Category Archives: populism

30/11/18: The Myth of Social Mobility and Wealth Inequality

Three charts, related topics.

Global wealth inequality has been a much-discussed problem these days, with both longer-term economic and social, not to mention political, impacts being assigned to it across both the Advanced Economies and the Emerging Markets. Setting aside the causes and drivers for this development, here is the latest evidence on the wealth distribution around the world from Credit Suisse:

The 3.211 billion people, accounting for 63.9% of the total estimated world population are holding USD6.2 trillion worth of wealth (1.9% of the world total value of assets). Another 26.6% of population or 1.335 billion people, hold 13.9% of total global wealth. Thus, 90.5% of population hold combined 15.8% of the total global wealth. In the top 10 percent category, those with wealth of USD100K to 1 million account for 8.7% of global population and hold 39.3 percent of total global wealth. The 0.8% of population (42 million people) have combined holdings of wealth around USD142 trillion or 44.8% of total global wealth.

This is striking and it is problematic. Even if most of our own wealth inequality referencing is done across the adjoining class of comparatives, the gap between the top of the pyramid and the bottom is so insurmountably vast, that any idea that there is some sort of meritocratic division of wealth in our global society flies out of the window. The problem is not so much income inequality, but the inequality arising from inherited wealth, which generates income returns from invested assets that cannot be offset or diluted by merit of effort, talent and work, no matter how hard one works. Even stripping out luck effects of self-made millionaires and billionaires, the pyramid above is the evidence to the endurance of inter-generational wealth transfers.

The dynamics of evolution in wealth inequality that got us here are presented in the following charts via Goldman Sachs Research:

These figures are for the U.S. economy and they are frightening, just as much as the wealth pyramid above is frightening. Share of wealth held by the top 1% wealth-holders grew from just above 21% in the late 1970s-early 1980s to closer to 37% in 2014. Since then, it has increased more. Share of wealth held by the remaining top 10 percenters declined from ca 44% in the early 1970s to around 35% from the late 1990s on. But the share of wealth held by middle America collapsed to below 27% since the high of around 36% in mid-1980s. Things were never brilliant for the bottom 50 percent of Americans to begin with, but since the Global Financial Crisis, lower middle of America has had negative net wealth through 2014. even though it might have risen since then somewhat, at no time in modern history have the middle and lower-middle class Americans enjoyed holding more than 2 percent of the total wealth.

This is a double-ugly conclusion, because it simultaneously runs against two key propositions on which the American society rests: the proposition of social cross-class mobility upwards from lower wealth classes to middle class, and the proposition that social progress in the American society is distinct from the ‘basket cases’ dynamics in the larger emerging economies (the likes of India and China). In a way, America replicates the world in terms of both, wealth inequality and its dynamics. And that is not a good thing for a society based on exceptionalism values.

The added dimension to this is that, given the above dynamics and the degree of elites entrenchment / capture within the political establishment, we are facing an impossible task of rebalancing the above wealth inequalities without triggering some serious political discontent. Worse, we have no tools for doing so, other than traditional socialist tools (expropriation via taxation of income), which are not effective in dealing with this problem. One of the reasons why these tools are ineffective is that broad-based income tax measures impact more adversely those who work for living (higher income earners) and do not touch those who experience wealth appreciation through capital gains on inherited wealth (as long as they re-invest their wealth-generated income). Another reason, is that higher income earners, on average, can claim merit as a source of their income more than those who hold inherited wealth. A third reason is that redistribution through taxation is highly inefficient: the funds flow to the politically-empowered, not to merit-deserving, and the losses on tax funds are high due to the cost of Government bureaucracy.

Which leaves us with the unpleasant dilemma: tax inherited wealth (during inheritance transfer in the future, and retro-actively, via tax on existent wealth, in the past). Which in itself is highly problematic for the following reasons: (1) wealth is mobile across borders, and financialized wealth is especially so; (2) a significant tax on wealth is likely to trigger repricing of all assets to the downside (liquidation of wealth to cover tax liabilities), adversely impacting wealth acquired by the first generation of entrepreneurs and investors; and (3) inducing a sizeable decline in the life-cycle expected wealth of the current younger generations, resulting is a large scale re-leveraging of these generations.

Neither of these effects is easy to address.

9/9/2018: Corporate Power, Charity, and Social & Policy Impacts

In an important discussion, titled "Tax-exempt lobbying: Corporate philanthropy as a tool for political influence", Marianne Bertrand, Matilde Bombardini, Raymond Fisman, and Francesco Trebbi (02 September 2018, argue that as "special interests use donations to influence the political process", "...philanthropic efforts in the US are targeted, at least in part, to influence legislators. Districts with influential politicians receive more donations, as do non-profits with politicians on their boards. This is problematic because, unlike PAC contributions and lobbying, influence by charity is hard for the public to observe." The resulting conclusion by the authors is that the case of corporate-charity interlinks "amounts to a taxpayer subsidy of corporations expressing their political voice". In other words, concentration of market power causes concentration push in lobbying and, thus, potentially forces policy formation to more closely reflect the interests of the corporate donors at the expense of the taxpayers and ordinary voters.

This is a very important issue in any analysis of the functioning of our democratic processes. But it also raises another 'adjoining' issue, not covered in the paper: American corporations are increasingly relying on other channels to alter social (and related policy) outcomes today. This channel is the companies increasing financial and other commitments to Corporate Social Responsibility and Social Impact (or even broader ESG) targeting. Whilst benign in its core values and ethos, the channel can be open to potential abuse by corporate powers. In addition, like charity status channel, the CSR and SI/ESG channel also avails of public funding link ups to corporate balance sheets (via tax incentives, subsidies, co-financing of projects, etc). The question worth asking, therefore, is the following one: To what extent do modern SI/ESG and CSR strategies of major corporations align with their lobbying objectives? In other words, do corporates use SI/ESG/CSR strategies to promote self-interest beyond purely societal interest?

Surprisingly, very little research in the Social Impact or ESG analysis has been devoted to the potential for corporations to 'game the system' in their favour.

9/9/18: Populism, Middle Class and Asset Bubbles

The range of total returns (unadjusted for differential FX rates) for some key assets categories since 2009 via Goldman Sachs Research:

The above highlights the pivot toward financial assets inflation under the tidal wave of Quantitative Easing programmes by the major Central Banks. The financial sector repression is taking the bite out of the consumer / household finances through widening profit margins, reflective of the economy's move toward higher financial intensity of output. Put differently, the CPI gap to corporate costs inflation is widening, and with it, the asset price inflation is drifting toward financial assets:

This is the 'beggar-thy-household' economy, folks. Not surprisingly, while the proportion of total population classifiable as middle-class might be stabilising (after a massive decline from the 1970s and 1980s levels):

 Incomes of the middle class are stagnant (and for lower earners, falling):

And post-QE squeeze (higher interest rates and higher cost of credit intermediation) is coming for the already stretched households. Any wonder that political populism/opportunism is also on the rise?

21/5/18: Italian Sovereign Risks Are Blowing Up

As I noted in my comment to ECR / Euromoney and in my article for Sunday Business Post (see links here: and, the ongoing process of Government formation in Italy represents a fallout from the substantial VUCA events arising from the recent elections, and as such warrants a significant (albeit delayed) repricing of country sovereign risks. This process is now underway:

Source: Holger Zschaepitz @Schuldensuehner

Per chart above, Italy's 10 year bonds risk premium over Germany jumped to 181 bps on markets concerns with respect to fiscal dynamics implied by the new Government formation. This, however, is just a minor side show compared to the VUCA environment created by the broader dynamics of political populism and opportunism. And in this respect, Italy is just another European country exposed to these risks. In fact, as the latest data from the Timbro's Authoritarian Populism Index, Europe-wide, political populism is on the rise:

21/5/18: Risk experts take flight over Italy’s political risk

Euromoney and ECR are covering the story of Italian political risk, with my comments on the rise of populism in Italy and its effects on sovereign risk with respect to the Italian Government formation negotiations: