The Unassuming Economist

While it has been postulated for long that wealth and aggregate income in the economy go hand in hand, developments in the last several decades point to a different phenomenon as the wealth to GDP ratio has been rising rapidly, reaching 6.1 times the GDP currently.

In a recent column for the Conversable Economist, Timothy Taylor writes on the issue, drawing insights from a 2021 McKinsey Global Institute report.

“…At the level of the global economy, the historical link between the growth of wealth, or net worth, and the value of economic flows such as GDP no longer holds. Economic growth has been sluggish over the past two decades in advanced economies, but net worth, which long tracked GDP growth, has soared in relation to it. This divergence has emerged as asset prices rose sharply—and are now almost 50 percent higher than the long-run average relative to income. The increase was not a result of 21st-century trends such as the increasing digitization of the economy. Rather, in an economy increasingly propelled by intangible assets, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These (ex-ante) savings have instead found their way into a traditional asset class, real estate, or into corporate share buybacks, driving up asset prices.”

Source: McKinsey Global Institute. (2021). The rise and rise of the global balance sheet: How productively are we using our wealth?

Real estate, rather than an ongoing investment boom in the 10 countries under study, is attributed to this rapid rise in global wealth. Furthermore, the study offers possible explanations for the consequences that such a trend might bring with it in the future- some happy and some not so happy ones.

Read on to know more. Click here.

Through cross-country evidence, the Organisation for Economic Co-operation and Development (OECD) has shown that economic inequality has risen in most OECD countries in the last thirty years or so while social mobility has stagnated or worsened. In its most recent report, the OECD turns its gaze to the question of how people perceive inequality and social mobility.

When it comes to questions on the perception of inequality, it has been shown in the report that there is overwhelming concern regarding income distribution and the lack of equal opportunities in the average world citizen. However, far from being an umbrella statement, there are instead a multitude of layers shaping people’s understanding of the phenomenon and factors affecting it.

In this report, emphasis is laid on providing an explanation to several such factors such as whether people care about inequality, how connected is their perception of inequality to the actually prevailing reality, how supportive is the general public for increased governmental action to bridge income gaps and how far are the people ready to go to hold governments accountable for failing to do so. It then moves on to providing interesting policy insights about the reform process and some hitherto ignored policies that have worked well.

Click here to read the full report.

Forging new paths to action for the Sustainable Development Goals

The Centre for Sustainable Development at The Brookings Institution and The Rockefeller Foundation convened the fourth annual 17 Rooms global flagship process to augment action, insight and community initiatives across the realm of the 17 sustainable development goals (SDGs). 17 working groups or “rooms” were developed, one per SDG, and leaders came together to advance action on each goal while also expanding opportunities to cooperate across goals.

Several themes were discussed and deliberated upon, some of which are as follows.

• Digital Public Goods: Discussions involved themes like the use of digital cash transfer systems to respond to emergencies, preempt disasters, broaden inclusion and reduce poverty, use of DPGs for gathering public health data, the need to educate communities, etc.
• Climate Change: This room discussed the role of leveraging societies’ dependency on the nature to catalyze large scale investments into preserving natural ecosystems, the need for new financing methods, etc.
• Support to Local Communities and Women’s Empowerment: This room discussed the dire need for international actors need to embrace existing local models and update legacy funding structures, focus on financial transparency, etc.
• Justice and Equity: The focus here was on promoting intergenerational learning teams, network for women leaders, community best practices in education, leadership and innovation, etc.
• Private Capital and Businesses: This room concentrated its attention at new tools, metrics, data systems, and reporting requirements that can help drive better alignment between private sector incentives and SDG outcomes.

Besides, several rooms also called for reframing the SDG ambitions, reflecting a desire for ongoing improvement in how the SDGs can promote human dignity, opportunity, and co-benefits across Goals.

Click here to read the full report.

In a recent column for Vox EU CEPR, Professor Daniel Waldenström of the Research Institute of Industrial Economics and senior fellow at CEPR writes about the conundrum of rapidly rising wealth-income ratios in the post-WW II period not translating into a reversal of trends of wealth concentration of the previous century.

While it is true that aggregate wealth to income ratios have risen in this period, it has not led to large-scale wealth equalization since private wealth has just changed hands over the 20th century, from being held by richer classes to now being largely held by the middle class. Previously in the 1900s, wealth was dominated by agricultural estates and corporate wealth, assets predominantly held by the rich. However, this changed in the post-war period as wealth accumulation mainly acquired the form of housing and funded pensions, which are assets held by ordinary people.

“Wealth concentration was exceptionally high a century ago, with the richest percentile owning between 50% and 70% of all private wealth. From the 1920s to the 1970s, wealth concentration fell dramatically in the Western world. Country studies confirm the importance of homeownership and pension savings for this equalisation trend. In the 1970s, wealth equalisation stopped, but then Europe and the US follow separate paths. In Europe, top wealth shares stabilise at historically low levels, perhaps with a slight increasing tendency, while in the US, top wealth shares have increased (exactly by how much is currently debated).”

Waldenström, D. (2021). Wealth and history: A reappraisal. Vox EU CEPR.

Results from this study cast influence on society’s understanding of the long-run evolution of wealth as we see it. They question the view that unfettered capitalism generates extreme levels of capital accumulation. They also cast doubt on the explanation that wars, crises, and capital taxation are necessary for wealth equalization.

Click here to read the full article.

Excerpts from a column by Professors Martin Ravallion (Georgetown University) and Shaohua Chen (Xiamen University) for Vox EU CEPR.

Ravallion and Chen’s newest paper (2021) highlights some theoretical arguments about potential trade-offs between reducing income polarisation and other valued goals, including poverty reduction, discussions on which are contained in their column for Vox EU CEPR.

“China’s well-documented success in reducing absolute poverty came, of course, with a rising share of its population living above official poverty lines (Chen and Ravallion 2021). Many of those who escaped absolute poverty joined China’s middle-class. Naturally, what this means depends on the setting. The prevailing definition of a middle-income group can be expected to change over time with rising living standards; what was considered a middle income in the China of the 1980s is clearly not the same today. “Fleshing out the olive” can be interpreted as reducing the spread of incomes relative to the current median, which may provide a more relevant reference point than a fixed absolute level of real income. 

This perspective suggests that the concept of polarisation as found in economics is relevant to monitoring China’s performance in “fleshing out the olive” and identifying potential trade-offs against other goals. And there is a measure available in the literature, namely the Foster-Wolfson (FW) polarisation index (Foster and Wolfson 2010). The greater the spread of incomes relative to the median (in either direction), the higher the FW index. What trade-offs might be found between this concept of polarisation and other goals for the distribution of income? And what does the time-series evidence suggest?”

Click here to read the full article.