Inequality is growing in most countries. This can be illustrated by examining what has been happening to countries’ Gini coefficient. The Gini coefficient measures income inequality, where 0.00 represents perfect equality, with everyone in the country earning the same, and 1.00 represent perfect inequality, with one person earning all the country’s income. (Note that sometimes it is expressed as the ‘Gini index’, with 100 representing perfect inequality). In virtually all countries, the Gini coefficient has been rising. In the OECD countries it has risen by an average of 0.3% per annum over the past 25 years. The OECD average is now 0.31.
But despite the fact that the Gini coefficient has been rising, its value differs markedly from one country to another, as does its rate of change. For example, Finland’s Gini coefficient, at 0.26, is below the average, but it has been rising by 1.2% per annum. By contrast, Turkey’s Gini coefficient, at 0.41, is above the average and yet has been falling by 0.3% per annum.
The most unequal of the developed countries is the USA. According to OECD data, its Gini coefficient is 0.38, well above the values in the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the USA has been increasing by an average of 0.5% per annum since the mid 1980s.
According to the United Nations’ Human Development Report 2010, the USA’s Gini coefficient is even higher, at 0.41 (see Table 3 of the report). But this is still below that of Russia, with a figure of 0.44, a figure that has markedly worsened over time, along with those of other former Soviet countries. According to the report (page 72):
The worsening is especially marked in countries that were part of the former Soviet Union – which still have relatively low Gini coefficients because they started with low inequality. Transition has eroded employment guarantees and ended extensive state employment. Before the fall of the Berlin Wall, 9 of 10 people in socialist countries were employed by the state, compared with 2 of 10 in Organisation for Economic Co-operation and Development economies. While the privileged elite (the nomenklatura) often attained higher material well-being, the measured differences in income were narrow.
The Gini coefficient for Russia is the same as the average of the 39 developing countries with the lowest level of human development &nbash; and developing countries are generally much less equal than developed ones. Of course, some developing countries have an even higher Gini coefficient: for Angola the figure is 0.59; for Haiti it is 0.60.
The following three webcasts look at aspects of the growing inequality in Russia.
Webcasts
Gap between rich and poor widens in Russia BBC News, Jamie Robertson (29/5/11)
Corruption slows Russian modernisation BBC News, Emma Simpson (29/5/11)
Corruption and poverty in Russia’s far east Al Jazeera (28/2/11)
Articles
Russia’s rich double their wealth, but poor were better off in 1990s Guardian, Tom Parfitt (11/4/11)
Russia’s growing wealth gap BBC News, Jamie Robertson (28/5/11)
A Country of Beggars and Choosers Russia Profile, Svetlana Kononova (16/5/11)
Rich and poor, growing apart The Economist (3/5/11)
Data
Distribution of family income – Gini Index CIA World Factbook (ranked by country in desending order)
Society at a Glance 2011 – OECD Social Indicators OECD: see particularly the Excel file 6. Equity Indicators: Income inequality (click on No if prompted about a linked workbook)
Russia Distribution of family income – Gini index Index Mundi
Chart of the week: inflation stoking inequality in China and India Financial Times, Andrew Whiffin (24/5/11)
List of countries by income equality Wikipedia
Reports
Growing Income Inequality in OECD Countries: What Drives it and How Can Policy Tackle it? OECD Forum on Tackling Inequality (2/5/11)
Human Development Report 2010 United Nations Development Programme
Questions
- Explain what is meant by the Gini coefficient. How does it relate to the Lorenz curve? What does a figure of 0.31 mean?
- Why has income inequality been growing in most countries of the world? Has the process of globalisation dampened or exacerbated this trend?
- What specific factors in Russia can explain the growing inequality?
- How is privatisation likely to affect income distribution??
- Why is it difficult to quantify the extent of inequality in Russia?
- What maxim of taxation has been used in setting income tax rates in Russia?
- What role does corruption play in determining the degree of inequality in Russia?
- What policy measures, if any, could realistically be adopted in Russia to reduce inequality? What constraints are there on adopting such policies?
“There are ‘incredible economies of scale in cloud computing’ that make it a compelling alternative to traditional enterprise data centers.” According to the first article below, cloud computing represents a step change in the way businesses are likely to handle data or use software. Rather than having their own servers with their own programs, they use a centralised service or ‘public cloud’, provided by a company such as Microsoft, Google or Amazon Web Services. The cloud is accessed via the Internet or a dedicated network. It can thus be accessed not only from company premises but by mobile workers using tablets or other devices and thus makes telecommuting more cost effective.
There are considerable economies of scale in providing these computing services, with the minimum efficient scale considerably above the output of individual users. By accessing the cloud, individual users can benefit from the low average costs achieved by the cloud provider without having to invest in, and frequently update, the hardware and software themselves.
In the case of large companies, rather than using a public cloud, they can use a ‘private cloud’. This is hosted by the IT department in the company and achieves economies of scale at this level by removing the need for individual departments to purchase their own software and servers. Of course, the costs of providing the cloud is borne by the company itself and thus the benefits of lower up-front IT capital costs are reduced. This is clearly a less radical development and is really only an extension of the policy of many companies over the years of having centralised servers holding data and various software packages.
In autumn 2010, EMC Computer Systems commissioned economists at the Centre for Economics and Business Research (cebr) to quantify the full impact that cloud computing will have over the years ahead. According to the report, The Cloud Dividend:
The Cebr’s research calculates that €177.3 billion per year will be generated by 2015, if companies across Europe’s five largest economies continue to adopt cloud technology as expected.
The Cebr found that the annual economic benefit of cloud computing, by 2015, will be:
• France – €37.4 billion
• Germany – €49.6 billion
• Italy – €35.1 billion
• Spain – €25.2 billion
• UK – €30.0 billion
Will the ability of cloud computing to drive down the costs of IT mean that a new revolution is underway? Just how significant are the economies of scale and are they likely to grow as cloud providers themselves grow in size and experience? The following articles look at some of the issues.
Articles
Reports and information
Questions
- What specific economies of scale are achieved through cloud computing?
- Why might the minimum efficient scale of cloud computing services be above the level of output of many companies?
- What are the downsides to cloud computing?
- How would you set about assessing the statement that we are on the brink of a fundamental revolution in business computing?
- Why are customer-heavy sectors, such as financial services, utilities, governments, leisure and retail, expected to buy into the concept fastest?
- How can product life cycle analysis help to understand the stages in the adoption of cloud computing?
The debate about how much and how fast to cut the deficit has often been presented as a replaying of the debates of the 1920s and 30s between Keynes and the Treasury.
The justification for fiscal expansion to tackle the recession in 2008/9 was portrayed as classic Keynesianism. The problem was seen as a short-term one of a lack of spending. The solution was seen as one of expansionary fiscal and monetary policies. There was relatively little resistance to such stimulus packages at the time, although some warned against the inevitable growth in public-sector debt.
But now that the world economy is in recovery mode – albeit a highly faltering one in many countries – and given the huge overhang of government deficits and debts, what would Keynes advocate now? Here there is considerable disagreement.
Vince Cable, the UK Business Secretary, argues that Keynes would have supported the deficit reduction plans of the Coalition government. He would still have stressed the importance of aggregate demand, but would have argued that investor and consumer confidence, which are vital preconditions for maintaining private-sector demand, are best maintained by a credible plan to reduce the deficit. What is more, inflows of capital are again best encouraged by fiscal rectitude. As he argued in the New Statesman article below
One plausible explanation, from Olivier Blanchard of the IMF, is that the Keynesian model of fiscal policy works well enough in most conditions, but not when there is a fiscal crisis. In those circumstances, households and businesses react to increased deficits by saving more, because they expect spending cuts and tax increases in the future. At a time like this, fiscal multipliers decline and turn negative. Conversely, firm action to reduce deficits provides reassurance to spend and invest. Such arguments are sometimes described as “Ricardian equivalence” – that deficits cannot stimulate demand because of expected future tax increases.
Those on the other side are not arguing against a long-term reduction in government deficits, but rather that the speed and magnitude of cuts should depend on the state of the economy. Too much cutting and too fast would cause a reduction in aggregate demand and a consequent reduction in output. This would undermine confidence, not strengthen it. Critics of the Coalition government’s policy point to the fragile nature of the recovery and the historically low levels of consumer confidence
The following articles provide some of the more recent contributions to the debate.
Keynes would be on our side New Statesman, Vince Cable (12/1/11)
Cable’s attempt to claim Keynes is well argued — but unconvincing New Statesman, David Blanchflower and Robert Skidelsky (27/1/11)
Growth or cuts? Keynes would not back the coalition – especially over jobs Guardian, Larry Elliott (17/1/11)
People do not understand how bad the economy is Guardian, Vince Cable (20/5/11)
The Budget Battle: WWHD? (What Would Hayek Do?) AK? (And Keynes?) PBS Newshour, Paul Solman (29/4/11)
Keynes vs. Hayek, the Rematch: Keynes Responds PBS Newshour, Paul Solman (2/5/11)
On Not Reading Keynes New York Times, Paul Krugman (1/5/11)
Would a More Expansionary Fiscal Policy Be Effective Right Now? Yes: On the Invisible Bond Market and Inflation Vigilantes Once Again Blog: Grasping Reality with a Prehensile Tail, Brad DeLong (12/5/11)
Keynes, Crisis and Monopoly Capitalism The Real News, Robert Skidelsky and Paul Jay (29/4/11)
Questions
- What factors in the current economic environment affect the level of consumer confidence?
- What are the most important factors that will determine whether or not a policy of fiscal consolidation will drive the economy back into recession?
- How expansionary is monetary policy at the moment? Is it enough simply to answer this question by reference to central bank repo rates?
- What degree of crowding out would be likely to result from an expansionary fiscal policy in the current economic environment? If confidence is adversely affected by expansionary fiscal policy, would this represent a form of crowding out?
- Why may fiscal multipliers have ‘turned negative’?
- For what reasons might a tight fiscal policy lead to an increase in aggregate demand?
- Your turn: what would Keynes have done in the current macroeconomic environment?
According to a report just published by accountancy firm Deloitte, UK household real disposable incomes are set to fall for the fourth year in a row. What is to blame for this? According to Deloitte’s chief economic adviser, Roger Bootle, there are three main factors.
The first is the combination of tax rises and government expenditure cuts, which are now beginning to have a large impact. Part of this is the direct effect on consumer disposable incomes of higher taxes and reduced benefits. Part is the indirect effect on employment and wages of reduced public expenditure – both for public-sector employees and for those working for companies that supply the public sector.
The second is the rise in food, fuel and raw material prices, which have driven up the rate of inflation, thereby eroding real incomes. For most people, “pay growth is unlikely to catch up with inflation any time soon. Inflation is heading towards – and possibly above – 5%. Real earnings are therefore all but certain to fall for the fourth successive year in a row – the first time that this has occurred since the 1870s.”
The third is that demand in the private sector is unlikely to compensate for the fall in demand in the public sector. “I still doubt that the private sector can compensate for the cuts in public sector employment – which is already falling by 100,000 a year.
The upshot is that I expect households’ disposable incomes to fall by about 2% this year in real terms – equivalent to about £780 per household. And it will take until 2015 or so for incomes to get back to their 2009 peak.
… In terms of the year-on-year change in circumstances, although not the absolute level, that would make 2011 the worst year for households since 1977 (the depths of the recent recession aside). Were interest rates to rise too, conditions would arguably be the worst for households since 1952.”
Well, that’s a pretty gloomy forecast! The following articles examine the arguments and consider the likelihood of the forecasts coming true. They also look at the implications for monetary and fiscal policy.
Since I wrote the above, two more gloomy forecasts have been published: the first by the Institute for Fiscal Studies and the second by Ernst & Young’s Item Club. Both reports are linked to below.
Articles
Squeeze on incomes expected to rule out rate rise Guardian, Phillip Inman (3/5/11)
No rate rise until 2013, says Bootle MoneyMarketing, Steve Tolley (3/5/11)
UK households ‘face £780 drop in disposable incomes’ BBC News (3/5/11)
Why our purchasing power is set to suffer the biggest squeeze since 1870 The Telegraph, Ian Cowie (3/5/11)
2012 ‘worst year’ for household finances says Deloitte BBC News, Ian Stuart, Chief Economist with Deloitte (3/5/11)
Retailers expect sales gloom to continue Guardian, Graeme Wearden (3/5/11)
What makes consumers confident? BBC News, Shanaz Musafer (4/5/11)
Household incomes in UK ‘may return to 2004 levels’ BBC News (13/5/11)
Biggest squeeze on incomes since 1980s TotallyMoney, Michael Lloyd (13/5/11)
High street to endure decade of gloom, says Ernst & Young Item Club Guardian, Julia Kollewe (16/5/11)
Outlook for spending ‘bleak’ and road to recovery is long, Ernst & Young ITEM Club warns The Telegraph, James Hall (16/5/11)
Reports
Feeling the pinch: Overview Deloitte (3/5/11)
Feeling the pinch: Full Report Deloitte (3/5/11)
Long-term effects of recession on living standards yet to be felt IFS Press Release (13/5/11)
ITEM Club Spring 2011 forecast Ernst & Young
UK high street faces difficult decade as consumer squeeze intensifies and households focus on paying down debt, says ITEM Club Ernst & Young (16/5/11)
Data
Forecasts for Output, Prices and Jobs The Economist
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury
Commodity Prices Index Mundi
Consumer Confidence Index Nationwide Building Society (Feb 2011)
Confidence indicators for EU countries Economic and Financial Affairs DG
Questions
- For what reasons may real household incomes fall by (a) more than and (b) less than the 2% forecast by Deloitte?
- What is likely to happen to commodity prices over the coming 24 months and why?
- With CPI inflation currently running at an annual rate of 4% (double the Bank of England’s target rate of 2%), consider whether it is now time for the Monetary Policy Committee to raise interest rates.
- For what reasons might households respond to falling real incomes by (a) running down savings; (b) building up savings?
- What are the implications of the report for tax revenues in the current financial year?
- What makes consumers confident?
The Greek economy is suffering. In April 2010, a €45 billion bailout package was agreed between Greece and the IMF and the EU. This was increased to €110 billion in May 2011. (The bailout loans expire in 2013.) In return for the loans, Greece agreed to tough austerity measures, involving tax increases, clamping down on tax evasion and government expenditure cuts. These measures have succeeded in cutting the deficit by 5 percentage points, but it still stood at 10.5% of GDP in 2010. Public-sector debt rose from 127% of GDP in 2009 to 143% in 2010. The market cost of borrowing on two-year government bonds currently stands at 23% per annum – a sign of a serious lack of confidence by investors in Greece’s ability to repay the loans.
The austerity measures have brought great hardship. Unemployment has soared. In February 2011, it reached 15.9%; in February last year it was 12.1%. According to the IMF’s World Economic Outlook (Table A2), Greek real GDP fell by 2.0% in 2009, by 4.5% in 2010 and is forecast to fall by 3.0% in 2011. But with GDP falling, this brings automatic fiscal stabilisers into play: lower incomes mean lower income tax revenues; lower expenditure means lower VAT revenue; higher unemployment means that more people claim unemployment-related benefits. This all makes it harder to meet the deficit reduction targets through discretionary tax rises and government expenditure cuts and makes it even more important to cut down on tax evasion. But, of course, the more taxes rise and the more government expenditure is cut, the more this suppresses aggregate demand. The austerity measures have thus worsened the recession.
On May 9, the ratings agency Standard & Poor’s downgraded Greece’s rating to B (15 points below the top rating of AAA and 6 points into ‘junk’ territory). It now has the lowest rating in Europe along with Belarus.
Worries have been growing that Greece might be forced to default on some its debt, or choose to do so. This would probably mean an extension of repayment periods. In other words, bondholders would be paid back in full but at a later date. This has been referred to as ‘debt re-profiling’. This could cause a renewed loss of confidence, not only in the Greek economy, but also in banks that are major lenders to Greece and which would be exposed in the case of default or restructuring.
The IMF and the ECB have been quick to stress that Greece can continue to manage its debt and that, if necessary, another loan might be negotiated. Anticipations are that Greece could indeed ask for a further bailout. But is this the answer? Or would it be better if Greece sought a restructuring of its debt? The following webcasts and podcasts consider the issue.
Webcasts and podcasts
Greece may need second financial bail-out BBC News, Stephanie Flanders (11/5/11)
Greece needs revised bail-out Financial Times Global Economy Webcasts, Luke Templeman and Vincent Boland (9/5/11)
Why Greece must stick to the plan Financial Times Global Economy Webcasts, Ralph Atkins, Frankfurt Bureau Chief, talks to Jurgen Stark (11/5/11)
Will Greece need more money? BBC News, Matina Stevis (9/5/11)
Economists debate Greek crisis BBC News, Thomas Mayer and David McWilliam (9/5/11)
Greece at ‘a very difficult stage’ BBC Today Programme, Stephanie Flanders and Vassilis Xenakis (11/5/11)
The Business podcast: PPI scandal and Greece’s debt crisis Guardian Podcast, Aditya Chakrabortty (11/5/11) (listen to last part of podcast, from 19:20)
Greece: Eurozone ministers discuss terms of second bailout BBC News, Nigel Cassidy (16/5/11)
Greece dominates eurozone talks in Brussels BBC News, Matthew Price (17/5/11)
Articles
S&P moves to cut Greek credit rating Financial Times, Richard Milne, Tracy Alloway and Ralph Atkins (9/5/11)
One Year After the Bailout, Greece is Still Hurting Time Magazine, Joanna Kakissis (12/5/11)
What price a Greek haircut? BBC News blogs: Peston’s Picks, Robert Peston (10/5/11)
What is debt ‘reprofiling’? BBC News, Laurence Knight (17/5/11)
Reprofiling: Greece’s restructuring-lite Channel 4 News, Faisal Islam (17/5/11)
Questions
- What are the arguments for and against tough austerity measures for Greece and other eurozone countries with high deficits, such as Portugal and Ireland?
- Should Greece seek a restructuring of its debts?
- What is a ‘haircut’ and is this a suitable form of restructuring?
- What are the arguments for and against a default, or partical default, by the Greek government on its debt?
- Is it in the intesests of European banks to offer a further bailout to Greece?
- What should be the role of the IMF in the current situation in Greece?