The Causes of Wealth Inequality (32): How Inheritance Not Only Perpetuates But Also Aggravates Inequality

Inherited wealth – the value of all assets (real estate + financial assets – financial liabilities) transmitted at death or through inter-vivos gifts – has become more important over time. Thomas Piketty estimates that

the annual inheritance flow was about 20%-25% of national income around 1900-1910. It then gradually fell to less than 10% in the 1920s-1930s, and to less than 5% in the 1950s. It has been rising regularly since then, with an acceleration of the trend during the past 20 years, and according to the latest data point (2008), it is now close to 15%. (source, source)

The drop between the 1920s and 1950s was caused by the Great Depression and WWII, two events that destroyed a lot of wealth.

Inheritance has always been an important cause of the persistence of wealth inequality. I guess that goes without saying. Capital is unevenly distributed in most populations, and will remain so to the extent that it can stay in the same families. It’s more interesting to look at the mechanisms through which inheritance could, under some circumstances, aggravate inequality. What are those circumstances? Here are some:

  1. Birth rates. People in developed countries have fewer children than they used to, and the children they have survive into adulthood at higher rates. As a result, those children inherit a larger part of their parents wealth. If numerous siblings no longer have to split their inheritance among themselves, the effect of inheritance on wealth inequality becomes stronger. Piketty as well has made this point in a recent talk.
  2. Higher house prices. Housing has become more expensive. This incites people to save more so as to allow their children to buy a house, which has a ripple effect across generations: the biggest savers are those who enjoyed an inheritance because if you’ve inherited a house or the money to buy one it’s easier to save than when you have to rent or pay a mortgage. And if you can save, your children will inherit. And so on.
  3. Inheritance taxes have been reduced in most countries.
  4. Slow economic growth in most developed countries means that the wealth produced in those countries is smaller compared to the wealth inherited.

Not all of these circumstances can be brought under human control. Perhaps an inheritance tax – the dreaded death tax – is a realistic option. I mean, if even Nozick could get behind that, you would need to be an outright fundamentalist about property rights  in order to oppose it.

For increases in the inheritance tax to happen, however, we will need to start thinking differently. When David Cameron, for instance, promised to raise the threshold for inheritance tax to £1m he did so because he believes that people who work hard, save money, and bequeath it to their offspring are somehow doing the noble thing. But while it may be noble to work hard and save, it’s far from noble to live off of an inheritance and its often huge returns. Hard work for one results in an unproductive lifestyle for its beneficiaries. If you want to promote work and productivity, by all means impose a death tax. And if you want the best for your children, it may be tempting to give them cash or other assets, but beware that this will be self-defeating beyond a certain amount.

More posts in this series are here.

Economic Human Rights (40): How Do Poor People Live?

The poor tend to become a number, a statistic, an undifferentiated mass, especially here on this blog. Talk of the “bottom billion” and the one-dollar-a-day people only makes things worse. Of course, it’s important to know the numbers, if only to see how well we are doing in the struggle against poverty. But to actually know what we have to do, we need to know what poverty actually means to poor people. How do these people live? Which problems do they face? Who are they? None of this can be captured in numbers or statistics. Pure quantitative analysis doesn’t help. We need qualitative stories here, and these stories will necessarily differentiate between groups of people because poverty means different things to different people.

Keeping in mind the caveat that poverty is “multidimensional” and that it varies with the circumstances, is it possible to give a more or less general impression of the “lives of the poor”? There’s an interesting attempt here. Banerjee and Duflo analyzed survey data from 13 countries in order to distill a picture of the way people live on less than one dollar a day, of the choices they have and the limits and challenges they face.

The countries are Cote d’Ivoire, Guatemala, India, Indonesia, Mexico, Nicaragua, Pakistan, Panama, Papua New Guinea, Peru, South Africa, Tanzania, and Timor Leste. Obviously, the lives of the poor are very different in these different countries, and vary even for different groups within each country. Still, some general information can be extracted:

  • The number of adults (i.e. those over 18) living in a family ranges from about 2.5 to about 5, with a median of about 3, which suggests a family structure where it is common for adults to live with people they are not conjugally related to (parents, siblings, uncles, cousins, etc.). When every penny counts, it helps to spread the fixed costs of living (like housing) over a larger number of people. Poverty has consequences for family structure, and vice versa.
  • Poor families have more children living with them. The fact that there are a large number of children in these families does not necessarily imply high levels of fertility, as families often have multiple adult women.
  • The poor of the world are very young on average. Older people tend to be richer simply because they have had more time to accumulate resources.
  • Food typically represents from 56 to 78 percent of consumption expenses among rural households, and 56 to 74 percent in urban areas.
  • The poor consume on average slightly less than 1400 calories a day. This is about half of what the Indian government recommends for a man with moderate activity, or a woman with heavy physical activity. As a result, health is definitely a reason for concern. Among the poor adults in Udaipur, the average “body mass index” (that is, weight in kilograms divided by the square of the height in meters) is 17.8. Sixty-five percent of poor adult men and 40 percent of adult women have a body mass index below 18.5, the standard cutoff for being underweight. Eating more would improve their BMI and their health, and yet they choose to spend relatively large amounts on entertainment. Which just shows that the poor have the same desires as anyone else and choose their priorities accordingly.
  • The poor see themselves as having a significant amount of choice, and choose not to exercise it in the direction of spending more on food. The typical poor household in Udaipur could spend up to 30 percent more on food than it actually does, just based on what it spends on alcohol, tobacco, and festivals. Indeed, in most of the surveys the share spent on food is about the same for the poor and the extremely poor, suggesting that the extremely poor do not feel the need to purchase more calories. This conclusion echoes an old finding in the literature on nutrition: Even the extremely poor do not seem to be as hungry for additional calories as one might expect.
  • Tap water and electricity are extremely rare among the poor.
  • Many poor households have multiple occupations. They may operate their own one-man business, sometimes more than one, but do so with almost no productive assets. They also have jobs as laborers, often in agriculture. And they cultivate a piece of land they own. Yet, agriculture is not the mainstay of most of these households. Where do they find non-agricultural work? They migrate. The businesses they operate are very small, lacking economies of scale and without employment opportunities for people outside the family. That’s a vicious circle because it means that few people can find a job and are forced to start petty businesses themselves. This circle makes economies of scale very difficult.
  • The poor tend not to become too specialized, which has its costs. As short-term migrants, they have little chance of learning their jobs better, ending up in a job that suits their specific talents or being promoted. Even the non-agricultural businesses that the poor operate typically require relatively little specific skills. The reason for this lack of specialization is probably risk spreading. If the weather is bad and crop yields are low, people can move to another occupation.
  • The poor don’t save a lot, unsurprisingly. Some of it has to do with inadequate access to credit and insurance markets. Banks and insurers are unwilling to give access to the poor and saving at home is hard to do; it’s unsafe and the presence of money at home increases the temptation to spend (that’s true for all of us by the way).
  • In 12 of the 13 countries in the sample, with the exception of Cote d’Ivoire, at least 50 percent of both boys and girls aged 7 to 12 in extremely poor households are in school. Schooling doesn’t take a large bite from the family budget of the poor because children in poor households typically attend public schools or other schools that do not charge a fee.

Religion and Human Rights (25): The Eurabia Falacy

If immigration isn’t opposed because of bogus economic reasons or bogus law and order reasons, then it’s opposed on the grounds of equally bogus cultural reasons. Excessive immigration is said to fundamentally change the culture of the destination region: Europe will turn into Eurabia, just like the Protestant U.S. were once believed to be on the verge of a Catholic takeover following Irish and Southern European immigration.

But even limited immigration will not save us given the supposed “high fertility rates” of immigrants:

That Muslims are grinding out babies ready to take over Europe is an outdated canard. The Eurabia authors worry about declining European fertility, but in fact the Muslim decline is much sharper. In 1970, women in Algeria and Tunisia averaged about seven children each. Now, according to the CIA World Factbook, they average fewer than 1.8. The French rate is almost exactly two. Parisian demographers Youssef Courbage and Emmanuel Todd demonstrate in their 2007 book “Le Rendez-vous des Civilisations” that after most men in a country become literate, eventually a majority of women becomes literate, and then fertility plunges. This demographic transition has now happened in most Muslim states. At last count Algerian women living in France averaged an estimated 2.57 children, or only slightly above the French rate. Moreover, the fertility rate of north African women in France has been falling since 1981. Eurabia is not a demographic prospect. …

The other problem with forecasting numbers of European Muslims in 2100 is the presumption that sixth-generation European Muslims will still be a foreign body here: Islam as a bacillus that even secular former Muslims carry around, forever dangerous. This ignores the transition affecting many nominal Muslims in France. …

Although here and there Muslims have made France a little more north African or Islamic, the influence seems to be more the other way: Muslim immigrants are being infected by Frenchness. (source)

Remember also that people in the 1960s were saying that the higher birthrates among Catholics would mean a swift “Catholic takeover” of Europe and the US:

In the United States the lower birth rate of the Anglo-Saxons has lessened their economic and political power; and the higher birth rate of Roman Catholic families suggest that by the year 2000 the Roman Catholic Church will be the dominant force in national as well as in municipal or state governments. A similar process is helping restore Catholicism in France, Switzerland, and Germany; the lands of Voltaire, Calvin, and Luther may soon return to the papal fold. (source)

Now, of course I’m not insensitive to the plight of culture. A national or regional culture is an important source of identity and wellbeing, and I believe the whole world gains when even a small culture is allowed to survive. I have an older post here lambasting the demographic aggression of China in Tibet. My point is not that immigration can never be a cultural problem, but that the size of the problem is systematically inflated, possibly as a cover for outright xenophobia. In this respect, the “problem” resembles the two other “problems” caused by immigration: more poverty and more crime.

Gender Discrimination (22): Gendercide

The Economist has a front page story this week on “gendercide”, the millions of girls missing in the world, especially in India and China. Perhaps as many as 100 million girls have disappeared in the last decades because of

  • selective abortions encouraged by new medical technology (ultrasounds and fertility technology)
  • childhood neglect of girls (nutritional, educational neglect and neglect in health care)
  • prejudice, preference for male offspring and
  • population policies such as the “one child policy” in China.

Interestingly, the skewed sex ratios that result from gendercide (in some areas of China, 130 boys are being born for every 100 girls) are coming back to haunt the men that are responsible (although many mothers probably aren’t without fault either). Because of their relative scarcity, women have found an unlikely source of power. They have a competitive advantage in the marriage market, and can demand more in marriage negotiations, or at least be more selective when choosing a mate.

Causes

In my view, the word “gendercide” is somewhat overwrought because, contrary to genocide, the word that inspired the neologism of gendercide, there’s no centralized plan to exterminate women. Femicide would be a better term since it’s obviously only one of two genders that’s targeted, but it still sounds like a government organized campaign of extermination. Gendercide is the result of a combination of causes:

  • individual choices based on
  • plain prejudice against girls
  • cultural and legal traditions, or
  • economic incentives that have been formed by historical prejudice.

Perhaps girls still need a dowry, and poor parents may find it difficult to save enough and hence prefer a boy. Or perhaps they prefer a boy because the law of their country or tribe – inspired by age-old prejudice – says that only boys can inherit land or the family business. Again, the parents may prefer a boy for this reason, not because they dislike girls. Or perhaps tradition holds that girls marry off into their husbands families, and parents simply want to be sure to have someone in their home to care for them when they are old (“raising a daughter is like watering your neighbor’s garden”, is a Hindu saying).

Consequences

The consequences of gendercide are mixed. It’s obviously horrible to the girls that are aborted or neglected to death. But, as in the “boomerang” case cited above, gendercide may ultimately empower women. However, the skewed sex ratios also spell trouble: the presence of armies of men who can’t find wives and have children (“bare branches” or “guanggun” they are called in China) may result in more sexual violence, depression, suicide, human trafficking etc. It’s estimated that in 10 years time, one in five young Chinese men won’t be able to find a bride. On the other hand, a shortage of women will encourage immigration, and immigration may help some women escape poverty, and perhaps will also result in more intercultural tolerance.

Solutions

Economic development won’t stop it. In China and India, the regions with the worst sex ratios are wealthy ones, with educated populations. Even in some population strata in the U.S. sex ratios are skewed. When people escape poverty, fertility rates drop, and when families have fewer children, the need to select for sex only becomes more important in order to realize their son preference. In poor societies with high fertility rates, families are almost destined to have a boy at some point. Female children will suffer relative neglect and may die more often and more rapidly (skewing the sex ratios), but selective abortions aren’t much of a risk: families don’t really feel the need to limit the number of children (on the contrary often, because children are a workforce), and ultrasound technology for sex determination of fetuses isn’t as readily available as in rich countries or regions. When families want few children – as they do in more developed regions – or are forced by the government to limit their number of children (as in China), they will abort female fetuses in pursuit of a son.

Ultimately, only a cultural change will help. The son preference has to die out. Education probably will help, as it always does. Ending pernicious policies such as the one child policy will also help, but then overpopulation hysterics will have to be dealt with. This policy didn’t help stop population growth anyway. Other East Asian countries reduced population pressure as much as China without brutal policies.

Old customs and discriminating laws should also be abolished. Think of the dowry system, or inheritance rights. Stigmatizing abortion, especially sex selective abortion, will also help.

Gender Discrimination (18): Missing Women and Gendercide in China and India

The word gendercide describes the results of sex-selective abortions that take place on a massive scale in some countries, particularly India and China. These abortions have led to the “disappearance” of perhaps more than 100 million girls and women (or about 1 million a year). Evidence of this can be found in the abnormal sex-ratios in both countries:

The sex ratio at birth was only 893 female births per 1,000 male births in China and India and 885 in South Korea (as compared to 980 for Kenya and South Africa and 952 for Cambodia and Mexico). … In India, the juvenile sex ratio (often defined as the sex ratio among children aged 0-6 years) has been falling … over the last 3-4 decades – from 964 females per 1,000 males in 1971 to 927 in 2001. … In China, too, the problem has become more acute over time. A study based on a survey of over 5 million children in China found that among children born between 1985 and 1989, there were 926 female births for 1,000 male births. But, among children born between 2000 and 2004, the number had fallen to 806. Thus, in both countries, the situation appears to be worsening. (source)

The main reason for these gendercides seems to be a strong cultural preference for male offspring. This makes it difficult to do something about it. Cultures change very slowly. Outlawing sex-selective abortions and prenatal ultrasounds doesn’t seem to work very well. It has been tried in both China and India, but the sex-ratios don’t seem to improve much.

It might seem that improving literacy and schooling among women might reduce the parental preference for sons. However, here, too, the evidence is not encouraging. There is disturbing evidence from India which points to a worsening of the juvenile sex ratio with increased female education and literacy. Why the perverse effect? A possible explanation has to do with the negative effect of female literacy on fertility. Educated women tend to have fewer children than less-educated women, and, in the context of a strong son-preference culture, the lower levels of fertility lead to greater pressure on couples to have boys instead of girls. This relationship between fertility decline and lower juvenile sex ratios has also been observed in South Korea and China. (source)

The only successful counter-measures are those that tackle gender discrimination at the root. There will no longer be parental preference for male children when man and women are considered equal human beings.

It is important to recognize that one (although not the only) reason for son preference is that, historically, inheritance laws in both countries have favored sons over daughters. While both countries now do not restrict women’s access to parental property, customary practices which consider sons the natural heirs of land are still prevalent in much of rural China and India. India only recently (in 2004) removed the discriminatory provisions of earlier legislation and allowed parents to bequeath their property to their daughters.

What is needed in both countries to combat the scourge of low juvenile sex ratios is a package of interventions that includes stricter enforcement of equal inheritance laws, economic incentives for parents to have daughters and educate them, and an educational curriculum at the primary and middle school levels that highlights the importance of equal treatment of boys and girls in the family. Even with such a package, it will take years for attitudes to change and for the practice of prenatal sex selection and neglect of the girl child to end. (source)

The Causes of Poverty (23): Better Healthcare = More People = More Poverty?

Investment in better healthcare results in lower mortality rates (especially child mortality rates) and larger populations. If more people have to live from an equal amount of resources, every individual has less resources. Hence there will be more poverty.

This reasoning is typical of Malthusians and others who fret about overpopulation. They forget, however, that high mortality rates and inefficient insufficient healthcare lead to high fertility rates because people decide to have many children in order to offset the risk of mortality. Better healthcare brings down fertility rates because it reduces this risk, but also because it leads to less poverty and hence eliminates another reason to have a lot of children: extra labor force.

Read more about this here.

The Causes of Poverty (19): Does Better Healthcare Lead to More Poverty?

This may look like a stupid – or, more kindly, counterintuitive – question. The answer is obviously “no”. At least when we focus on the level of the individual, better healthcare seems like the best way out of poverty rather than a cause of more poverty. With better health comes better education, better and more productive work, and hence less poverty. Even a society as a whole seems better off if less of its members are unhealthy. Overall productivity and wealth increase when there is less disease. Healthy people produce more, innovate more and contribute in other ways to social wealth.

However, many people believe – wrongly in my view – that the question should be answered in the affirmative, especially when the topic is development aid. When a country drastically improves its healthcare system – thanks to development aid for instance – life expectancy rates will go up and child mortality rates will go down. This results in population growth which often outpaces GDP growth (for example because scarce development resources have been targeted at healthcare rather than GDP). GDP per capita will therefore decrease, which means increasing poverty levels and perhaps even famine.

This type of reasoning is sometimes used to justify limits on development aid in the field of healthcare. However, it’s plainly wrong. Better healthcare doesn’t lead to high population growth, and this non-existing population growth therefore cannot result in more poverty.

Now, why doesn’t better healthcare lead to population growth? With just a few exceptions, it’s the poor countries of the world that have high fertility rates, and when countries become richer, these rates drop dramatically. Poverty leads to high fertility rates for a number of reasons (see also here), but the most important one is that people tend to have more children to offset the risk of high infant mortality rates that are typical for poor countries.

Countries with high infant mortality rates also have high population growth (contrary to intuition). Some other reasons why high fertility rates are correlated with poverty:

  • More developed countries move away from agriculture and towards urban and industrialized economies, reducing the need for children as farmworkers.
  • For the same reason, women become more active in the economy, increasing the cost (in money and time) of raising children.
  • Also for the same reason, contraceptives and family planning become more common.

In this case, it seems that our initial intuitions are correct.