SINGAPORE (August 20): I wrote about the growing empirical evidence of declining income mobility some weeks back. Few would dispute that this is happening, in both the developed and developing worlds. There may be more debate over the reasons behind this phenomenon but the unequal distribution of income growth and wealth inequality are, without doubt, the key factors.
Economic inequality has risen rapidly, especially in the past decade, perpetuated by digitalisation of economies and, perhaps unwittingly, by central bank policies in the aftermath of the global financial crisis.
Digitalisation and technology have been especially disruptive for small businesses while favouring larger and larger corporates. Last week, I talked about the inevitable monopolisation of the economy by technology giants. This concentration of bargaining power has kept worker wages stagnant even as top management and shareholders reap ever-higher salaries and profits.
Meanwhile, ultra-low interest rates have further punished small savers and pensioners while inflating asset (such as property, stocks) prices and enriching owners.
According to the 2017 Credit Suisse global wealth report, median wealth has either declined or stagnated almost everywhere in the world except in China throughout the course of this current economic recovery — even as total global wealth has climbed.
As a result, the richest 1% now account for 50% of total household wealth, up from 46% in 2000 and 43% in 2008, at the height of the global financial crisis. At the other end, 70% of the world’s working-age population (3.5 billion adults) account for a combined global wealth of just 2.7%.
There is no question that education is the best bridge we have, one that will lift us up in life. This is why parents work hard to give their children a better education, so that they will have the best chance forward.
But reality has turned out a little differently. Millennials are better educated than their parents, and yet they account for a disproportionately higher percentage of those with low household wealth.
Recall the conclusion from the Equality of Opportunity Project undertaken by academics in Stanford University, which shows declining absolute income mobility in the US for the past 50 years. Only half of the children born in 1984 grew up to earn more than their parents, down from 92% for those born in 1940.
Education alone does not equalise. Income mobility is also a function of opportunity, which can be constrained by gender, race, politics and geography. And in reality, social status and economic background have outsized influence on one’s ability to move up the income ladder too.
Left alone, the current trajectory for income growth distribution is unlikely to change. After all, wealth is self-perpetuating. The rich get richer because they have more to invest in yielding assets, which in turn generates more income and wealth.
Rising property prices and declining affordability are putting home ownership beyond the reach of the young. It is not surprising that they are the biggest losers in terms of wealth accumulation.
The traditional solution is relatively straightforward. The government steps in with policies (some are better than others) to promote equal opportunity for all and rebalance the inequality.
Protectionist policies such as that currently advocated by the US are widely viewed as a lose-lose proposition for all. Raising minimum wages will have an adverse impact on businesses and investments, and setting the bar too high may have the opposite effect of reducing employment.
Most countries have some form of programmes for redistribution of economic gains, by raising tax revenue and funding social welfare plans, public healthcare and education.
Progressive income tax works to a certain extent but has proven insufficient because of loopholes created by exemptions, offshore havens and so on. And we learnt first-hand that consumption tax (Goods and Services Tax) hurts low-income earners more.
Is it time to introduce estate duties? It is an intuitive and appealing ideology: Inherited wealth is unearned and, therefore, the advantages — from social status and opportunity hoarding to access to better healthcare and quality higher education — that come with it, unfair.
Why should birth — and your parent’s postcode — determine one’s well-being?
Nevertheless, the issue of estate/inheritance tax is contentious, often complex with loopholes for those rich enough to hire fancy financial planners-lawyers. A number of countries — including Singapore and Hong Kong as well as Norway and Sweden — have repealed such taxes in recent years.
But given the rapid rise in income-wealth inequality and the associated social-political risks, perhaps this subject warrants further debate?
Closer at hand, technological progress has shouldered much of the blame for exacerbating inequality. But technological progress is irreversible and will unfold faster than most expect.
If technological progress is truly irreversible, can it instead be harnessed to promote greater income and wealth equality? Can it be the cure rather than the curse? I will explore this very topic in the weeks ahead.
Stocks in the Global Portfolio fell 3.6% in the past one week. Most of the stocks in the portfolio ended lower, except for Amazon.com and Sunpower Group. Nine Dragons Paper, DIP Corp and Alibaba Group Holding were among the worst hit by deteriorating sentiment for global stocks.
Total portfolio returns since inception were pared to 1.2%. The portfolio is now underperforming the MSCI World Return index, which is up 1.9% over the same period.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
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