Why Inequality Starts Becoming a Problem Now

the global pandemic Undead almost a decade's worth of improvement in reducing Global extreme poverty levels and that was a reversal of the most productive decade ever for reducing Global poverty so this was a big blow at the same time as this side of the global wealth Spectrum was taking a huge step backwards the world's richest people got even richer 47.8 of the world's wealth is now in the hands of just 1.2 percent of people who are around 62.5 million adults with a net worth of over 1 million US Dollars unfortunately 2.8 billion adults more than half of the global adult population have a net worth of less than ten thousand dollars economists always want to stress that inequality is a complicated subject and our modern globalized value-adding economy is not a zero-sum game a small group of people with a lot of assets does not necessarily come at the expense of everybody else in some cases this concentration of wealth can even improve other people's living standards as it can be invested into industry that produces more output and provides more opportunities for everyone almost since the beginning of the Industrial Revolution that's exactly what's been happening there are more people alive today living lives filled with luxuries that wouldn't have even been thinkable for the investments into technology and Industry that made the world a much more prosperous place but now for the first time in nearly 250 years that progress could be reversing to where someone's economic Fortune could be an economic burden for billions of others and has a lot to do with the now 300 trillion US dollars worth of debt the global is dealing with that number by itself might sound very scary but to most economists it hasn't been a huge cause for concern until recently and to understand why we need to as always answer a few important questions what are the economic forces that have been driving inequality what does record Global debt have to do with this problem is there an optimal level of inequality to maximize prosperity for all economic participants and if there is how do we get to it now regardless of what the numbers and economic theories say it can feel very frustrating to live in a society where some people are struggling every day While others won't be materially affected by things like Rising living costs or Energy prices the visibility of inequality has never been higher with social media and with so many people putting on a front for their online personas it's understandable that you might feel like you're just not living up to your potential that's where our sponsor for this video better help comes in like a lot of people I had a really tough time during the first year of the pandemic and talking to someone really helped me find the tools to feel better every day and not let myself become stagnant in my life and work when I couldn't do the things I used to do whether it's generally feeling a bit blue about your life situation or a clinical diagnosis with better help you can talk to a licensed therapist who understands and can help you improve your mental well-being I use therapy to become the best version of myself it's online and you can speak with your therapist however you feel comfortable plus it's more affordable and fits in with your schedule so you can always find time to work on yourself after just a few questions you can get matched with a therapist and it's easy and free to switch to if you want someone else that you connect with more if you use betterhelp.com ee or the link in the description to sign up you'll not only get 10 off your first month to better help but you'll also support this Channel at no extra cost to you starting to talk to a licensed therapist might be one of the most important things you ever do an economic statistic that doesn't get nearly enough attention is that about a decade and a half ago Global income inequality started doing something interesting for the first time since the start of the Industrial Revolution it started going backwards this came after a plateau and inequality that started around the end of the 1980s so even though a lot of commentators are talking about the problem of global inequality the reality is that as a planet we've been moving in the right direction at least up until very recently the biggest driver of the reduction in global inequality has been the growth of once very poor but very populous economies primarily China but also Indonesia India Thailand the Philippines South Korea and Taiwan these countries have all grown their economies significantly in the past half century and shared that Prosperity with their people which represents close to half of the population of the Earth the asia-pacific region specifically can clearly be seen as pushing billions of people out of extreme poverty which is fantastic on a humanitarian level but it also means that for economists that a large part of the world's population has closed the gap on the world's wealthiest list which represents a reduction in inequality this is all great but as this was happening and global inequality was falling something interesting was happening within the countries that were driving the global reduction in inequality their inequality was Rising during its two decades of most concentrated economic growth China's income inequality rose from a genie coefficient of 32 to a genie coefficient of 44. we'll explain exactly what that means shortly but for now it means that China was becoming a significantly less equal country while at the same time making the world more equal now China may have been an outlier here after all it was transitioning from a centrally planned Communist economy that subscribed at least partially to Marxist leninist's ideals of worker equality and it was transitioning to the highly Market focused system it's home to today China's unofficial economic model at this time was that everybody will get rich by letting some people get rich first despite this though China was not unique now a quick little disclaimer here is that figures on inequality are hard to come by because they're quite difficult to collect especially in countries that are rapidly developing and a lot of the economy remains informal even still in almost every major economy that has experienced a high level of growth in the past half century inequality has increased and yet it's these same countries that have somehow improved equality across the World Imagine the world was a collection of football teams most of them are fairly basic and made up of players that just like to play for fun on the weekend but then some like say the USA and some Western European teams are made up of world-class professional players obviously if these teams were ever to go against one another it wouldn't be particularly Fair because Talent is so heavily focused in just a few top teams but now let's say we take all of the teams and give underperformers some real star players of their own on a tournament wide level this would even out the game but the skills distributions within the teams themselves would be worse this could will be a good thing for the average casual player because they won't lose every game and with the added attention they get their team might be able to afford better coaches and equipment to make everybody more competitive as countries developed and adopted modern Industries a few industrialists got rich shot the process but overall it was still good for everybody as the new modern Industries offered much better opportunities to everybody in the country the average person in China is much better off today than the average person in China 50 years ago even though they are technically suffering under a higher level of inequality on a wider level this is why the world became more unequal following the Industrial Revolution before modern production and value-adding industries The Wealth of Nations was mainly determined by how productive their Farmland was some countries tried to stretch this by colonizing and extracting resources from across the world but overall everyone was pretty equally poor the only real way to own wealth in these times was to own land which could be used to grow food just getting enough to eat was still the primary occupation of most people alive mon industry and Technology like railroads steam engines production lines and later electricity created a large divide between the countries that were utilizing these Technologies and those that weren't today agriculture is only a minor component of the global economy and an even smaller part of most advanced economies and with International Investment and globalization it's much easier for countries to industrialize now than it was all the way back then inequality is complicated but generally it can be reduced by making wealthy people poorer or poor people richer overall the ideal economic outcome is to make the poor people richer but sometimes this has the side effect of making already wealthy people even wealthier which can give the illusion that things are getting worse when the reality is that life for everybody is getting much better as long as someone's wealth is made by adding value to the economy rather than taking value from the economy it should all other things been equal made the world a better place now all other things been equal the classic Economist cop-out is a big assumption at the level of global macroeconomics and even if it's universally beneficial overall inequality can still cause some unavoidable issues a common defense of lavish spending done by the world's wealthiest people is that it's better for the economy if they spend their money rather than the alternative which would be hoarding it now the theory behind this defense is not entirely wrong if a billionaire buys a private jet then the money that they spend on it will indirectly be transferred to the thousands of people involved in the entire supply chain for every component on that plane after it's built they'll need a pilot and crew it'll also provide jobs to ground staff at airports and Engineers that keep it flight worthy this one major purchase has boosted industry and employment and improved output in the economy some commentators and even some economists take these improvements to suggest that the best thing wealthy people can do for the economy is to spend their money on consumption like this consumer spending is a component of GDP so an increase in consumer spending represents an increase in economic output and a consistent increase in these figures is how we get economic growth the problem is that most people are looking at this backwards the reason we use consumption to measure economic output is because it's just easier to collect data on than production it's self if something is produced it's either going to be purchased and used by consumers purchased and used by the government exported or are we kept around as an investment for example if a company produces a big piece of factory equipment it's likely to be sold to another company that will use it to produce even more value in the economy now companies won't produce goods and services for consumption if nobody's going to consume them and they won't invest into New pieces of capital to help them make goods and services again if they have nobody to sell them to this is why during downturns economists become very concerned with consumer confidence and spending but that does not mean that consumption is automatically always the best economic outcome for everybody and yeah there's probably an argument here about the social and environmental issues caused by an overly consumption focused Society but we're not even talking about that we're talking about just the economic problems it can cause when consumption is focused so heavily at the top the foundation of Economics is solving the central economic problem which is that humans have unlimited desires but limited resources in which to fulfill those desires one of the most important questions that comes from this is who those limited resources get used on if a very wealthy person Hoards their wealth and redirects it exclusively into Investments that's normally seen as a bad thing but in reality those Investments can and often do create more wealth for everybody overall while creating just as many jobs and contributing just as much to Output as consumption consumption on the other hand is consumption once resources are allocated to be used in a private jet with a limited service life that's millions of dollars worth of resources that can't be used for improving the industrial capacity of the planet or just improving the lives of more regular consumers if we assume that instead of buying that plan that the billionaire invested into a factory that would still create jobs and it would still boost economic growth but now instead of literally burning wealth it would add more value to the global economy by taking inputs and turning them into more valuable outputs obviously this is an incredibly oversimplified example but it should still make sense it's great when money circulates through an economy and consumption is an easy and quick way to achieve this but long term it's better when both resources and money circulate through the economy improving output now and improving output in the future but even if wealthy people do invest their money the concentration of wealth can still cause problems especially when those Investments come in the form of global debts Global debt is now over 300 trillion US Dollars and last week's episode we explored how that's not necessarily a problem because all of this debt is owed to ourselves the joke being that we haven't figured out how to take out a loan from the Martians yet on a global level that's true Global debt is high but that's offset by the fact that for every dollar of debt that exists there is a receivables asset that's worth just as much but zoom in and it's not as simple there are a small number of people that own most of this debts about five percent of global debt worldwide is owned by governments and non-government organizations like the World Bank and the IMF the biggest debt holding government is China that not only holds on to other government treasuries as a way to keep foreign reserves but also does lending of its own for projects like its built-in Road initiative although it has slowed down on that significantly now either way the remaining 95 of global debt is owned directly or indirectly by households most of this is controlled by corporations like Banks and companies with large treasury Holdings but households own in those companies the availability of debt and getting access to loans has always been a very important part of the economy there are projects and technologies that will provide a lot of value to the economy but require a lot of capital to develop if the people that wanted to develop these projects don't have enough Capital themselves and they can't get a loan then they just won't happen and they won't go on to add value to the economy which is obviously a bad outcome this does not just apply to people that have a great business idea there are a lot of countries in the world that have enormous economic potential given their natural resource wealth or skilled labor force but aren't realizing their potential because they can't access enough Capital to develop their Industries to where they will be globally competitive if debt is created effectively and always put towards the most worthy projects this wouldn't be a problem for the global economy and it could actually be a good thing because the people giving the loans could assess the viability of a project before the global economy's limited resources are wasted on pursuing it if someone wanted to borrow a billion dollars to fund Research into renewable energy that generated electricity by having cats run around in hamster cages it's probably for the best that there would be an intermediary there to allocate the resources more effectively but sometimes that can be taken too far and good ideas don't get funded because lending decisions are made by a tiny group of people Ben Bernanke yes that Ben Bernanke won the Nobel Prize in economic Sciences last year for research he did on the availability of credit and its effects on the economy economics is a social science and as academic as economists try to make the issue of inequality there are always going to be differing opinions realistically a certain level of inequality is a great way to motivate participants in an economy to innovate and work harder for the promise of building a better life for themselves and in doing so creating a wealthier economy for everybody around them but too much is going to run counter to this goal and slow down projects and waste resources that could have been allocated to making the world a better place this was part two to last week's episode on global debt so as always we didn't want to repeat too much here but if you haven't watched that yet don't worry it doesn't matter what order you watch them in but these two episodes are definitely meant to be watched together thanks for watching mate bye

Channel: Economics Explained

Views: 595,328

Keywords: economics, economics explained, economy explained, global debt, global inequality, inequality, economic inequality, income inequality, wealth inequality

Id: BtVNO0H7yLU

Length: 14min 48sec (888 seconds)

Published: Sun Jul 16 2023