14/3/2016: Inheritance-Rich Social Disasters?

Using microdata from the Household Finance and Consumption Survey (HFCS), a recent research paper from the ECB examined “the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries.”

Top of the line findings:

1) “About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit.” Which is sort of material: in a democracy 1/3 of voters making their decisions based on inherited wealth can and (I would argue) does impose a cost on those who do not stand (do not expect) to inherit wealth. Examples of such mis-allocations? Take Ireland, where everything - from retirement to housing markets to childcare provision to education hours is predicated on transfers of income and / or wealth within the family. While those who stand to gain through this system cope well, those who stand to not gain through this familial wealth and income transfers system, stand to lose. Guess who the latter are? Of course: the poor (or those from the poor background, even if they are higher earners today) and the foreign-born.

2) “Regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.” Which, in basic terms means that you have to work 2.5 times harder to achieve the same impact as inheritance for every point increase in inherited wealth. Merit, you say? Of course not: daddy’s money vastly outperforms, as far as financial returns go, own education, effort, aptitude etc… Though, of course, here’s a pesky bit: for all those pursuing equality and other nice social objectives, higher income taxes, of course, make it even less feasible for income (work) to catch up with inherited wealth. Which might explain why well-heeled (and often inept) folks of Dublin South are so much in favour of the ideas of raising income taxes, but are not exactly enthused about hiking inheritance taxes.

3) “Multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth.” Which, basically, says the utterly unsurprising: wealthy households don’t rely on social welfare. Doh, you’d say. But not quite. The “findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase -- rather than a decrease -- of observed wealth inequality.”

In other words, inheritance induces higher inequality in wealth. It compounds this effect by allocating inheritance without any sense of merit and at an indirect (policy) cost to those households that are not standing to inherit wealth. Which means that more inheritance-based is the given society, more wealth inequality you will get in it, and less merit in wealth allocation will result. Which, in turn implies you gonna pay for this with higher taxes (everyone will, except, of course, the really wealthy).

Next time you driving through, say Monkstown, check them out: the *daddy’s money* wandering around… they cost you, in tax, in higher charges for policy-related services, and in merit-less society.


Full paper here: Fessler, Pirmin and Schuerz, Martin, Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State (September 22, 2015). ECB Working Paper No. 1847: http://ssrn.com/abstract=2664150

10/12/15: R v G and all the Pikettian Theory Malarky

You know the Pikettian Thesis that if return on capital exceeds in the long run economic growth, then capital income appreciation relative to wages income growth will lead to rising wealth inequality. Except, err...

Source: @MaxCRoser 

Which says, really, that since the start of the 20th century, wages income of the richest 1% became more important in the determination of their full income, whilst entrepreneurial income remained roughly the same, and capital income shrunk. R > G and all that malarky...

30/5/2013: More on Wellbeing v Income

Recently, I have posted on the issue of subjective wellbeing and measured incomes: here. This week, The Economist crunched through the OECD data on synthetic indices of well-being: here.

The chart from The Economist is telling:

Do note that the distance for Germany (gap) is pretty similar to that in the US and, given lower overall well-bing in Germany than the US, proportional gap is probably actually larger.

And the conclusion is: "for all the fancy metrics, the Better-Life Index does not look too different from classic GDP rankings."

Now, back to the top link above for more in-depth analysis...

4/5/2013: Higher Income vs Higher Subjective Well-Being

A very interesting paper on the topic I had a chance to briefly discuss on twitter recently. Basically, does life satisfaction / happiness decline with income increases? In other words, is there a point at which people earning more are experiencing less happiness? Is there a point of saturation?

"Subjective Well-Being and Income: Is There Any Evidence of Satiation?" by Betsey Stevenson and Justin Wolfers, NBER Working Paper No. 18992 from April 2013 (http://www.nber.org/papers/w18992) attempts to shed some light on this question, often debated and subject of may research papers in the past.

Headline results [emphasis in italics is mine]: "Many scholars have argued that once “basic needs” have been met, higher income is no longer associated with higher in subjective well-being. We assess the validity of this claim in comparisons of both rich and poor countries, and also of rich and poor people within a country. Analyzing multiple datasets, multiple definitions of “basic needs” and multiple questions about well-being, we find no support for this claim. The relationship between well-being and income is roughly linear-log and does not diminish as incomes rise. If there is a satiation point, we are yet to reach it."

Some more beef from the paper (unfortunately - not available to general public, but here's a link to the authors more condensed article on it: http://www.brookings.edu/research/papers/2013/04/subjective-well-being-income).

"In 1974 Richard Easterlin famously posited that increasing average income did not raise average well-being, a claim that became known as the Easterlin Paradox." Needless to say, many scholars since then picked the idea and even advanced it to greater extremes.

Per authors, however, "in recent years new and more comprehensive data has allowed for greater testing of Easterlin’s claim. Studies by us and others have pointed to a robust positive relationship between well-being and income across countries and over time (Deaton, 2008; Stevenson and Wolfers, 2008; Sacks, Stevenson, and Wolfers, 2013).

"Yet, some researchers have argued for a modified version of Easterlin’s hypothesis, acknowledging the existence of a link between income and well-being among those whose basic needs have not been met, but claiming that beyond a certain income threshold, further income is unrelated to well-being. The existence of such a satiation point is claimed widely, although there has been no formal statistical evidence presented to support this view. For example Diener and Seligman (2004, p.5) state that “there are only small increases in well-being” above some threshold. While Clark, Frijters and Shields (2008, p.123) state more starkly that “greater economic prosperity at some point ceases to buy more happiness,” a similar claim is made by Di Tella and MacCulloch (2008, p.17): “once basic needs have been satisfied, there is full adaptation to further economic growth.”

"The income level beyond which further income no longer yields greater well-being is typically said to be somewhere between $8,000 and $25,000. Layard (2003, p.17) argues that “once a country has over $15,000 per head, its level of happiness appears to be independent of its income;” while in subsequent work he argued for a $20,000 threshold (Layard, 2005 p.32-33). Frey and Stutzer (2002, p.416) claim that “income provides happiness at low levels of development but once a threshold (around $10,000) is reached, the average income level in a country has little effect on average subjective well-being.”

It is worth noting the thresholds in income cited above - all are well below the median and mean incomes in the advanced economies today. The test carried out by the authors of the study cover incomes both below these thresholds and above, including to well above (multiples of almost 7 times the highest threshold mentioned).

"Many of these claims, of a critical level of GDP beyond which happiness and GDP are no longer linked, come from cursorily examining plots of well-being against the level of per capita GDP. Such graphs show clearly that increasing income yields diminishing marginal gains in subjective well-being.

"However this relationship need not reach a point of nirvana beyond which further gains in well-being are absent. For instance Deaton (2008) and Stevenson and Wolfers (2008) find that the well-being–income relationship is roughly a linear-log relationship, such that, while each additional dollar of income yields a greater increment to measured happiness for the poor than for the rich, there is no satiation point.

So now, to the paper itself. Some basics first:

"In this paper we provide a sustained examination of whether there is a critical income level beyond which the well-being–income relationship is qualitatively different, a claim referred to as the modified-Easterlin hypothesis.

"As a statistical claim, we shall test two versions of the hypothesis. The first, a stronger version, is that beyond some level of basic needs, income is uncorrelated with subjective well-being; the second, a weaker version, is that the well-being–income link estimated among the poor differs from that found among the rich.

"Claims of satiation have been made for comparisons between rich and poor people within a country, comparisons between rich and poor countries, and comparisons of average well-being in countries over time, as they grow. The time series analysis is complicated by the challenges of compiling comparable data over time and thus we focus in this short paper on the cross-sectional relationships seen within and between countries. Recent work by Sacks, Stevenson, and Wolfers (2013) provide evidence on the time series relationship that is consistent with the findings presented here.

"To preview, we find no evidence of a satiation point. The income–well-being link that one finds when examining only the poor, is similar to that found when examining only the rich. We show that this finding is robust across a variety of datasets, for various measures of subjective well-being, at various thresholds, and that it holds in roughly equal measure when making cross-national comparisons between rich and poor countries as when making comparisons between rich and poor people within a country."

Some actual results:

The above shows that the well-being-income gradient is strong for the rich countries and even stronger for the countries where income per capita exceed USD15,000 (GDP per capita). Per authors: "These data clearly reject both the weak and strong versions of the modified-Easterlin hypothesis." Authors attain qualitatively identical results for a number of other measures / surveys of well-being. "Each of these datasets strongly reject" the modified-Easterlin hypothesis. "Moreover, to
the extent that the well-being–income relationship changes, it appears stronger for rich countries."

Core conclusions: "While the idea that there is some critical level of income beyond which income no longer impacts well-being is intuitively appealing, it is at odds with the data. As we have shown, there is no major well-being dataset that supports this commonly made claim. To be clear, our analysis in this paper has been confined to the sorts of evaluative measures of life satisfaction and happiness that have been the focus of proponents of the (modified) Easterlin hypothesis. In an interesting recent contribution, Kahneman and Deaton (2010) have shown that in the United States, people earning above $75,000 do not appear to enjoy either more positive affect nor less negative affect than those earning just below that. We are intrigued by these findings, although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results. Indeed, those authors also find no satiation point for
evaluative measures of well-being."

Here is a slightly clearer chart from the blogpost by The Economist: