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Friday, October 17, 2014

U.S. Median Wealth Up from 27th to 25th

Today Credit Suisse released its Global Wealth Databook 2014 to go along with the Global Wealth Report issued Monday. Global wealth hit another new record of $263 trillion as of mid-2014, up 8.3% from mid-2013 (Report, p. 3). Rich people are doing well, but how about the middle class? One measure of this is median wealth per adult, the exact midpoint of the wealth distribution.

In the United States, mean wealth per adult reached $347,845, and median wealth per adult hit $53,352 (Databook, Table 2-4). This represents an increase in median wealth of 18.8% over 2013, enough to move the U.S. up two places to 25th in the world.

Before we congratulate ourselves too much, we need to remember that $53,352 is not all that much money, especially for retirement (don't forget that figure includes home equity). With 49% of Americans in the private sector having no retirement plan at all, and only 20% having a defined-benefit pension, a retirement crisis is looming for younger baby boomers and all later middle-class retirees. Meanwhile, if Republicans take control of the Senate in this year's elections, we are likely to hear increasing demands for cuts to Social Security, when what we actually need is to raise Social Security benefits.

The relatively low median wealth also points to persistent inequality in the United States. While only 25th in median wealth per adult, the U.S. ranks 5th in mean wealth per adult. With a ratio between mean and median wealth per adult of 6.5:1, this is higher than any of the other top 25 countries. Number one Australia has a ratio of less than 2:1. Without further ado, here is the list of all countries with median wealth per adult above $50,000.

Cross-posted at Angry Bear.



Median wealth per adult, mid-2014


1. Australia                  225,337
2. Belgium                   172,947
3. Iceland                    164,193
4. Luxembourg            156,267
5. Italy                         142,296
6. France                     140,638
7. United Kingdom     130,590
8. Japan                       112,998
9. Singapore                109.250
10. Switzerland           106,887
11. Canada                    98,756
12. Netherlands             93,116
13. Finland                    88,130
14. Norway                   86,953
15. New Zealand          82,610
16. Ireland                     79,346
17. Spain                       66,752
18. Taiwan                    65,375
19. Austria                    63,741
20. Sweden                   63,376
21. Malta                       63,271
22. Qatar                       56,969
23. Germany                 54,090
24. Greece                     53,375
25. United States          53,352
26. Israel                       51,346
27. Slovenia                  50,329

Source: Credit Suisse Global Wealth Databook 2014, Table 2-4

Monday, October 13, 2014

Is Piketty wrong on British and Swedish wealth?

Embarrassingly, I missed this reply by Tim Worstsall to my post "Understanding Piketty, part 1." My apologies to Mr. Worstall and my readers; despite his writing it August 14, I just discovered it the other day when I was mindlessly looking at site traffic data from Alexa.

In his post Worstall takes issue with Piketty's claim (which I endorsed) that if Financial Times author Chris Giles was correct about the level of British wealth concentration (the top 10% controlling 44% of UK wealth), then British wealth inequality in 2010 was lower than that of Sweden and, indeed, lower than even the lowest share ever held by the top 10% of wealth owners in Sweden (about 53%) which, he said, "does not look very plausible."

Worstall's point was that, surprisingly enough, if we measure wealth inequality by the Gini index, Sweden in 2000 had greater inequality than did the U.K, 0.742 to 0.697 (higher is more unequal). His ultimate source (according to the Wikipedia article he cites) was work by the creators of the Credit Suisse Global Wealth Report, a research effort which Piketty praises as "innovative" in capital21c, p. 623 n. 8.

Let's first note that even if that were true, it does not get Giles off the hook. Giles, whose error was to tack survey-based UK wealth data for 1990-2010 on to earlier tax-based wealth data (thereby biasing it severely downward; see also Howard Reed in The Guardian), does not dispute that the proper measure for inequality is the wealth share of the top 1% and top 10% of wealth owners. Giles makes no appeal to alternate measures to save himself. Thus, on their agreed measure of wealth inequality, Giles fails to make a dent in Piketty's data.

However, Worstall's point is an interesting one on its own merits to Piketty's attempted reductio ad absurdum. While in part 1, I pointed out that income inequality measured by the Gini index is lower in Sweden than in the United Kingdom, the further fact that wealth inequality is always higher than income inequality within each country does not mean, as I blithely assumed, that the country with lower income inequality will necessarily have lower wealth inequality as well.

The question then becomes which is the more meaningful measure of wealth inequality. The U.K. has higher top 1% and top 10% shares but, evidently, a lower Gini coefficient. As I noted in part 3, Piketty deliberately avoids using the Gini index. As Piketty's sometime-collaborator Facundo Alvaredo writes, "The most commonly used measure of inequality, the Gini coefficient, is more sensitive to transfers at the center of the distribution than at the tails." This is not a problem for the top shares measures; they have a much more intuitive meaning than the dimensionless Gini index. One might well argue that there is more political significance for the top 1% of wealth owners to increase their share from 20% to 30% than there is for owners at the 85th percentile to gain a corresponding amount of wealth from those below them. But to make that argument doesn't prove it's true.

Alvaredo also elaborates on a way to adjust the Gini index for variations at the top of the distribution, which he attributes to Atkinson. As Alvaredo shows in his paper, it is possible for the unadjusted Gini index to be falling even as the adjusted Gini index is rising. I took a stab at adjusting the figures given by Worstall by taking the top 1% share of Sweden in 2000 as 20% and the U.K.'s as 30%. That gives adjusted Gini indices of (.742*(1-0.2)) + 0.2 = 0.7936 for Sweden and (0.697*(1-0.3)) + 0.3 = 0.7879 for the UK. These are much closer, but the U.K. is still slightly more equal if I have gotten this right. In any event, while Swedish income inequality remains robustly lower using either top shares or Gini index, wealth inequality for Sweden is only lower using income shares, but still not Gini.

There remains an obvious question for Worstall: What is the trend of U.K. wealth inequality using the Gini index? If it increased, then Piketty's finding of an increase using wealth shares will be robustly backed up with this measure Worstall is preferring. Gini may give Worstall a desirable result for a comparison, but still unpleasantly show that Britain is more unequal in wealth than in 1980. That's the actual question Piketty and Giles were disputing. However, I have yet to find a such a 1980 Gini index for wealth; as Piketty notes in capital21c, the drawback of the Credit Suisse research is that it does not go back in time very far. Perhaps a reader knows where a series of Gini indices for wealth (unlike income, which is easy to find) can be found.

So the answer to the question in the title is that we don't actually know. Likely, however, it doesn't matter as far as trends in inequality since 1980 are concerned. It's definitely worth thinking about what it might mean that the two wealth inequality measures diverge for ranking Britain and Sweden in 2000, even if we eventually conclude that one measure is definitely better than the other.

And it's not like Piketty is unaware of a potential for greater wealth inequality in Sweden. In June, he lectured in Helsinki, arguing against a recent trend in the Nordic countries to abolish estate (inheritance) taxes. Sweden abolished its inheritance tax in 2005. Not only does this shift the tax burden to those with lesser wealth, as he argued in Helsinki, but it follows from the argument of the book that it takes away the possibility of generating the most reliable form of data on wealth inequality itself.

Cross-posted at Angry Bear.

Wednesday, October 8, 2014

New Government Accounting Standards to Require Subsidy Disclosure

In a move with potentially enormous implications, Good Jobs First reports that the Government Accounting Standards Board (GASB) will soon issue new draft rules for Generally Accepted Accounting Principles (GAAP) for governments. Don't fall asleep; this could be awesome!

As regular readers know, one of the things bedeviling subsidy debates is the lack of transparency in what governments actually give to businesses, and on whether incentive recipients actually deliver on their promised jobs and investment. We have just seen how Boeing is moving 2000 jobs out of Washington state despite receiving huge subsidies  there. And since the stakes nationally are $70 billion a year, by my estimates, better transparency is a must if we are to have any kind of democratic debate and accountability.

As Good Jobs First reports, the GASB proposal would require governments to publish detailed information on "tax abatements" (an oddly narrow term it applies to the wider concept of tax incentives; but what about cash grants or free infrastructure?) in order to comply with Generally Accepted Accounting Principles. State and local governments will have no choice but to comply with whatever is adopted, as it is impossible to issue bonds or carry out other basic financial operations unless they meet GAAP standards. This is why Good Jobs First has long campaigned for a change by GASB. The centrality of GAAP means that we have to pay attention to the draft rules and comment on them in the three-month comment period starting in November.

It turns out that taxpayers aren't the only people who want to know about tax incentives. Bond analysts want to know about present and committed tax subsidies to help them assess whether bond issuers can really pay them back. Good Jobs First cited the example of Memphis, where tax breaks consume about one-seventh of potential property tax revenue.

What we have now is a complete patchwork where some states (and proportionately fewer cities) have good disclosure and others don't. This requires the constant monitoring and central aggregating of subsidy costs that Good Jobs First does so well (250,000 subsidies and counting). It also necessitates the construction of estimates, like mine, of the overall costs of investment incentives and other subsidies to business. In a good world (not even a perfect one), these data would already be available in easy-to-analyze forms. Really strong GASB rules would get us a long way to reaching that point.

I'll let you know when the comment period starts.

Cross-posted at Angry Bear.

Thursday, October 2, 2014

Boeing moving 2000 jobs from Washington state

Via @BlogWood, I learned that Boeing is going to move 2000 skilled jobs away from Washington state, despite just receiving $8.7 billion (with a B) in subsidies for the years 2025-2040. Really, I'm speechless. "Chutzpah" is one of the more printable words I can think of to describe this.

You will recall that the state's legislators were angry when their $2 billion (present value of $3.2 billion over 20 years) 2003 subsidy for the Dreamliner did not stop Boeing from putting a Dreamliner assembly line in South Carolina. So the 2013 subsidy was supposed to guarantee that Boeing couldn't do this again.

Boeing's response no doubt will be that these jobs are in the Defense division, not in civil aircraft. Thus they are not covered by either the 2003 or the 2013 subsidy. This has already been hinted at by a commenter on the Business Week article, wraiths13@yahoo.com.






Tuesday, September 30, 2014

Apple set to lose billions in EU state aid case

The Financial Times writes today that the European Commission has decided to open a formal investigation into whether Apple received illegal subsidies ("state aid," in EU-speak) from Ireland going as far back as 1991. The FT quotes "people involved in the case" as saying that this can cost Apple billions of euros.

What the decision technically does is establish what is known as an "Article 108(2)" investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU's competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.

As I speculated in June, one issue raised by the Commission is Apple's "nowhere" subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: "According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified." Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple's tax risk.

What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal ("not compatible with the common market") aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.

As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland's tax system. In 1998, it ruled that Ireland's 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.

If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple's aid repayment would go to Ireland and help reduce its budget deficit.

Cross-posted at Angry Bear.

Thursday, September 25, 2014

Iceland Bankers Convicted and Unemployment is Down

Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country's gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.

When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home's value. Iceland's 2012 unemployment rate was 6.0% compared to Ireland's 14.7%. But that was two years ago; what's happening now?

In December 2013, four top officials of the country's formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.

Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland's inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland's inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the "relief" comes in the form of people being allowed to use their retirement savings  (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it's great to pay your mortgage with pre-tax dollars, but it's still your own money you're paying, which will no longer be available for retirement. The IMF has raised doubts about the plan's overall effect on government finances, too.

As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland's unemployment rate has been artificially lowered due to net emigration from the country.

While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it's making at least some of them pay for that, which is more than we can say in the United States.

Cross-posted at Angry Bear.

Saturday, September 20, 2014

Irish Austerity Exodus Lingers On

August brings us the annual Irish immigration data, so it's time to look at what has happened in their statistical reporting "year" that ended in April 2014. While better than last year, it's still not pretty.

According to the Central Statistics Office, net emigration continued in 2013-14, with net emigration of 21,400. a decline of just over 1/3 compared to net emigration of 33,100 in 2012-13. Of the new total, once again, the Irish themselves accounted for over 100% of the net departures, with 29,200 more Irish nationals leaving the country than returning.

This continued out-migration continues to diminish any published improvements in Irish employment numbers and unemployment rate. In the year to the second quarter of 2014 (the closest quarter to April 2014 immigration figures), employment  increased to 1,901,600, a rise of 31,600 over a year previous. Unemployment fell by even more, 46,200, in the year to Q2 2014. So, while there is definite improvement even accounting for emigration, Ireland is nowhere near back to its peak 2007 employment figure of about 2.15 million. So employment is still 11.6% below its peak.

In Iceland (create a custom table here), by contrast, despite (but also in part because of of) the almost 50% decline in the value of the kronor, the sharp dip in unemployment has been almost completely erased, with July 2014's value of 179,000 employed being a mere 1.7% below May 2008's maximum of 182,100. Indeed, Iceland's unemployment rate has fallen to a mere 4.4% in July 2014, compared with 6.2% in the United States -- and 11.5% in Ireland.

So the lesson, if I have haven't pounded it into your head enough already, is that Ireland's austerity measures are not paying off, as it has failed to regain its pre-crisis employment level  and has seen its unemployment rate fall only by reverting to its historical solution of exporting people, as in the 1980s.

Cross-posted at Angry Bear.