read two years ago – and it is (of course) still relevant today.
The title of the article was ‘You may be higher in the global wealth pyramid than you think’ and it discusses exactly that: how much wealth does it take for someone to be considered ‘rich’? The answer to this question is of course, ‘it depends’. And it does depend on which group you compare yourself against. Although this may feel obvious, some of the statistics that are presented in this article may surprise you.
According to the article
If you had $2200 to your name (adding together your bank deposits, financial investments and property holdings, and subtracting your debts) you might not think yourself terribly fortunate. But you would be wealthier than half the world’s population, according to this year’s Global Wealth Report by the Crédit Suisse Research Institute. If you had $71 560 or more, you would be in the top tenth. If you were lucky enough to own over $744 400 you could count yourself a member of the global 1% that voters everywhere are rebelling against.
For many (including yours truly) these numbers may come as a surprise when you first see them. $2200 in today’s exchange rate is about £1640. And this is wealth, not income – including all earthly possessions (net of debt). £1640 of wealth is enough to put you ahead of half of the planet’s population. Have a $774 400 (£556 174 – about the average price of a two-bedroom flat in London) and – congratulations! You are part of the global richest 1% everyone is complaining about…
Such comparisons are certainly thought provoking. They show how unevenly wealth is distributed across countries. They also show that countries which are more open to trade are more likely to have benefited the most from it. Take a closer look at the statistics and you will realise that you are more likely to be rich (compared to the global average) if you live in one of these countries.
Of course, wealth inequality does not happen only across countries – it happens also within countries. You can own a two-bedroom flat in London (and be, therefore, part of the 1% global elite), but having to live on a very modest budget because your income (which is a flow variable, as opposed to wealth, which is a stock variable) has not grown fast enough in relation to other parts of the national population.
Would you be better off if there were less trade? Certainly not – you would probably be even poorer, as trade theories (and most of the empirical evidence I am aware of) assert. Why do we then talk so much about trade wars and trade restrictions recently? Why do we elect politicians who advocate such restrictions? It is probably easier to answer these questions using political than economic theory (although game theory may have some interesting insights to offer – have you heard of the ‘Chicken game‘?). But as I am neither political scientists nor a game theorist, I will just continue to wonder about it.
Articles and information
- Were you surprised by the statistics mentioned in this report? Explain why.
- Do you think that income inequality is a natural consequence of economic growth? Are there pro-growth policies that can be used to tackle it?
- Identify three ways in which widening income inequality can hurt economies (and societies).
How much do you know about cryptocurrencies? Even if you don’t know much you are very likely to have heard about the most popular member of the family: Bitcoin. Bitcoin (BTC) has been around for some time now (see the blog Bubbling Bitcoin). It was first released in 2009 by its inventor (the mysterious Satoshi Nakamoto, whose real identity still remains unknown), and since then it has gradually increased in popularity.
According to the Bitcoin Market Journal (a specialised blog, commenting on trends in digital currencies – primarily Bitcoin), there are currently about 29 million digital wallets holding at least 0.001 BTC, although some individual users may own multiple wallets.
Although BTC is the most popular digital currency (and the first one to become widely recognisable), it is certainly not the only one. There are currently more than 400 recognisable cryptocurrencies traded in special digital exchanges (twice this number if you count smaller, less successful ones) with a total capitalisation of $700 billion at its peak (January 3, 2018) – although since then the market has lost a significant part of this value (but it’s still worth 100s of billion of US dollars).
If you have heard about Bitcoin before, chances are you first searched for it sometime between December 2017 and January 2018; that is when the value of Bitcoin soared to $20 000 a piece. A search on Google Trends (a Google utility that shows how many people have searched over a period of time for a certain term – in this case “Bitcoin”) shows this very clearly.
So what do people do with Bitcoin and other cryptocurrencies? The truth is that the majority of users use them for speculative purposes: they buy and sell them, in the hope of making a profit. Due to its extreme volatility (it is very common for the price of the larger cryptocurrencies to fluctuate by 10–20% daily) and the unregulated nature of the cryptocurrency market, it is hardly surprising that most users treat them as very high-risk commodity. This is also why digital currencies tend to attract attention (and new users) when their price soars.
However, cryptocurrencies are not only used for speculation. They can also be used to facilitate transactions. Indeed, according to Wikipedia, there are currently more than 100 000 merchants accepting BTC as a form of payment (online or offline with wallet readers). Financial technology (‘Fintech’) is catching up with this market and some new companies try to compete with the traditional payment networks (Mastercard, Visa and others) by launching plastic cards linked with crypto-wallets (primarily Bitcoin).
Santander bank has expressed an interest in exploring this market further. It is certain that if the market for cryptocurrencies keeps growing at this pace, there will be a lot more challenger fintech firms launching new products that will make it easier to use digital currencies in everyday life.
Cryptocurrencies, therefore, are likely to have a significant impact on the way we pay for our transactions. They can be used to lower transaction costs (e.g. by simplifying the process of sending money abroad), speed up the processing of payments, facilitate microfinancing and transactions in some of the poorest places on earth – where the closest bank may be 50 miles away or further from where people live).
But there is a dark side to these products. They have been linked to tax-evasion for instance, as many people who trade digital currencies fail to declare capital gains to national tax authorities. They can be used to overcome capital controls and other restrictions imposed by national governments (the case of Greece comes to mind as a recent example).
They have also been blamed for facilitating illegal trading activities, such as in drugs and weapons, due to the anonymity that some of these coins are thought to offer to their users – although quite often they are much easier to trace than their users believe.
Cryptocurrencies do have the potential to change the way we live. They also have the potential to become the biggest Ponzi scheme in the history of mankind.
Over the next few months, I will write a number of blogs to explore the literature on the economics of cryptocurrencies, and discuss some of the major challenges that needs to be overcome if this technology is to become mainstream.
Articles and information
- How much do you know about Bitcoin and other cryptocurrencies? When did you first find out about them and what triggered your interest?
- Would you be willing to accept payment in BTC? Why yes? Why no?
- Identify five ways in which the use of cryptocurrencies can benefit or damage the global economy.
The IMF has just published its six-monthly World Economic Outlook. This provides an assessment of trends in the global economy and gives forecasts for a range of macroeconomic indicators by country, by groups of countries and for the whole world.
This latest report is upbeat for the short term. Global economic growth is expected to be around 3.9% this year and next. This represents 2.3% this year and 2.5% next for advanced countries and 4.8% this year and 4.9% next for emerging and developing countries. For large advanced countries such rates are above potential economic growth rates of around 1.6% and thus represent a rise in the positive output gap or fall in the negative one.
But while the near future for economic growth seems positive, the IMF is less optimistic beyond that for advanced countries, where growth rates are forecast to decline to 2.2% in 2019, 1.7% in 2020 and 1.5% by 2023. Emerging and developing countries, however, are expected to see growth rates of around 5% being maintained.
For most countries, current favorable growth rates will not last. Policymakers should seize this opportunity to bolster growth, make it more durable, and equip their governments better to counter the next downturn.
By comparison with other countries, the UK’s growth prospects look poor. The IMF forecasts that its growth rate will slow from 1.8% in 2017 to 1.6% in 2018 and 1.5% in 2019, eventually rising to around 1.6% by 2023. The short-term figures are lower than in the USA, France and Germany and reflect ‘the anticipated higher barriers to trade and lower foreign direct investment following Brexit’.
The report sounds some alarm bells for the global economy.
The first is a possible growth in trade barriers as a trade war looms between the USA and China and as Russia faces growing trade sanctions. As Christine Lagarde, managing director of the IMF told an audience in Hong Kong:
Governments need to steer clear of protectionism in all its forms. …Remember: the multilateral trade system has transformed our world over the past generation. It helped reduce by half the proportion of the global population living in extreme poverty. It has reduced the cost of living, and has created millions of new jobs with higher wages. …But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure. So let us redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures.
The second danger is a growth in world government and private debt levels, which at 225% of global GDP are now higher than before the financial crisis of 2007–9. With Trump’s policies of tax cuts and increased government expenditure, the resulting rise in US government debt levels could see some fiscal tightening ahead, which could act as a brake on the world economy. As Maurice Obstfeld , Economic Counsellor and Director of the Research Department, said at the Press Conference launching the latest World Economic Outlook:
Debts throughout the world are very high, and a lot of debts are denominated in dollars. And if dollar funding costs rise, this could be a strain on countries’ sovereign financial institutions.
In China, there has been a massive rise in corporate debt, which may become unsustainable if the Chinese economy slows. Other countries too have seen a surge in private-sector debt. If optimism is replaced by pessimism, there could be a ‘Minsky moment’, where people start to claw down on debt and banks become less generous in lending. This could lead to another crisis and a global recession. A trigger could be rising interest rates, with people finding it hard to service their debts and so cut down on spending.
The third danger is the slow growth in labour productivity combined with aging populations in developed countries. This acts as a brake on growth. The rise in AI and robotics (see the post Rage against the machine) could help to increase potential growth rates, but this could cost jobs in the short term and the benefits could be very unevenly distributed.
This brings us to a final issue and this is the long-term trend to greater inequality, especially in developed economies. Growth has been skewed to the top end of the income distribution. As the April 2017 WEO reported, “technological advances have contributed the most to the recent rise in inequality, but increased financial globalization – and foreign direct investment in particular – has also played a role.”
And the policy of quantitative easing has also tended to benefit the rich, as its main effect has been to push up asset prices, such as share and house prices. Although this has indirectly stimulated the economy, it has mainly benefited asset owners, many of whom have seen their wealth soar. People further down the income scale have seen little or no growth in their real incomes since the financial crisis.
- Clouds gather over global economy, casting long shadow on Europe
Politico, Pierre Briançon (18/4/18)
- IMF warns rising trade tensions threaten to derail global growth
Reuters, David Lawder (17/4/18)
- IMF outlook contains cause for celebration but a horrendous hangover is looming
The Guardian, Greg Jericho (18/4/18)
- World trade system in danger of being torn apart, warns IMF
The Guardian, Larry Elliott (17/4/18)
- IMF Warns of Rising Threats to Global Financial System
Bloomberg, Andrew Mayeda (18/4/18)
- IMF issues warning on global debt
BBC News, Andrew Walker (18/4/18)
- The IMF has a simple message: the global recovery will peter out
The Guardian, Larry Elliott (17/4/18)
- Global growth is built, alas, on shaky foundations
The Irish Times, Martin Wolf (18/4/18)
- Government debt
The Economist (19/4/18)
- This Is How Much Money the World Owes
- For what reasons may the IMF forecasts turn out to be incorrect?
- Why are emerging and developing countries likely to experience faster rates of economic growth than advanced countries?
- What are meant by a ‘positive output gap’ and a ‘negative output gap’? What are the consequences of each for various macroeconomic indicators?
- Explain what is meant by a ‘Minsky moment’. When are such moments likely to occur? Explain why or why not such a moment is likely to occur in the next two or three years?
- For every debt owed, someone is owed that debt. So does it matter if global public and/or private debts rise? Explain.
- What have been the positive and negative effects of the policy of quantitative easing?
- What are the arguments for and against using tariffs and other forms of trade restrictions as a means of boosting a country’s domestic economy?
I recently found myself talking about my favourite TV shows from my childhood. Smurfs aside, the most popular one for me (and I suppose for many other people from my generation) had to be Knight Rider. It was a story about a crime fighter (David Hasselhoff) and his a heavily modified, artificially intelligent Pontiac Firebird. ‘Kitt’ was a car that could drive itself, engage in thoughtful and articulate conversations, carry out missions and (of course) come up with solutions to complex problems! A car that was very far from what was technologically possible in the 80s – and this was part of its charm.
Today this technology is becoming reality. Google, Tesla and most major automakers are testing self-driving cars with many advanced features like Kitt’s – if not better. They may not fire rockets, but they can drive themselves; they can search the internet; they can answer questions in a language of your choice; and they can be potentially integrated with a number of other technologies (such as car sharing apps) to revolutionise the way we own and use our cars. It will take years until we are able to purchase and use a self-driving car – but it appears very likely that this technology is going to become roadworthy within our lifetime.
Artificial intelligence (AI) is already becoming part of our life. You can buy a robotic vacuum cleaner online for less than a £1000. You can get gadgets like Amazon’s Alexa, that can help you automate your supermarket shopping, for instance. If you are Saudi, you can boast that you are compatriots with a humanoid: Saudi Arabia was the first country to grant citizenship to Sophia, an impressive humanoid and apparently a notorious conversationalist who does not miss an opportunity to address a large audience – and it has done so numerous times already in technology fairs, national congresses – even the UN Assembly! Sophia is the first robot to be honoured with a UN title!
What will be the impact of such technologies on labour markets? If cars can drive themselves, what is going to happen to the taxi drivers? Or the domestic housekeepers – who may find themselves increasingly displaced by cleaning robots. Or warehouse workers who may find themselves displaced by delivery bots (did you know that Alibaba, the Chinese equivalent of eBay, owns a warehouse where most of the work is carried out by robots?). There is no doubt that labour markets are bound to change. But should we (the human labour force) be worried about it? Acemoglu et al (2017) think that we should:
Using a model in which robots compete against human labor in the production of different tasks, we show that robots may reduce employment and wages […] According to our estimates, one more robot per thousand workers reduces the employment to population ratio by about 0.18–0.34 percentage points and wages by 0.25–0.5 per cent.
Automation is likely to affect unskilled workers more than skilled ones, as unskilled jobs are the easiest ones to automate. This could have widespread social implications, as it might widen the divide between the poor (who are more likely to have unskilled jobs) and the affluent (who are more likely to own AI technologies). As mentioned in a recent Boston Consulting Group report (see below):
The future of work is likely to involve large structural changes to the labour market and potentially a net loss of jobs, mostly in routine occupations. An estimated 15 million UK jobs could be at risk of automation, with 63 per cent of all jobs impacted to a medium or large extent.
On the other hand, the adoption of automation is likely to result in higher efficiency, huge productivity gains and less waste. Automation will enable us to use the resources that we have in the most efficient way – and this is bound to result in wealth creation. It will also push human workers away from manual, routine jobs – and it will force them to acquire skills and engage in creative thinking. One thing is for certain: labour markets are changing and they are changing fast!
- What do you think is going to be the effect of automation on labour market participation in the future? Why?
- Using the Solow growth model, explain how automation is likely to affect economic growth and capital returns.
- In the context of the answer you gave to question 2, explain how human capital accumulation may affect the ability of workers to benefit from automation.
 Daron Acemoglu and Pascual Restrepo, Robots and Jobs: Evidence from US Labor Markets, NBER Working Paper No. 23285 (March 2017)
The last two weeks have been quite busy for macroeconomists, HM Treasury staff and statisticians in the UK. The Chancellor of the Exchequer, Mr Phillip Hammond, delivered his (fairly upbeat) Spring Budget Statement on 13 March, highlighting among other things the ‘stellar performance’ of UK labour markets. According to a Treasury Press Release:
Employment has increased by 3 million since 2010, which is the equivalent of 1,000 people finding work every day. The unemployment rate is close to a 40-year low. There is also a joint record number of women in work – 15.1 million. The OBR predict there will be over 500,000 more people in work by 2022.
To put these figures in perspective, according to recent ONS estimates, in January 2018 the rate of UK unemployment was 4.3 per cent – down from 4.4 per cent in December 2017. This is the lowest it has been since 1975. This is of course good news: a thriving labour market is a prerequisite for a healthy economy and a good sign that the UK is on track to full recovery from its 2008 woes.
The Bank of England welcomed the news with a mixture of optimism and relief, and signalled that the time for the next interest rate hike is nigh: most likely at the next MPC meeting in May.
But what is the practical implication of all this for UK consumers and workers?
For workers it means it’s a ‘sellers’ market’: as more people get into employment, it becomes increasingly difficult for certain sectors to fill new vacancies. This is pushing nominal wages up. Indeed, UK wages increased on average by 2.6 per cent year-to-year.
In real terms, however, wage growth has not been high enough to outpace inflation: real wages have fallen by 0.2 per cent compared to last year. Britain has received a pay rise, but not high enough to compensate for rising prices. To quote Matt Hughes, a senior ONS statistician:
Employment and unemployment levels were both up on the quarter, with the employment rate returning to its joint highest ever. ‘Economically inactive’ people — those who are neither working nor looking for a job — fell by their largest amount in almost five and a half years, however. Total earnings growth continues to nudge upwards in cash terms. However, earnings are still failing to outpace inflation.
An increase in interest rates is likely to put further pressure on indebted households. Even more so as it coincides with the end of the five-year grace period since the launch of the 2013 Help-to-Buy scheme, which means that many new homeowners who come to the end of their five year fixed rate deals, will soon find themselves paying more for their mortgage, while also starting to pay interest on their Help-to-buy government loan.
Will wages grow fast enough in 2018 to outpace inflation (and despite Brexit, which is now only 12 months away)? We shall see.
Data, Reports and Analysis
- What is monetary policy, and how is it used to fine tune the economy?
- What is the effect of an increase in interest rates on aggregate demand?
- How optimistic (or pessimistic) are you about the UK’s economic outlook in 2018? Explain your reasoning.