Brazil’s widening wealth gap

Gillian Lacey-Solymar, Business correspondent for BBC Newsnight has a piece on tonight’s show about the rising inequality in Brazil as her economy continues to experience breakneck growth. Expect an excellent video clip to be available from the BBC web site immediately after the Newsnight programme has aired. Excellent for highlighting the links between growth and income and wealth distributio, especially with a tax system that appears to have regressive effects on the lowest income earners.

Labour’s failure on inequality

Gary Duncan has a really important and useful article in The Times today on the issue of persistent and deep-rooted relative poverty in the UK - something which transcends the political posturing of recent days and weeks over the furore about the abolition of the 10% starting rate of income tax.

“The stark truth is that after a decade of Labour Government, Britain is a nation of greater income inequality, in which the plight of the very poor has worsened. True, Labour has succeeded in lifting half a million children out of poverty since 1998. Yet the Government’s figures are based on a poverty line drawn at 60 per cent of average incomes. If it is placed, instead, at 40 per cent - officially defined as “severe poverty” - the picture looks much bleaker, with the numbers of children in such dire straits no lower than in 1997.”

This is a superb article to read for those students revising for exam questions on income and wealth inequality. A BBC news article from March highlighted the widening wealth gap and here is a reminder that inequality is not solely a question of disposable income.

The rest of Gary Duncan’s article can be found here

The social curse of the property boom

Charles Moore provides a welcome dose of reality in his article in today’s Telegraph. There will be victims of the housing recession - but Moore builds a convincing argument. Rising house prices do not create much in the way of meaningful wealth - they are simply a way of transferring wealth from one generation to another.

He writes

“The social benefit of property ownership is that it meets the human need for security and the human aspiration to rise in the world and establish oneself and one’s family. Soaring property prices kill both these things for the majority: they are a social curse.”

The remainder of his article “Why is everyone worried about house prices?” is here

More to life than GDP?

Happiness economics is a topic very much in vogue at the moment, and this year’s edition of Social Trends has clearly paid homage to that fact by including a measure of subjective well-being: Satisfaction with standard of living and financial prospects [Table 5.5]. The data made no attempt to debunk the Easterlin paradox: while household income has increased by over 60% and household wealth has more than doubled, satisfaction with standard of living has remained constant at around 85%.

Bhutan and Gross National Happiness

Is there a trade off between wealth and well-being? I missed this Newsnight report from Mark Easton which appeared on BBC2 last month - but came across it whilst revising my work schemes for our new courses next year. This is a terrific eight minute video on life in the absolute monarchy of Bhutan - a country without traffic lights and which has banned plastic bags and adverts for Pepsi and Coca Cola. The video clip is excellent perhaps as an introduction to discussion on living standards or even the basic economic problem.

Tim Harford’s essay on happiness which was published a couple of years ago is still well worth a read.

The most powerful law in the world?

We are studying information failure this week and at one point during the lesson today I was tempted to spurt out that the biggest information failure of all was the failure of people to understand the law of compound interest. That was going to be in the context of discussing why people often leave it so late to start saving money when a small pot earning interest on a compound basis over a large time period can grow very quickly if it invested for long enough. Just small changes in the annual return - say from 2.5% pa to 3.0% pa can have an enormous effect on the final value of a pension fund. MindYourFinances has a good example to use by way of illustration.

I will leave that discussion until the next lesson ... but tonight I picked up a piece by John Kay which will appear in the FT tomorrow on the wealth of Warren Buffett newly crowned as the world’s richest man. Kay reinforces the power of compound interest in shaping the value of the Buffett Foundation. 

“Albert Einstein supposedly observed that the most powerful force in the universe is compound interest, and Mr Buffett’s frugality has enabled compound interest to work its magic. During Mr Buffett’s tenure at Berkshire Hathaway, the S&P 500 index has produced an average total return of 10 per cent. That return reinvested over 42 years will multiply your stake 67 times. But if your investments yield twice as much as that – as Mr Buffett’s have done – your wealth increases not by twice 67, but 67 squared, a factor of 4,500. That arithmetic makes Mr Buffett the richest man in the world.”

Read the rest of John’s piece here

Signs of a negative “wealth effect” for the USA?

One of the big recession risks facing the US economy is that a sharp decline in the net wealth of millions of US households will cut deep into consumer confidence and a willingness and ability to spend on big ticket items. The so called ”wealth effect” can be very powerful either when asset prices are surging ahead as they have for most of the last ten years. Or when the wealth effect goes into reverse and people find that the value of the property, shares and other financial assets are in freefall. The negative wealth effect was a noticeable feature of the last economic recession in the UK in the main due to the steep fall in nominal and real house prices.

Today the Federal Reserve Bank published their regular ‘flow of funds’ figures - and inside them was the news that US families are getting poorer for the first time in more than five years. Asset prices are falling and levels of debt are rising - the result a cut in household net worth and a rise in the stress barometer.