Saturday, 24 January 2015

The 1 percenter next door.

Oxfam's report on wealth inequality has produced some interesting coverage.  It was quite timely for us in Jersey as the Chief Minister had recently commented on the high levels of poverty locally1.    The claim that the top 1%  will own half the wealth of the world within a year or so is both shocking and very worrisome. 

I am fully in support of the broad thrust of the report - the inequality at  the extremes is simply unacceptable.   Numerically the wealthiest 80 people in the world have the same wealth as the poorest  3.5 billion. It is not the same as income, though of course if you have billions in wealth , you will surely have a huge income too.  There were of course some negative comments on the report, one of two of which bear some examination.

Radio Jersey covered it  with a couple of guests.  It was a very poor debate.  The respondents conflated income with wealth(assets) and some time was spend bemoaning the tax rates on the middle earners locally.  There is an issue there, but it has little to do with the global wealth inequality of the Oxfam report. It is like mistaking a balance sheet for a cash flow statement.  However it does raise one of the other argument deployed by some detractors - wealth is an inadequate measure of poverty.
Certainly it is possible to be asset rich and income poor.  Dairy farmers in the UK who are getting less per litre of milk than it costs to produce might well be in that position.  Conversely it is possible to have high income , but no net wealth, especially if you have a 'high maintenance' lifestyle. It is half the reason some celebrity footballers and performers quickly go bankrupt if their income stream declines. 

This conflation of income and wealth is one of the key points made in a derogatory piece in the Spectator.  They include this graphic

Quite why they think the millennium goals set in 1990 should still be the standard in 2015 isn't explained.  Nor do they appear to have heard of either inflation , or of sudden currency movements (The Swiss franc mover 30% last week!  Exceptional, yes, but it happens)  $1.00 in 1990 had the same buying power as $1.85 in 2014 3. Annual inflation over this period was 2.59%.  Or put another way their graphic implies no significant change in the actual inflation adjusted income poverty of the poorest in the  world.

The same article then goes on to make a real howler of a claim.  According to the Spectator this graph show inequality is falling long term.  It is true there is a drop from 2000 -2010, but even they admit there's been an 'uptick ' in more recent years.  But clearly the level in inequality is higher in this decade than it was at any time in 1960's, 1970's or 1980's ! 

Perhaps the most valid of the problems  directed at the wealth report is the impact of debt. The measure Oxfam used is effectively  net assets, so people in debt are identified as the poorest, poorer than those who have no assets, but no debt.  That means, for example, if you have negative equity on a house you are likely regarded as poor.   However that fact hides a twist.  Generally  you can only go into debt if yo have surplus income over basic requirements.  If you have no visible means to pay back a loan you are very unlikely to be able to secure one.  Where it does prove possible for the income poorest it in place like India where bonded labour abuse is used to effectively enslave people.

Debt might  also distort the picture in another way.   It is quite possible to have wealth in shares that are valued significantly but in companies that have 0 or even negative net asset value.  We are not talking small companies here either. Currently, for example, I believe BT has NAV of 0.  It is not magic - as long as the business can service it debts it may have value.  But therein is the problem It own BT shares are they count as an asset, even though they have no asset value!  The company has no wealth, but if I have some shares in them I do have wealth.  It  looks like a paradox arising from the artificial separation of concerns between the owner of the shares and the owner of the debt.

While it is clear the top 80 have huge wealth, and the bottom half almost none, the question arises who are the one percent.  The distribution of wealth follows a power law.  At the higher end a small change makes a big difference.  $3,500 net assets puts you in the top half globally 4. To be in the top ten percent requires around $77,000.  The mean wealth of the top 1% is about $2.5million, but the lower end is around $800,000 (A little over half a million pounds).

Half a million pounds might seem an impossible sum to younger readers, but it is attainable.  Someone in their fifties who has paid off a mortgage on a three bed detached house with a garden in Jersey is almost there.  I don't know if the Oxfam methodology accounted for it, but social security is another implied source of wealth.  Taking just the pension aspect, if you are near to claiming the  age pension in Jersey you are in effect getting an index linked annuity, with full contributions, of  £10,200 per year.  To purchase such an annuity would cost roughly £300,000 at age 65 5. Many developing countries do not have a functioning state pension system for the poorest, who do not have the disposable income to contribute into any system.  All that is before considering any employer or private pension arrangements. 

A pensioner living in a mortgage free house on no more income than the state pension wouldn't strike most people as particularly rich , certainly in income terms.  Yet such a person might arguably be in the one percent globally.  Which makes the point that if our pensioners are wealthy, the poor globally really are poor.   The other observation worth making  is that it is exactly this fifty year old mortgage free cohort who  attend  parish assemblies and vote in our elections.  Do you think that is a coincidence?






Tuesday, 13 January 2015

Privates on parade

It has not been a good week for those who hold that the private sector is better than the public for delivering services.   Today we hear that the UK government wants to strip the consortium running nuclear clean up at Sellafield of its £20 billion contract.  Previously the operators of the only privately run NHS hospital in the UK indicated they wanted to pull out.   In both cases it looks like the operations will revert to the public sector.  Both are far too important to be allowed to fail, and both cite spiralling costs as a factor. 

In my opinion we should never have had nuclear facilities largely because we simply do not know how to deal with the waste properly, and it is morally repugnant to throw that burden on countless future generations. The real costs of nuclear are coming home to roost - decommissioning Sellafield is expected to take over 100 years. and I predict costs will increase even further.

Hospitals are at the other end of the spectrum - a highly socially desirable undertaking  Circle who run Hitchinbrook claim they have saved the public £23million.  That's similar to what  NPM makes annually running Sellafield clean up operations.  Of course for private enterprises that is the name of the game - making a profit.  If  one is not visible, or a contract has turned to a loss, they will seek to exit, possibly renege, or even go bust.  It is the government, the people, who stand as the provider of last resort.  It is a factor often overlooked by those who argue fervently that private is more efficient more cost effective.  The Government effectively carries the insurance burden of those large private ventures that get into difficulties or fail.  Just look at the banking crisis and who picked up the costs there.

Jersey has in recent times taken this private good, public meme to heart.  We have incorporate ports and removed the housing stock from public ownership.  It is as though none of the ministers had head of WEB and the reasons why it had to be renamed and reinvented.

Just as private is not a panacea and not always a good outcome, so public can be problematic too.  The truth is that if your venture is under capitalised, if you have demotivated, under trained or overstretched staff, no matter whether you are public or private you will struggle to succeed.  What is certain is that there will always be someone prepared to take a risk to make a profit, and there will always be the expectation the government will be there to pick up the bits when it goes awry.