A highly political, highly politicised topic. The most simplistic picture: the prosperous get richer at the expense of the poor. The most simplistic solution: higher minimum wages and/or taking more (tax) money from the prosperous will make the world more equitable.

In the present political environment it is particularly important to look at the facts very carefully, and to try to understand some of the drivers of the change in relative household incomes, also understand the differences between advanced and emerging economies. Understanding these trends and drivers is also and in particular important for a food company, because this is about our consumers.

And it is important to keep the right perspective on the real problem: for those with very low incomes it is not the Gini-index that matters, but how to make sure there is a way to improve (or at least not deteriorate) their situation.

 

A few points on developments in advanced economies:

Between 1915 and 1980, income distribution followed the Kuznets curve after the turning point (separate paper enclosed). Developments of the last 35 years must be seen in a longer-term context (chart enclosed): Sweden from 25% for the top percentile before WWI for to less than 5% in 1980 (and similar developments for many other OECD countries). To talk about “record inequality between rich and poor”, as OECD and others do, is therefore a slight exaggeration.

What happened with real household income in OECD27, mid 1980s to late 2000s? Income differentials have been increasing again – but to levels still far below those before WWI. The OECD report “Divided we stand” (Paris 2011) provides the data: for the top decile plus 1.9% per annum, for the bottom decile plus 1.3% per annum. Over these 30 years, the 1.3% per annum growth for the bottom decile adds up to an improvement of close to 50% — as mentioned in real terms. The low income groups are not getting poorer.

 

Some of the drivers of these differences in growth rates after 1980:

In the last two decades before the turning point, there was no longer mainly market led re-balancing of incomes, but compression of wage and income differentials driven by the heavy hand of the state (e.g., scala mobile in Italy), leading straight into the Eurosclerosis of the late 70s and early 80s (little incentive to work hard, to invest in education).

After 1980, adding a few hundred million Chinese and Indians to the world’s productive labour force slowed the rise in income for workers all over the developed world. But structural change in industry corrected a lot of this; where this structural change was blocked by government interventions, the low income groups had to pay. There is one more aspect to this: imports from newly industrialised countries changed also the relative prices of goods; prices of goods that the poorer people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Taking this into consideration, US inequality, for instance, grew two-thirds less than standard measures would suggest.[1]

Today, there seems to be a greater importance of good education for income (particularly two-income households, he and she with high qualifications). Often high cost of this education, e.g. in USA, that needs to be recovered (net lifetime income would for the US provide a different picture)[2].  And one may also add that increasing wage differentials work as an important incentive for people to actually invest in education (ultimately adding prosperity for all).

On the high income side: the long-term chart from Roine and Waldenstrom makes an interesting distinction for Sweden after 1980: when including capital gains, increase in the income share of the top percentile to 8-10%; excluding capital gains: share more or less flat at 5% (chart enclosed).

Some people actually left behind, e.g., today, the worst paid people in Switzerland, for instance, are chamber maids in hotels, a sector where little structural change, little improvement due to better education was possible. And there are societal factors we see in Switzerland (but also in other OECD countries): the highest risk to fall back in household incomes is for divorced couples with children, the one who raises the children alone and the other who has to pay alimony – for the background: divorce rate in Switzerland increased from 25% in 1980 to more than 50% today[3]; similar data again for other OECD countries.

 

Outlook advanced economies (OECD):

For quite some years to come little optimism for further capital gains of the top percentile. But if Europe s still able to generate some growth and remain competitive, if structural adjustment can continue, there is no reason to believe that there cannot be at least some modest further growth for those in the productive process – maybe below the 1.3% per annum for the lowest decile as over the last 30 years. Most of the recent announcements for tax hikes, however, imperil this moderately positive outlook.

There are, however two further major risks:

• High youth unemployment today, more than 50% in some OECD countries. If these youngsters stay out of work for several years they will never again enter a qualified job. Youth unemployment across Europe is directly related to labour market inflexibility, including minimum wages. Rigid labour markets hurt the most vulnerable
• Uncovered age-related entitlements: Highly indebted and possibly even bankrupt states will have more and more difficulties to deliver on all of their promises. With demographic change age-related payments will rapidly increase: according to a study by the Bank for International Settlement, the central bank of central banks, these age related payments (pensions, elderly and health care) risk adding to public debt in an order of magnitude between 60 and 140 percentage points of GDP by 2040 – for countries such as France, Germany, UK, USA and the Netherlands. Needless to say that these huge contingent liabilities appear nowhere in the books.

 

Emerging economies (see also separate post on the Kuznets curve):

India (PPP USD 5,800 p.c.) and China (PPP USD 12,900 p.c.) are still left of the Kuznets turning point, but getting closer relatively fast. According to IMF GDP forecasts, China may pass the point already towards the beginning of the next decade.

Outlook: The main risk today and in the years to come for those who stay poor: prices of basic (staple) food, i.e., simple forms of calories and proteins that can be the equivalent of up to 50% of household budgets of people in poor countries. With the food price crises 2008 and 2010, around 200 million people again fell below the poverty line – actually below an income where they go hungry to bed.

 

Conclusion: (quoting a CATO paper from 2009):

“(Debate on) income inequality is a dangerous distraction from the real problems (that need to be addressed): poverty, lack of economic opportunity, and systemic injustice.” Inclusive growth is about opportunity, about improvement, not about status-quo measurement of Gini coefficients. Inclusion is about getting a chance, and about the willingness to contribute to the common good.

And a final quote, from Abraham Lincoln: “You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot help the wage-earner by pulling down the wage-payer.”

[1] John Broda and Christian Romalis, Inequality and prices: Does China benefit the poor in America?, University of Chicago Working Paper, March 2008.

[2] According to the Consumer Financial Protection Bureau, total student debt (which includes private loans and federal loans) climbed to more than $1 trillion.

[3] http://www.hoepflinger.com/fhtop/Wandel-der-Familien.pdf

“Financial firms are progressively investing in commodity derivatives as a portfolio hedge since returns in the commodity sector seem uncorrelated with returns to other assets. While this ‘financialisation of commodities’ is generally not viewed as the source of price turbulence, evidence suggests that trading in futures markets may have amplified volatility in the short term.”
United Nations Food and Agricultural Organisation (FAO) (2010) . Price Volatility in Agricultural Markets . Economic and Social Perspectives Policy Brief 12

“Due to the increased participation of financial players in those markets, the nature of information that drives commodity price formation has changed. Contrary to the assumptions of the efficient market hypothesis (EMH), the majority of market participants do not base their
trading decisions purely on the fundamentals of supply and demand; they also consider aspects which are related to other markets or to portfolio diversification. This introduces spurious price signals to the market.”
“The financialisation of commodity futures trading has made commodity markets even more prone to behavioural overshooting.”
United Nations Conference on Trade and Development (UNCTAD) (2011) : Price Formation in Financialised Commodity Markets: the Role of Information

“While the debate on the relative importance of the multiple factors influencing commodities prices is still open, it is clear that price movements across different commodity markets have become more closely related and that commodities markets have become more closely linked to financial markets.” “Real market forces in these diverse markets are largely independent of one another, and therefore price changes should be essentially uncorrelated.
This was clearly true historically; from 1984 through 1999 average correlation between all commodities was only 7%. In 2007 this average rose to 64%. Correlation with the GSCI was 23% historically, and rose to 76% in 2007. Index speculation has swamped real market forces.”
House of Commons Select Committee on Science & Technology of the UK (2011)

“We find an overall increase of the level of short-term endogeneity since the mid-2000s to October 2012, with a typical value nowadays around 0.6–0.7, implying that at least 60–70 per cent of commodity price changes are now due to self-generated activities rather than novel information.” (This estimate seems rather at the high end, Ob)
Filimonov, Vladimir (ETH Zurich) / Bicchetti, David (UNCTAD) / Maystre, Nicolas (UNCTAD) / Sornette, Didier (ETH Zurich) (2013): Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets

When you do a web search on energy subsidies in Switzerland, you won’t find some broader overview summarizing the total cost, even less a cost-benefit analysis, but wonderfully designed webpages on ‘how to get more of them’, with a broad diversity of offers by different levels and sections of government, with layouts that look like a combination of Amazon and offers of wellness resorts offering eternal happiness.

Let us assume I consider buying an electric car, or one running on biogas. A quick search will get you to up to USD 2000 initial handout from your local community, the canton (in my case Vaud) will reduce your annual vehicle tax by 75%, and the confederation will not charge any levy on the fuel. For petrol it is more than USD 2.50 per gallon – mostly meant to finance the roads.[1]  And you may get special rebates on insurance.

Similar things happen when you use the train (considered to be environmentally friendly and energy saving), except that you get the subsidy by default: users pay less than 45% of the actual cost, the rest is covered by taxpayers.[2] Despite the high subsidy, the share of public transport in total transport decreased from 53% in 1980 to less than 40% in 2016. The strongest impact is on bureaucracy: headcount in central administration of the Swiss railway was 740 ten year ago, it soared to 1,500 in 2016.

You may intend to do something about energy used at home – actually or symbolically. Again, a search provides you with a beautiful shopping catalog of support offers – for better insulation, re-using waste-heat, optimizing your central heating, changing the way of providing warm water, etc. etc.[3]

Further subsidies support the supply of ‘renewable’ energy, with all kind of goodies when you invest in wind or solar, large or small, on the roof of your house for the latter.[4] The low-quality electricity from these two sources (it is produced unreliably when the weather allows – not when the energy is actually needed) gets a guaranteed price of slightly more than 20 US cents per kWh (called in best bureaucrat lingo ‘compensatory feed-in remuneration’, while market prices are around 4 cents. Wind power plants above 1,700 meters get an additional 2.5 cents – leading to ugly installations in our alps. [5]

Part of the arguments of those driving these handouts: it creates jobs and supports innovation. This is a politicians’ and bureaucrats’ myth circulating all over Europe. It is as if the money spent came from nowhere, and had no other use. However, a Spanish study on subsidized wind power showed that there are opportunity costs, that 2.2 private sector jobs were destroyed for every “green” job created by government subsidies. The missed opportunity is investing the money elsewhere, thereby creating in the average of the Spanish economy three times as many jobs.[6] And not surprising,  generate very little economic value. According to the Copenhagen Consensus, the value (including the environmental part) generated by investments in ‘renewable energy’ is not only far below average returns of an advanced economy, but with only 0.8 USD per one USD invested even negative.

Above are just examples to illustrate a weird situation. More subsidies and, increasingly, hefty steering fees (taxes and other) are distorting the efficient allocation of resources. And worse is still to come, for instance in the form of a planned tax on CO2 (“Klima- und Energielenkungssystem”[7]).

But how do our Swiss politicians and bureaucrats keep such a strange scheme running? Media and indoctrination have their share. And there are these handouts for more and more people who do ‘the right thing’– forgetting that it is their own taxpayers’ money. Real money is being spent to build ever bigger and fancier castles in the air.

[1] https://www.strasseschweiz.ch/fileadmin/pdf/Jahresberichte/StrasseSchweiz_JB2016_de.pdf

[2] https://www.bfs.admin.ch/bfs/de/home/statistiken/mobilitaet-verkehr/querschnittsthemen/oeffentlicher-verkehr-schienengueterverkehr.html

[3] https://www.energie-experten.ch/de/energiefranken/energiefranken-resultat.html?plz=1807&ort=Blonay#privat

[4] https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-62433.html

[5] https://www.strom.ch/fileadmin/user_upload/Dokumente_Bilder_neu/010_Downloads/Basiswissen-Dokumente/15_Windenergie.pdf

[6] https://www.instituteforenergyresearch.org/wp-content/uploads/2015/05/090327-employment-public-aid-renewable.pdf

[7] https://www.newsd.admin.ch/newsd/message/attachments/41483.pdf

Text based on a speech delivered in a forum on ‘Innovate 4 Water’, organised by Waterpreneurs, Water Vent and the World Intellectual Property Organisation (WIPO) at the WIPO headquarters in Geneva on 9 June 2017

 Water for irrigation in the Swiss Alps

Water has a simple chemical formula – but is highly complex in nature, societal and economic context. The text below takes a brief view on one dimension, namely an economist’s view on global water challenges, including some facts that matter particularly from this perspective.

 The first challenge is about access to safe drinking water.

• Let me start with the positive news: over the lasr 20 years, more than two billion people gained access to so-called improved drinking water sources[1].
• But this still leaves 750 million people without improved drinking water – and, worse, improved does not mean safe: according to Aquafed, some 2.6 billion people still rely on unsafe drinking water from standpipes, from trucks or from leaking pipes serving their homes. This last point is a reminder that we also talk about industrialised countries: leakage losses of drinking water are up to 30% in London (with pipes often 150 years old, the water company no longer tries to reduce the losses, but merely attempts to let the percentage not further increase), or 16% in the US[2]. Needless to say that leaks work both ways, i.e., drinking water does not necessarily maintain the quality when leaving the treatment pant once reaching households.

To change this situation would require huge amounts of investment. A few years ago, OECD estimated that more than one trillion USD annually are needed the for renewal of ageing infrastructure for water supply and wastewater collection. But actual spending is only about half of this amount, so infrastructure and as a result water quality keep deteriorating.

 

Another aspect is affordability. Municipal water supply organisations tend to cross-subsidise, they keep prices for tap water at home far below the cost of infrastructure. But this is money handed out to the more prosperous – 2.3 billion people without household connection often pay a multiple per cubic-metre of water of what the more prosperous have to pay.

This clearly shows: investment will not be enough; better politics and management will have to contribute to sorting this out.

 

The next challenge: to improve water quality by reducing pollution and eliminating dumping of untreated wastewater.

Actually, over 80% of wastewater is not collected or treated worldwide.[3] Contaminated water from inadequate wastewater management provides one the greatest health challenges restricting development.[4]

 

The third challenge:  to substantially increase water-use efficiency across all sectors; to ensure sustainable withdrawals and supply of freshwater to address water scarcity; and substantially reduce the number of people suffering from water scarcity.

Again, this is about both developed and developing economies.

We can see the result of massive water overuse in some surface waterbodies: Aral Sea, lake Chad, rivers across the world that no longer reach the sea.

We can’t see, and this makes it even more dangerous, with the overuse of an increasing number of underground aquifers:

• Jakarta, New Orleans, Mexico City, Bangkok. In these cities, the excessive use of groundwater leads to subsidence, particularly a problem of urban settlements close to the sea.
• Rural Punjab: due to agricultural use of the water, the groundwater level goes down one meter per year. Farmers get the electricity to pump the water for free.
• One last example – Ogallala, the major source of groundwater in the US Mid West: today, withdrawals exceed natural renewal by more than 10% [5]

This last two examples concern regions that are among the main food baskets of the world.

And indeed, the main user are farms: about 70% of freshwater withdrawn worldwide goes to agriculture, used to grow our food. And a substantial part that increased massively in past years is used for biofuels – probably one of the most absurd initiatives supported by mandated and subsidies supposedly in favour of sustainability. As a reminder: farmers need about one litre of freshwater per calorie grown. But when looking at relative magnitudes of energy and food markets with respect to this measure: trying to grow enough corn and soy to replace only 5% of world energy by theses so-called biofuels would require the same amount of water as for the whole global food supply.

 

Without changing the way the world is using water today we risk shortfalls in global food production of up to 30% by 2030 as a result of water shortage; if we further increase the production of biofuels – with governmental subsidies and mandates – the extent of water shortage and its impact on the world will be even more severe.

 

The fourth challenge: address these issues in a relevant and cost-effective manner, and address these issues country-by-country, watershed-by-watershed. This sounds obvious, but is in very few places and instances actually applied. I might extend on that point on another occasion.

 

In summary: the water challenges I just outlined are bigger and more complex than many people think. The 2015 SDGs of the UN brought for the first time a comprehensive view on the different aspects. Here I refer in particular to the water goal (SDG 6) with its 8 targets. They provide a frame for governments to set priorities for their country, for their watersheds, since not everything is equally urgent and not everything can be done at once.

SDG 6 and other discussions show that there are valid responses to the water challenges just outlined, and other challenges not addressed above. And the list of participants of this event shows quite well that knowhow and the technology are there.

What is most important: we have to start the action now.

 

PS:

After my speech, in the discussion around coffee tables, the question came up how climate change relates to the major water challenges. So I looked this point up in the official documents of IPCC. The outcome is clear: as of today, the water problems are mainly caused by directly water-related policies and mistakes, as the three quotes below show:

“It should be noted that, using the per capita water availability indicator, climate change would appear to reduce overall water stress at the global level.”

http://www.ipcc.ch/pdf/technical-papers/ccw/chapter3.pdf   page 45

“There is low confidence that anthropogenic climate change has affected the frequency and magnitude of fluvial floods on a global scale. The strength of the evidence is limited mainly by a lack of long-term records from unmanaged catchments. Moreover, floods are strongly influenced by many human activities impacting catchments, making the attribution of detected changes to climate change difficult. “

“There is low confidence in observed global-scale trends in droughts, due to lack of direct observations and due to geographical inconsistencies in drought trends. There is also low confidence in the attribution of changes in drought over global land areas since the mid-20th century, due to the same observational uncertainties and difficulties in distinguishing decadal scale variability in drought from long-term trends.”

http://www.ipcc.ch/pdf/assessment-report/ar5/syr/SYR_AR5_LONGERREPORT.pdf

 

Footnotes:

[1] http://www.who.int/mediacentre/news/releases/2012/drinking_water_20120306/en/

[2] https://www.epa.gov/sites/production/files/2015-04/documents/epa816f13002.pdf

[3] http://www.unwater.org/statistics/statistics-detail/fi/c/211793/

[4] http://www.unep.org/pdf/SickWater_screen.pdf

[5] https://www.washingtonpost.com/news/wonk/wp/2012/08/10/where-the-worlds-running-out-of-water-in-one-map/?utm_term=.5350c80d45d6

“Der Satz, die Welt wolle betrogen sein, ist wahrer geworden, als wohl je damit gemeint war. Nicht nur fallen die Menschen, wie man so sagt, auf Schwindel herein, wenn er ihnen sei’s noch so flüchtige Gratifikationen gewährt; sie wollen bereits einen Betrug, den sie selbst durchschauen; sperren krampfhaft die Augen zu und bejahen in einer Art Selbstverachtung, was ihnen widerfährt, und wovon sie wissen, warum es fabriziert wird. Uneingestanden ahnen sie, ihr Leben werde ihnen vollends unerträglich, sobald sie sich nicht länger an Befriedigungen klammern, die gar keine sind.” (Adorno ResK: S.66)

“Die Bevölkerung ist so an den Unfug gewohnt, der ihr widerfährt, daß sie selbst dann nicht auf ihn verzichten mag, wenn sie ihn halb durchschaut.” (Adorno Jazz: S. 126)

http://www.commontology.de/andreas/philo/kulturkritik.html