- [Narrator] Inequality is
one of the biggest issues that has divided economists
for as long as economics has been studied and probably
a good amount of time before that as well. One of the central
questions that economists are constantly trying to answer is to whom the fundamentally
limited resources of an economy should be provided to. There are no correct
answers to this question but there are some that
are obviously wrong. I think most of you watching would agree that the wealth of an
economy should not be hoarded by authoritarian rulers
that don't answer in any way to their people. On the opposite end of this argument, the accumulation of resources is one of the primary motivators
for people to work harder, innovate, and prescribe
capital efficiently. These actions by economic
participants add value to the entire economic system but they are also difficult,
risky, time consuming, and not very fun. So not rewarding these
actions with a larger share of resources will mean
that they are not done which will result in an economic system that is worse off overall for everybody. We've spent a lot of time on
this channel talking about some of the most unequal countries in the world and the economic problems that are caused by this inequality. If a majority of people
in an economy are too poor to afford proper education,
nutrition, and healthcare, on top of these being
terrible social issues, it's actually bad for the economy overall, even the wealthy elite of that economy with a very large share of the wealth because poorly educated, sickly, and undernourished economic participants make for a very bad labor force. If workers can't perform at their best, then there'll be less
wealth generated overall, which means even if the 1%
of the 1% own a huge portion of the economic pie, the
pie will be smaller overall, leaving them worse off in absolute terms than if they were to share
that wealth more equitably. So even if they didn't
care about their country being plagued by poverty,
there is still an argument that some level of equality
is in their best interest. So, instead of learning from the mistakes of economies that have
got this balance wrong, it's perhaps more insightful to look at the most equal country in the world to work out what they are doing right. So how do economists work out
what the most equal country in the world is? What tools do these countries employ to manage that equality? And finally, are there
any economic drawbacks caused by this equality? There are lots of ways that
economists measure inequality. The most popular is something
called the Gini Coefficient. The Gini Coefficient works by
plotting out something called a Lorenz Curve. The Lorenz Curve named after
the economist, Max Otto Lorenz, is made by breaking the
economy down into percentiles and then graphing out the
cumulative share of resources that each percentile owns in that economy. If we are looking at income
inequality, the lowest 1% of earners might only
make a 10th of a percent of the total national
income in the economy. The next 1% will make 0.2 of
a percent, which adds together to make a running total of
0.3% and so on until we get to the top 1% of earners,
which might make 10% of the total national
income in an economy. If we run a line through
each of these percentiles we get the Lorenz Curve for
that particular economy. We can then imagine an economy
that is perfectly fair. The lowest 1% of earners
makes 1% of the income. The lowest 2% also makes 1%,
and the top 1% of earners if you can call them that still
only makes 1% of the income. If we follow the cumulative
total of these data points, we make a 45 degree line. No economy in the real world
is ever going to look like this because there will always be some level of income inequality. But if we lay out the Lorenz
Curve from that real economy over this perfectly equal hypothetical, the graph will have two areas on it, the area above the Lorenz Curve and the area below the Lorenz Curve. The Gini Coefficient is simply calculated by looking at the percentage of the area that is above the Lorenz Curve. So in this economy, let's say
roughly 40% is above the line and 60% is below the line. That would give the economy
a Gini Coefficient of 0.4, which is pretty good by global standards. If for example, nobody made any
money at all in this economy other than the top 1%, then
the curve wouldn't really be a curve at all. It would be a 90 degree angle
at the end of the chart, which means that the area
above this line angle thing is 100% of the area with
nothing existing below it. This would be a Gini Coefficient of one, which is perfect inequality. If we had that perfectly
equal economy from earlier, it would match the 45 degree line exactly meaning that 0% of the area
would be above the line and 100% of the area
would be below the line. This would give the economy
a Gini coefficient of zero. Now, I know I've just thrown
a lot of graphs and numbers at you so if you don't
completely understand it, don't worry. All you really need to know and all that most professional
macroeconomists know, for that matter, is
that the closer to zero a Gini coefficient score is
the more equal the country. In the real world, all economies are going to exist somewhere
between these two extremes, but the most equal country
in the world would simply be the one with the lowest Gini number and we know exactly which one that is. It's Iceland with an income
Gini coefficient of 0.369 according to the 2022 OECD report. So there we go. Video done, well done to the
People's Republic of Iceland. Except of course it's not that simple. There is a lot of interesting economics behind what makes Iceland so equal and the first is that they just
don't have that many people. Iceland only has a population of 370,000, which is smaller than most medium towns. Two thirds of the entire
country's population could fit in the Indianapolis Motor Speedway. A small population by itself doesn't mean there can't be inequality. Any population of two or
more will have some level of inequality if we chart
it out on a Lorenz Curve. But Iceland's low population
helps it in other ways. Iceland is a country rich
in geothermal energy, which means electricity
there is extremely cheap, which makes energy intensive industries like aluminum smelting and
even cryptocurrency mining, very globally competitive. The country also has a surprisingly strong financial services sector, which is part of the reason that it got into so
much trouble in the GFC. It's also a major commercial fishing hub and I know fishing doesn't sound that glamorous or profitable,
but Icelandic fishing is done on huge boats employing
state-of-the-art equipment to make billions of dollars every year. On top of that, the country is beautiful, which is why outside of global pandemics, the country had more
tourists arriving every year than it had citizens. If we remember our factors
of production, land, labor, and capital, Iceland has
very productive land, a good amount of capital, but
only a tiny pool of labor, which means the workers that
it does have are very valuable and even average workers can
demand very high salaries because employers just
don't have that many options to choose from. Combine this with a
very egalitarian culture and political system, and it makes sense that Iceland would top the
list for income inequality. But remember when I said
it wasn't that simple? Well, it isn't that simple. Iceland's Gini coefficient
of 0.369 is measured before taxes and transfers. What this means is that
it only measures people's before tax incomes and excludes any money they might have received through government assistance programs. These are two of the three biggest ways that the government can
control income inequality in their economies. We'll get to a third
one soon, but for now, see if you can guess it along the way. Typically, taxes reduce the net income of higher income earners
and government assistance increases the income of
lower income earners. So, high taxes and high levels
of government assistance will make the economy more equal. Actually, almost any type of
taxes and government assistance will usually improve income inequality, with the exception being
government assistance programs that specifically
help businesses. Even still the Gini coefficient
of all of the countries that the OECD monitors improved when including taxes and transfers. Some improved quite
significantly, like Slovakia, which has a Gini coefficient
of just 0.222 after taxes and transfers which then makes
it the most equal country in the world. Slovakia's Gini coefficient
before these interventions is still good. I mean, just falling
behind Iceland at 0.383, which means it was fairly
equal before taxes and welfare and it was even more equal after them. But Slovenia, the runner
up after tax equality is a little bit more interesting. Slovenia before taxes had
an income Gini coefficient of 0.444, which while
certainly not terrible by global standards, leaves a very big gap between its coefficient of
0.246 after taxes and welfare. This just means that
Slovenia has very high taxes, which it does, especially for individuals. Income taxes top out at 50%, which is high but isn't crazy by itself. There are countries like Finland that have a top marginal tax rate of 57% but the difference is that
Finnish residents need to earn a lot more before
they start paying that. In Slovenia, people start
paying 50% of their income on everything they earn over 72,000 euro, which is an extremely low
top marginal tax bracket. That goes on to fund generous
welfare and retirement schemes which is why the country has
such low income inequality, which is great, but it can cause problems. The economist Arthur Laffer
devised yet another curve to consider when it comes
to national income equality. The Laffer Curve is the
theoretical relationship between total government revenue
and the effective tax rate of the nation, and it
charts this relationship out between the extremes of a 0%
tax rate and a 100% tax rate. Government tax revenue
at a 0% effective rate will obviously be zero
and then it will increase as the government increases the rate. That's pretty simple
so far but Laffer added that at a certain tax
rate, any further increases will actually result in
the government generating less tax revenue for the economy. The reason this happens is
because if taxes get high enough, then people will have
less incentive to work, and a greater incentive to
find ways to avoid taxes, either through legal
loopholes or illegal dodging. People with high incomes
and highly marketable skills will also start to move out of the country to other countries with lower tax rates where they can enjoy a
higher quality of life. This not only results
in lost revenue directly from those people who will
no longer be paying taxes directly to the government
but it also hurts the economy in other ways by removing
highly skilled workers from the labor force
because they are the ones most likely to move to
secure higher incomes with lower taxes elsewhere. The exact shape of the Laffer
Curve is highly debated and almost all countries
exist on the left-hand side of the curve but that
doesn't mean the countries can just solve the issue of inequality through this kind of intervention without causing other economic problems. Income taxes and welfare
payments also don't directly impact the arguably more
important metric for inequality and that is wealth inequality. Income inequality is the
difference between the income of the lowest and highest
earners in an economy where wealth inequality is the difference between the net worth of
the richest and poorest in an economy. We can still chop this
out on a Lorenz curve and create Gini coefficients but wealth inequality
is almost always greater than income inequality because
people on higher incomes will have more money left
over after covering essentials to make investments. Those investments will start
to make their own returns which means that wealth can accumulate to a larger degree than incomes. For reference, Iceland
has a wealth inequality Gini coefficient of 0.69. Nice. Where its income inequality was only 0.37. Improving income inequality
doesn't always improve wealth inequality like you might expect either because a lot of the
wealthiest people in economy don't make their fortunes
through earned income. Their wealth comes from their
assets accumulating in value. In certain conditions,
improving income inequality can actually worsen wealth inequality because as the lowest
earning people in an economy earn more money, they will
spend more at businesses or maybe even invest
into those businesses. Either way, this will increase the value of those businesses, which
disproportionately benefits the people that already own
them as in very wealthy people. If you wanna see this
counterintuitive process of improved income inequality resulting in worse wealth inequality, then just look at the global economy
between 2020 and 2022. Generous stimulus measures
made with the best intentions to help struggling households through an unprecedented
economic shakeup leveled the income playing field a bit but it made people who
were already very wealthy even wealthier because most
of this money was channeled into companies that they already owned, either through investments
or product purchases. How many people do you know
that either bought Tesla shares or an actual Tesla car? All other things been equal,
however, over the long term, more equal incomes should result in a more equal wealth distribution. So, then what country is the most equal by wealth inequality metrics? Again, this is a very simple
question that you can find out by just looking at a list of countries by wealth inequality
Gini coefficient figures. The answer is either Slovakia,
again, Belgium, Myanmar, or East Timor. Yeah, these ones get a
little bit harder to explain. Using the Gini coefficient
is still possible to measure wealth inequality
but there are some reasons that the results that we
get might not be as easy to compare country to country
as income inequality figures. For starters, the data is
just not as easy to collect. Almost every major economy
in the world taxes income in one form or another
and if your tax income, you need to track income. So figuring out how much
people earn is as simple as using tax agency databases. Only a tiny handful of
countries have wealth taxes so most governments don't
even bother tracking theirs. The list we are working off for this video is made of composite data
from four different sources that all use slightly
different methodologies and data collection techniques. Wealth is also much more subjective. It's difficult for people
to agree on how much a house or a car might be worth at any given time but those assets will still
make up a significant portion of a significant number
of people's total wealth. Wealth can also go into the negatives as people take on debt, but
most economists would agree that even though someone with
a negative $50,000 net worth because they have $10,000
in cash and $60,000 in student loans might technically
fall into the bottom 1% of people by net wealth,
they are probably better off than someone with only $5 in their pocket. The person with only
$5 might technically be $50,000 wealthier but
their earning potential and quality of life will be much lower. Countries like Myanmar and
East Timor achieve their level of wealth inequality, partly
because it's very difficult for people in these
countries to go into debt because they just aren't financial
institutions set up there to serve them. Wealth inequality also
gets a bit difficult towards the top end with
extremely wealthy people that can skew results
for entire countries. If a group has one billionaire and 999 people that are flat broke then the average person in
that group is a millionaire. In the same way, just a few
extremely wealthy people can distort the Lorenz Curve enough to make a very egalitarian
economy look like an oligopoly. According to the best available
Gini coefficient statistics, the Netherlands, Sweden, and Denmark all technically have a higher
level of wealth inequality than Saudi Arabia and South Africa. But any reasonable person
would obviously much rather be working class in Sweden than South Africa. This also highlights another
problem with wealth inequality, which is that it's not
necessarily a problem unless it's making people poorer. As the world has become richer it has also become more
unequal because the capacity for extreme wealth
generation has grown with it. I would rather live in an
economy where the average person is worth a hundred thousand dollars but there are a few billionaires than an economy where everybody
is equally worth $10,000. That might sound like a facile argument because the first economy
just has more wealth overall but the development of
industry and innovation in the modern world was largely
pushed by the profit motive. All of this is to say that
wealth inequality is really, really difficult for economists to measure and that makes it really
difficult to work with. The popular solution of just limiting the wealth of the extremely rich doesn't necessarily
improve living standards for average people unless
their wealth has been generated by actively stealing from regular
people through corruption. In certain circumstances, it can actually hurt the
overall wealth of an economy because it removes the incentive
for already wealthy people to reinvest their capital
into risky endeavors because there is no potential upside. But I didn't promise you a
list of all of the challenges that economists face when working
at inequality and economy. I promised you the most
equal country in the world and that's probably Australia. So this is a weird one because
Australia does all right in income Gini figures but
not amazingly when compared to Eastern European or
Scandinavian countries. It is also middle of the road
by wealth inequality figures but it wins out in arguably the most important
inequality metric, which is, if you had to be a working
class person in any country on earth, where would you wanna be? Now, obviously maybe unbiased but I would argue you would probably want it to be Australia. To begin with, the average
Australian is very wealthy, trading back and forth with Switzerland to be the wealthiest people
in the world, so that helps. The country does have a lot
of wealthy people with 11.2% of the population being
millionaires, but even the average Australian does
very well by global standards. The median Australian as
in half of the population is richer than them, and half
of the population is poorer than them, is worth $238,000. The share of wealth owned by
the bottom 80% of the country is 27%, which might not sound amazing but it's only 15% in the USA. Obviously, Australia
has a lot of advantages. It's a globally desirable
location for investment. It has a large mining industry and a relatively small population, which as we learned earlier, does help with these sorts of things. But it also has policies in place that both look after the average person while not stifling entrepreneurship. Remember when I said that
there were three ways that governments could control inequality? Taxation, welfare, and one other? Well, that other control is
policies around minimum wages. Congratulations to anybody
that guessed it along the way. Australia consistently has
the highest minimum wage rate of any country in the
world, and on top of that, employers are required to
make mandatory payments into their employees'
retirement funds regardless of their working arrangements. Those forced retirement
savings are part of the reason that the average Australian is so rich. Australians can't access this money until they are 60 years old and it turns out then forced to save 10% of your paycheck for life
builds up surprisingly fast especially with wages
that are world-leading. This combined with a very
low unemployment rate means that the average working
Australian can build a very comfortable life for themselves in some of the most
livable areas in the world. There are, of course still
problems, housing affordability in major cities, being chief among them but having a wealthy
population that is surprisingly concentrated in just a few
small areas of a massive country will do that. If you don't agree with
me, then that's great because it proves just
how difficult the debate about inequality can be
and we can't even agree on what country is
getting inequality right and there is a compelling argument that at least a dozen countries could be the most equal on earth. I don't wanna get too philosophical here but economics is a social science and that often means that
good economists need to look beyond statistical numbers when trying to work out optimal outcomes. It's no good making an economy
the most equal in the world if everybody is equally miserable. Thanks for watching mate. Bye.
