Showing posts with label wealth. Show all posts
Showing posts with label wealth. Show all posts

Wednesday, December 15, 2021

Inheritance: the major life event no politician wants to mention

When I was growing up, my family didn’t have much. We lived rent-free in a succession of down-at-heel manses (the Salvos called them “quarters”), but my father’s stipend was a small one on which to support four kids.

Mum worried about where my parents would live after they retired but, with much scrimping and saving (including making my sisters hand over almost all their wages), they built and paid off a small cottage at Lake Macquarie, near Newcastle.

After my father died, Mum spent many impatient years in God’s waiting room, longing to be “promoted to Glory” and thus reunited with my Dad.

That was in 2004 but, though all she had was the cottage and a thousand or two in the bank, that was enough for the four of us to receive one or two hundred thousand each. By then, we were middle-aged and well established. It was nice to add it to the pile, but we didn’t desperately need it.

More people are receiving significant inheritances these days. They’re getting bigger and will get bigger still.

We worry that houses are becoming unaffordable, but the other side of ever-rising house prices is that inheritance has become an important event in most people’s lives. Many people look forward to it, and family disputes or unhappiness over wills is not uncommon.

But here’s a funny thing. When was the last time you heard a politician talking about inheritances? You didn’t. They never do. I’m sure they think about their own inheritance, but they never want to mention yours or anyone else’s.

In the 1970s, Australia became one of the few rich countries to abolish death duties (state and federal). People were so happy to see the end of them that death duties have become one of the bogeymen of federal politics.

Want to start a scare campaign? Spread a rumour that the other side has a secret plan to reintroduce death duties. Want to oppose limits on share franking credits? Claim it’s a form of death duties.

This is why, compared with other countries, we have little information – and even less reliable figures – on the size and dispersion of inheritances. The pollies fear that if they let the bureau of statistics ask people questions about their wealth, their opponents would jump to conclusions.

This explains why last week’s report from the Productivity Commission was “the first comprehensive research report on wealth transfers” and was initiated by the commission, not requested by the government.

The report explains that rising house prices are just the main reason inheritances are getting bigger. Another is that, with superannuation having been compulsory for about 30 years, more people are dying with unspent super balances. And, of course, family sizes are getting smaller.

The report finds that each generation has been wealthier than the previous one, though Baby Boomers have done particularly well. It found that $120 billion was transferred in 2018 – 90 per cent as inheritances and 10 per cent as earlier gifts – which was more than double that in 2002.

The average inheritance, we’re told, was $125,000. But that included a few large inheritances plus many much smaller ones. The average inheritance received by the wealthiest 20 per cent of recipients was $121,000, and by the poorest 20 per cent was about $35,000. Or so we’re told.

Not surprisingly, the children of rich parents received much bigger inheritances than the children of poor parents. Nor is it very surprising that the children of rich parents tend also to be rich, while the children of poor parents tend also to be poor.

But this may surprise: if you switch from focusing on absolute dollars to looking at relative size, you find that the smaller inheritances received by people without much wealth increase that wealth by a much higher percentage than the larger inheritances increase the wealth of already-rich recipients. The same thing can be seen in other countries’ figures for wealth transfers.

So, to a small extent, the growing prevalence of inheritance is reducing the gap between rich and poor. And, as the report’s authors stress, inheritance isn’t the main reason the children of the rich are also rich and the children of the poor also poor.

No, monetary inheritances explain only about a third. The rest is explained by “all the other things parents give their children – education, networks, values and other opportunities”. And remember, IQ is mainly genetic. Luck is another factor.

Did you notice how little of the wealth transfers gifts accounted for? The authors say they couldn’t find strong evidence of larger transfers from the Bank of Mum and Dad “despite popular belief”.

Sorry, not convinced. By their own admission, the data they’ve been using are “somewhat limited”. My guess is that more people receive inheritances than their figures show. The size of inherited amounts seems very low. As for parents having to cough up to help their kids buy a home, it’s become a big deal relatively recently.

So if the statisticians can’t find much evidence of it, that’s probably because they haven’t been asking the right questions.

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Monday, April 5, 2021

Wealth and happiness don't give meaning to our lives

Easter Monday’s a good a time to reflect on what we’re doing with our lives and why we’re doing it. I’ve been banging on about all things economic for more than 40 years, but if I’ve left you with the impression economics and economic growth is the be-all and end-all, let me apologise for misleading you.

The more I’ve learnt about economics, the more aware I’ve become of its limitations. Economics is the study of production and consumption, getting and spending. But as someone connected with Easter – not the Easter Bunny – once said, there’s more to life than bread alone.

Unfortunately, the conventional way of thinking about the economy has pretty much taken for granted the natural environment in which our economic activity occurs, and the use of natural resources and ecosystem services on which that activity depends.

We’re learning the hard way that this insouciance can’t continue. We’re damaging our environment in ways that can’t continue. I keep writing about the need for economic growth because, as the economy is presently organised, it’s pretty much the only way to provide sufficient jobs for our growing population.

But that just means we need to redefine economic growth to mean getting better, not bigger (and probably should do more to limit world population growth).

Conventional economics focuses on the material aspects of life: producing and consuming goods and services; buying and selling property. There’s no denying the inescapable importance of the material in our lives – “bread” – but conventional economics encourages our obsession with material accumulation at the expense of other important dimensions of our lives.

Some aspects of economic activity can damage our physical health – smoking, drinking, burning dirty fossil fuels, even eating fast foods – but we need to become more aware of the way the fast pace and competitive pressures of modern life also threaten our mental health. Too many people – particularly the young – suffer chronic stress, anxiety, depression and suicidal thoughts.

Too much emphasis on material success can also come at the expense of the social aspect of our lives – our relationships with family, friends and neighbours – which, when we’re thinking straight, we realise give us far more satisfaction than any new car or pay rise. Economists often advocate policies that will increase the efficiency of our use of resources without giving a moment’s thought to their effect on family life.

Nor should we allow our pursuit of material affluence to come at the expense of the moral and spiritual aspects of lives. I’ve just read social commentator Hugh Mackay’s book, Beyond Belief, which has done so much to clarify my thinking about Christianity, religion and spirituality that I’m sorry I didn’t get to it earlier.

Yet another thing that mars conventional economic thinking is its emphasis on the individual as opposed to the community, it’s effective sanctification of self-interest as the economy’s only relevant driving force, and its obsession with competition and neglect of the benefits of co-operation.

Mackay says that, if you ignore the doctrines and dogmas of the church – all the things you’re required to believe in – and focus on the teachings of Jesus, the first thing to strike you is that none of it was about the pursuit of personal happiness.

“The satisfactions offered or implied are all, at best, by-products of the good life,” he says. “The emphasis is on serving others and responding to their needs in the spirit of loving-kindness, the strong implication being that the pursuit of self-serving goals, like wealth or status, will be counterproductive.”

Jesus’ teachings “were all about how best to live: the consistent emphasis was on loving action, not belief. According to Jesus, the life of virtue – the life of goodness – is powered by faith in something greater than ourselves (love, actually), not by dogma.”

Mackay says we should “avoid the deadly trap of regarding faith as a pathway to personal happiness. The idea that you are entitled to happiness, or that the pursuit of personal happiness is a suitable goal for your life, is seriously misguided.

“If we know anything, we know that’s a fruitless, pointless quest – doomed to disappoint – because . . . our deepest satisfactions come from a sense of meaning in our lives, not from experiencing any particular emotional state like happiness or contentment.”

The self-absorbed mind’s entire focus is individualistic. It’s “the polar opposite of the moral mind. Its orientation is towards the self, not others; its currency is competition, not cooperation; it’s all about getting, not giving. Its goal is the feel-good achievement of personal gratification, however that might be achieved and regardless of any impact it might have on the wellbeing of ‘losers’.”

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Saturday, January 26, 2019

You'd be surprised what's propping up our living standard

It’s the last lazy long weekend before the year really gets started, making it a good time to ponder a question that’s trickier than it seems: where has our wealth come from?

The question comes from a reader.

“Australia has been without a recession for 25 or more years, the economy seems booming to me, just by looking around: employment, housing prices, explosive building in major capitals, etc. Where is the wealth coming from? Mining? Other exports? Because the resources have to come from somewhere,” he writes.

That’s the first thing he’s got right: it’s not money that matters (the central bank can create as much of that stuff as it sees fit) it’s what money is used to buy: access to “real resources” – which economists summarise as land (including minerals and other raw materials), labour and (physical) capital.

But here’s the first surprise: of those three, when you trace it right back, probably the most important resource is labour – all the work we do.

The first complication, however, is the word “wealth”, which can mean different things. It’s best used to refer to the value of the community’s assets: its housing, other land and works of art, the equipment, structures and intellectual property owned by businesses (part of which is represented by capitalised value of shares on the stock exchange), plus publicly owned infrastructure (railways, roads, bridges and so forth) and structures.

To get net wealth you subtract any debts or other liabilities acquired in the process of amassing the wealth. In the case of a national economy, the debts we owe each other cancel out, leaving what we owe to foreigners. (According to our national balance sheet, as calculated by the Australian Bureau of Statistics, at June last year our assets totalled $15.4 trillion, less net liabilities to the rest of the world of $3.5 trillion.)

But often the word wealth is used to refer to our annual income, the total value of goods and services produced in the market during a year, as measured by gross domestic product (which in the year to June was $1.8 trillion).

The people in an economy generate income by applying their labour to land and physical capital, to produce myriad goods and services. Most of these they sell to each other, but some of which they sell to foreigners. Why? So they can buy other countries’ exports of goods and services.

Only about 20 per cent of our income comes from selling stuff to foreigners and only 20 per cent or so of the stuff we buy comes from foreigners. This exchange leaves us better off when we sell the stuff we’re better at producing than they are, and buy the stuff they’re better at than we are.

Much of what we sell to foreigners is minerals and energy we pull from the ground and food and fibres we grow in the ground. So it’s true that a fair bit of our wealth is explained by what economists call our “natural endowment”, though it’s also true that we’re much more skilled at doing the mining and farming than most other countries are.

Speaking of skills, the more skilled our workers are – the better educated and trained – the greater our income and wealth. Economists call this “human capital” – and it’s worth big bucks to us.

How do the people in an economy add a bit more to their wealth each year? Mainly by saving some of their income rather than consuming it all. We save not just through bank accounts, but by slowly paying off our mortgages and putting 9.5 per cent of our wages into superannuation.

It’s the role of the financial sector to lend our savings to people wanting to invest in the assets we count as wealth: homes, business structures and equipment and public infrastructure. So if most of our annual income comes from wages, most of our savings come from wage income and our savings finance much of the investment in additional assets.

But because our natural endowment and human capital give us more investment opportunities that can be financed from our savings, we long have called on the savings of foreigners to allow us to invest more in new productive assets each year than we could without their participation.

Some of the foreigners’ savings come as “equity investment” – their ownership of Australian businesses and a bit of our real estate – but much of it is just borrowed. These days, however, our companies’ (and super funds’) ownership of businesses or shares in businesses in other countries is worth roughly as much as foreigners’ equity investments in Oz, meaning all our net liability to the rest of the world is debt.

Naturally, the foreigners have to be rewarded for the savings they’ve sunk into our economy. We pay them about $60 billion a year in interest and dividends, on top of the interest and dividends they pay us.

The main thing we get in return for this foreign investment in our economy is more jobs (and thus wage income) than we’d otherwise have, plus the taxes the foreigners pay.

People worry we can’t go on forever getting wealthy by digging up our minerals and flogging them off to foreigners. It’s true we may one day run out of stuff to sell, but our reserves – proved and yet to be proved – are so huge that day is maybe a century away (and the world will have stopped buying our coal long before we run out).

A bigger worry is the damage we’re doing to our natural environment in the meantime, which should be counted as reducing our wealth, but isn’t.

But mining activity accounts for a smaller part of our high standard of living than most people imagine – only about 8 per cent of our annual income.

Most of our prosperity – our wealth, if you like – derives from the skill, enterprise and technology-enhanced hard work of our people.
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