Lies, Damned Lies and . . .. What was the other kind?

top-1-percentI don’t often go searching for words of economic wisdom in the pages of The Washington Post, but the headline grabbed my attention, and I wondered if, just maybe, someone over there was starting to get f****** real’, as a young economist eloquently instructed someone on NZ television the other day.

Admittedly the headline was a little equivocal, but wasn’t it at least a step in the right direction? ‘Why some billionaires are bad for growth’, it said, before adding, ‘and others aren’t’. Well, probably the best thing that can be said about economists is that they like to have a dollar each way on most issues – though in this particular case, the writer, according to her Forbes bio, worked as a pajama model in China for a few years, so that could also be considered a plus.

The sad fact about people in that line of work (economics as well as pajama modelling) is that, like most of us, they have to earn a living, and, like the proverbial piper, they tend to play the tune called by whoever is paying them. English economist Tim Harford is on record as saying, ‘People today don’t become economists to make the world a better place’, if they ever did.

Anyway, in this article, Ana Swanson is reporting on a new study by Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University that reputedly resolves the debate about whether the mega-rich are beneficial for the world economy, or, as some believe, an unmitigated disaster.

Apparently these two academic pipers found that wealth inequality is actually growing over time – confirming our own empirical observations. They also found that their measure of wealth inequality corresponded with a negative effect on economic growth. However, acknowledging, one imagines, the sensibilities of their paymasters, the pair moved on to examine what they considered a crucial difference in the way the mega-rich acquired their mega-riches, namely, whether as a result of political connections, or their own entrepreneurial talents with a little help from Lady Luck.

inequality crtnWell, at least Ms Swanson recognises the potential difficulty here – and admits that the researchers used a rather narrow definition of ‘political connections’. Nevertheless, building on this flimsy premise, they went on to conclude that “The negative effects of wealth inequality are largely being driven by politically connected wealth inequality.” The researchers suggest that when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest. Amen to that, say I!

As far as I could understand the argument, the two economists were suggesting that extreme wealth acquired as a result of ‘political connections’ exerted an adverse effect on a country’s economy and slowed growth compared with squeaky-clean countries where the rich got rich by their own talent and efforts.

For example, they said, politically connected business elites can charge consumers higher prices for services, control access to bank loans and other funding, and prevent outsiders from starting competing businesses. “One of the things that shocked us is that once the billionaires had a significant amount of wealth, they would often take steps to try to limit the amount of competition,” Bagchi said. But only in corrupt Third World states, you understand.

Well, I’m not an economist, and haven’t been anywhere near Harvard Business School or any other MBA-dispensing institution of higher learning, but it does seem to me that there are several flaws in this case:

Dark_MoneyFirst, political influence comes in many forms, of which nepotism, family connections, such as exist, say, in Saudi Arabia, are only the most obvious and crude. According to Atlantic.com, Corporations [in the United States] now spend about $2.6 billion a year on reported lobbying expenditures. Today, the biggest companies have upwards of 100 lobbyists representing them, allowing them to be everywhere, all the time. For every dollar spent on lobbying by labor unions and public-interest groups together, large corporations and their associations now spend $34. Of the 100 organizations that spend the most on lobbying, 95 consistently represent business.”

Then there is so-called “Dark Money”, “a term for funds given to non-profit organizations that can receive unlimited donations from corporations, individuals, and unions, and spend funds to influence elections, but are not required to disclose their donors. . . . According to the Center for Responsive Politics, ‘spending by organizations that do not disclose their donors has increased from less than $5.2 million in 2006 to well over $300 million in the 2012 presidential cycle and more than $174 million in the 2014 midterms.’”

Bagchi and Svejnar produced a table purporting to show the level of ‘political connection’ in the wealth acquisition of billionaires in twenty-three countries. Perhaps unsurprisingly, Columbia came out on top of the list with a rating of 84%, followed by India. Indonesia, Korea, Italy, Mexico, Saudi Arabia, Spain and Brazil also featured in the top ten. I have to tell you I was a little shocked, though, to see our trans-Tasman cousins Australia highly placed at Number Three! However, shock turned to disbelief when I found the USA and the United Kingdom with a 0% rating for political involvement in wealth creation.

Child poverty protestThe article didn’t append comparative figures for economic growth of the 23 countries, so I checked them myself – and found that, contrary to what the researchers seemed to be arguing, growth in the top (worst) five averaged 4.6% in 2014, while the second five only managed 1.3%. The USA and the UK did achieve growth of 2.4 and 2.6% respectively – but it’s hard to see any clear evidence to support the conclusion that “our” billionaires are good for the economy and “theirs” aren’t.

This would seem to be borne out by the fact that the government of my own beloved homeland, New Zealand is doing its best to encourage wealthy Asians to ‘invest’ in the country by offering fast track residence visas. According to the government website:

“The Investor Visa (Investor 2 Category) is an option if you plan to invest a minimum of NZ$1.5 million over a four year period. If you’re looking to invest $NZ10 million or more then the Investor Plus Visa (Investor 1 Category) could be a better option.”

For foreign billionaires who may not see residence in New Zealand as an attractive option, a new organisation has been established, the New Zealand Super Yacht Group (NZSG) whose stated aim is to provide facilities encouraging the owners of super-yachts to call in and spend big. Additional incentives apparently include tax exemptions and the right to tie up in the marina for up to two years. One that availed itself of the opportunity recently was the 119-metre ‘A’ owned by the Russian couple Andrev and Aleksandra Melnichenko, reportedly purchased in 2008 for $US 300 million.

The mega-yacht 'A'

The mega-yacht ‘A’

Sad to say, the mega-riches of these privileged ‘investors’ and ‘visitors’ don’t seem to be trickling down to the needier levels of New Zealand’s society. According to a recent UNICEF report “as many as 28% of New Zealand children live in poverty.” House prices in the main cities, especially Auckland, are rising astronomically, primarily as a result of speculative ‘investment’ by wealthy Asians. Just this week The New Zealand Herald reported that a house in a very modest Auckland suburb, purchased for $NZ 291,500 in 2012, had been sold in May this year for $475,000, and subsequently flicked over twice with the price reaching $559,000. Last week it was sold again, but the real estate agents coyly declined to disclose the price.

In terms of immigration to New Zealand, there seems to be little sympathy for less affluent would-be migrants seeking refuge from zones of conflict such as the Middle East. A recent article in the same newspaper declared, “New Zealand is a heartless country and a bad global citizen. There’s really no other conclusion to be drawn from the pitifully low number of refugees allowed into this country.”

So, the big question is, can we believe The Washington Post, Ms Ana Swanson, and those two piping economists when they tell us that letting these super-rich hold on to and increase their mega-millions is actually good for you and me? According to Wikipedia, the term ‘trickle-down’ applied to an economic theory of wealth distribution was coined by the American comedian Will Rogers during the Great Depression – and we can assume that Mr Rogers had his tongue firmly in his cheek at the time. US President Ronald Reagan and economist Milton Friedman coined a new phrase, “supply-side” to lend credibility to the theory in the 1980s. JK Galbraith cynically referred to it as the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.

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4 thoughts on “Lies, Damned Lies and . . .. What was the other kind?

  1. A SIDE-NOTE:
    Does this report have any validity:
    “In Turkey, President Recep Tayyip Erdogan has brought the country to the brink of civil war in an effort to nullify a strong showing at the ballot box by the pro-Kurdish HDP. In the process, he’s managed to put the lira under more pressure than it might already be under and indeed, the currency is putting in new lows against the dollar on almost daily basis.”
    Source: http://davidstockmanscontracorner.com/three-ems-crumbling-brazil-turkey-and-malaysia/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Saturday+9+AM

    Please share what you can. Thanks.

    • I read that article. no validity whatsoever, in my opinion – and I’m living here. The topic is on my to-do list for a post asap. Briefly, I and a good many Turks believe Erdoğan is the best thing that’s happened to Turkey since Atatürk. Certainly he has faced pretty fierce opposition since he was Mayor of Istanbul – which has never turned into effective opposition at election time. When I came to Turkey in 1995, you couldn’t even say the word ‘Kurdish’ in Turkey. Now there are Kurdish language TV channels and open debate on the issue. The fact that HDP managed to pass the 10% threshold for parliamentary representation is testament to the fairness of the last election. Many non-Kurds voted for HDP because of the general ineffectiveness of the two main opposition parties. As for the Turkish Lira, I’m inclined to believe that international financiers are using that method to put pressure on the local electorate to oppose AKP – as they did with Morsi in Egypt. Anyway, I appreciate your interest.

      • I was suspicious because a blitz of media reports portray instability in Turkey and a crumbling Tayyip Erdogan government. You will find recent news reports from Reuters.
        Happy writing; Ciao!

  2. Pingback: Lies, Damned Lies and Statistics (Part 2) | Turkey File

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