The Wealth Spread Index - The Fairness Bourse

A friend of mine and I went out for drinks recently. While we were speaking about politics, economics and how to solve the future... he gave me a great idea for a use for something I've been messing around with.


The History

Wealth Distribution - how we compare

Some short time ago I was doing some research on wealth distribution. I wanted to come up with a way of comparing countries directly.

Recently, I heard a talk from Paul Krugman, a Professor of Economics from Princeton University. In fact, I've written on that talk before.

What had stuck in my head from Krugman's talk was the issue of "wealth spread" and "fairness" within an economy - we should have a way of comparing different economies directly.

More specifically - while I "know" from common understanding that the US economy has become much less evenly spread over the last couple of decades, and many of the Scandinavian countries have maintained their even equality of wealth - I wanted to be able to calculate the situation more accurately; to clearly measure and compare the different economies; possibly work out where Australia is on that scale, right now.

I looked around and couldn't find any consensus on the issue - no standard way of measuring what I wanted to measure.

After some hunting around and a little experimenting I came up with with a basic model/system of my own.

Now at that point I had no idea what to do with it. It was interesting to me and I liked to see the results - but I couldn't see what the practical upshot of it could ever be to anyone.

And this is where my drinks with Simon come into it. He gave me the idea of what to do with it while we were talking that night.

Why do we so easily measure a country's health and value by:

• GDP Growth
• Interest Rates
• Inflation
• Unemployment Rates
• Stock market values
  

Why can't we talk about "Spread of Wealth", "Long term vs Short Term Unemployment", "Ease of Basic Living"... the simple reason, I would hypothesise, is because GDP, Interest Rates, Inflation and Unemployment all have single numbers attached to them - and the Stock market has the "bourse" value (e.g. ASX200, FTSE, Nasdaq etc.)

All the other issues (Spread of Wealth etc.) have no single number that can be associated with them - and therefore can't be summarised as easily.

One example in support of this theory is the topic of "housing afford-ability". Until recently, in Australia, the issue had never been discussed widely. In order to have the conversation about it - in order to make it news worthy - we needed a specific housing afford-ability index, so that we could compare States with each other, record whether it's gone up or down and by how much... and generally discuss the issues using simple concepts. That's what we did. We made a "housing afford-ability index".

And so... the idea that came out of my discussion with Simon is this:

If we want to have a discussion about "fairness" and the "spread of wealth" in our economy, then we need a fairness bourse... a wealth spread index; a single number that can be compared between economies and over time within an economy.

So - let's make one.


The overview

The original ideas

Using data easily available, I wanted to find a value that would vary within a known range (say 0 to 100) and that would represent the level of inequality within an economy.

So allowing for the idea that the "worst" possible economy is one in which the bottom 60% of the population own nothing at all and the "best" economy is one in which everyone owns a completely equal share of the wealth - it was fairly simple to come up with a reasonably basic way of scoring economies within the given range.

With a tip of the hat to Ghandi's/Churchill's/Truman's quote (see many confused references to this quote across the internet - Florida Today, Ask MetaFilter, Memorable Quotations, Askville to list a few):

"A nation's greatness is measured by how it treats its weakest members"

the formula I used gives more weight to the fairness imparted on the bottom feeders than the big end of town. So while an economy could improve its rating by decreasing the amount of wealth that is "soaked up" by the richest people, it will improve its index value far more quickly by improving the lot of its worst off inhabitants.

Here are the initial results:

All of the initial results were between the values 57.5 (Turkey) and 77 (Slovakia) (represented by the red bars).

These values can, alternatively, be viewed by stretching them out between 0 and 100 so that the lowest scoring economy always receives a score of 0 and the highest 100 (represented by the blue bars).

Some notable scores amongst the list are:

• America - 23.08
• 2nd worst score
• New Zealand - 38.46
• I was surprised by how low NZ scored
• United Kingdom - 38.46
  
• Australia - 53.85
• France - 64.10
  
• Sweden - 87.18
  
• Japan & The Czech Republic - 94.44
• 2nd highest score
  

On a comparative basis - I think this system of scoring shows some merit and represents a step forward in finding a single value to represent the spread of wealth within an economy.

However both systems show some limitations.

The first version, with values between 57.5 and 77, show little absolute variance and gives the mistaken impression that there isn't much difference between these economies in the terms being measured.

The second version with values between 0 and 100, tries to deal with that limitation, but suffers from, or emphasises, a few more:

• it stretches out values at the bottom of the range and compresses values at the top
• it could make countries in the lower values appear as if they were improving or slipping faster than they are
• it could mask improvements/drops in countries with higher values by making the changes seem smaller than they are
  
• one country slipping at the bottom or the top could make the others appear as if they were improving when they weren't
• one country improving at the bottom or the top could make all the others appear as if they were slipping when they weren't

The final solution

It soon became clear why these systems each had these particular problems.

They treated "100" as an attainable goal, as if the "perfectly fair" society was something reachable.

In order to make the scale work like a normal bourse, the "perfect" solution needed to remain something unattainable. Something that everyone aims for, but no one can ever reach - stretching into infinity.

Taking this into account allowed me to calculate these values:

The final results varied from 5.0 up to 22.23 and will increase in rate of growth (approaching infinity) as the economies being measured approach "perfect".

Some notable scores amongst the list are:

• America - 6.2
• again, 2nd worst score
• New Zealand - 8.26
• again, surprised
  
• United Kingdom - 8.26
  
• Australia - 8.9
• France - 11.5
  
• Sweden - 17.4
  
• Japan & The Czech Republic - 22.23
  
• Now the highest score

The Details

All calculations were based on details of the relevant economies from this UNICEF web site:

http://www.unicef.org/infobycountry/industrialized.html


The calculations are based on 2 main values:

1. Low = the % of the nations wealth held by the bottom 40% of the population
2. High = the % of the nations wealth held by the top 20% of the population

The accuracy of the figures, and how up-to-date they are are somewhat irrelevant at this point. The point was, and is, to come up with a reliable, convenient and illuminating way of measuring an economies fairness.


The values actually used were as follows:

Country	Low	High
Australia	18	41
Austria	22	38
Belgium	22	41
Canada	20	40
Czech Republic	25	36
Denmark	23	36
Estonia	19	43
Finland	24	37
France	20	40
Germany	22	37
Greece	19	42
Hungary	23	37
Ireland	20	42
Israel	16	45
Italy	19	42
Japan	25	36
Korea, Republic of	22	38
Latvia	18	45
Lithuania	18	43
Netherlands	21	39
New Zealand	18	44
Norway	24	37
Poland	19	42
Portugal	17	46
Slovakia	24	35
Slovenia	23	36
Spain	19	42
Sweden	23	37
Switzerland	20	41
Turkey	15	50
United Kingdom	18	44
United States of America	16	46

The Final Results

The fairness values calculated, in order form "worst" to "best", were as follows:

Turkey	5
United States of America	6.2
Israel	6.3469387755102
Portugal	7
Latvia	8.06382978723404
New Zealand	8.26086956521739
United Kingdom	8.26086956521739
Lithuania	8.46666666666667
Australia	8.90697674418605
Estonia	9.5
Greece	9.74418604651163
Italy	9.74418604651163
Poland	9.74418604651163
Spain	9.74418604651163
Ireland	10.9047619047619
Switzerland	11.1951219512195
Canada	11.5
France	11.5
Netherlands	13.2105263157895
Belgium	13.9230769230769
Austria	15.1666666666667
Korea, Republic of	15.1666666666667
Germany	15.6285714285714
Hungary	17.4117647058824
Sweden	17.4117647058824
Denmark	17.969696969697
Slovenia	17.969696969697
Finland	19.3636363636364
Norway	19.3636363636364
Slovakia	20.6774193548387
Czech Republic	22.2258064516129
Japan	22.2258064516129

The Final Calculation

The calculation used was as follows:

((100 - High) + Low^2)/((High - 20) + (40 - Low))

The Reasoning

The reasoning is as follows:

• The value of "High" varies between 20 -> 100
• The value of "Low" varies between 0 -> 40
• In the "perfect" situation - High = 20, Low = 40
• (High - 20) + (40 - Low) = 0
  
• In the "worst" situation - High = 100, Low = 0
• (High - 20) + (40 - Low) = 120
  
• The inverse of (High - 20) + (40 - Low)
• maximum (infinity) in the "perfect" situation
• minimum (1/120) in the "worst" situation
• To further increase the exponential effect of both "High" and "Low" (but particularly of "Low") multiply the above calculation by ((100 - High) + Low^2)

And you are left with final calculation:

((100 - High) + Low^2)/((High - 20) + (40 - Low))

The Conclusion

After some experimentation and testing with varying values around the current "correct" values, I am convinced that this is a valuable way of calculating the over-all fairness of an economy.

I would be very interested to hear any feedback, comments or findings related to the calculation - how its adoption could be encouraged, and what might improve its usefulness.

A message for the future

A friend of mine sent this to me today.

I have grown a little older and more cynical - and never was it clearer than while I watched this video. I assumed, as it started, that it was going to be a joke of some kind... most of the videos I get sent these days are, after all.

Then, as I watched and realised it wasn't a joke, I wanted nothing more than to be able to laugh at it. Whatever it was that was coming, I wanted it to be silly, saccharine... an inadvertent joke, with itself as the punch line.

But finally, as I got further, I realised just how important this video was...

No matter how jaded you are... no matter how many times you've made the argument "but it's more complicated than that"... this video, this message, is the point we should all start from.

We pass off sentiments such as this as "simple", "too broad". We ignore such advice by saying such things as:

• we need to think about the bigger picture
• the economy is important too
• it's just not that simple

All of these statements are true. But, it is no less true or more broad sweeping to say:

• we create enough food for everyone in the world
• we aren't trying hard enough
• "we shouldn't break what we can't fix"

This message, in the video below, is where it all starts - the big picture, the simple dream, from a clear thinking child's perspective.

This is a message from 1992... I thought it was filmed today when I first saw it... and the really sad message there is, a child could tell us all of this 16 years ago and we're still not listening.

I love Nelson as a leader... for the Coalition

Actually, I'm starting to suspect Dr Nelson never really changed his politics after all. Maybe he's still actually working for the Labor Party.


The Challenge

I wish to offer you, dear reader, a challenge.

1. Make sure you have nothing around you to entertain distract you
2. Watch the video below. Pay close attention and focus only on the video.
3. Try to make it past the 2:00 mark without feeling the desperate desire to watch something else or turn it off entirely.

Please respond with your own personal reactions below.



What Brendan Nelson has learned

So apparently, Brendan Nelson has discovered that there are people in this country who can only afford $30 a week for petrol, and people who can only put $5 worth of petrol in their car at a time.

Wow. It's obviously been a big week for the man. I wonder if his coalition buddies will believe him.

"No" they will say, "that just can't be! How can people live like that. You must be mistaken. Obviously this is all the fault of the Labor Party and their mismanagement of the economy. This kind of thing never happened under Howard. No one will put up with those kind of living standards for long."

Well I guess if he learns only this one small thing then he has at least listened to someone and learned something.

It's a start, anyway.

But honestly, if that's a revelation to Brendan Nelson - no wonder he doesn't get what 2020 is all about. If he honestly needed to talk first hand to poorer Australians in order to work out they exist - or in order to work out that not everyone can afford to fill their tank with petrol whenever they want to... why should we ever expect him to understand an issue like Global Warming, or the importance of education to social equality.


What Brendan Nelson just doesn't get

And in further news - Brendan Nelson wants us to feel sorry for the banks.

Brendan Nelson: life hard for banks
Nelson wants you to encourage banks to make a profit
Banks are people too: Nelson

Yes that's right. Dr Nelson wants us to realise that "Banks are people too"...

Um... no, actually...

They're not...

They're banks... you know - Companies...

They may be, by strict legal definition, for tax purposes, "entities" much like a person. But the day we start taking our definition of "people" from the tax department, I think we've really lost the battle against pseudoscience in our education system.

But wait, hold on, isn't he saying we should feel sorry for the individuals who have to foreclose on people's mortgages - I hear you say.

Well, in this day an age, I'm sure that an individual employee's experience of foreclosing on customers, compared to times in the past, is about as close as fighting a field battle is to launching an international missile strike. Someone sits in a room somewhere and hits a button that causes the printing of a thousand letters. They get folded and packed by machine and posted to a thousand customers. Some of them contain offers of more credit, new loans and investment opportunities. Some of them contain foreclosure notices.

Along with his lack of understanding about how many Australians live their lives with respect to money, Brendan Nelson also seems to have very little idea about how large offices work in the modern society.

Banks, these days, run by rules and regulations. Certain levels of risk imply certain behavior and certain levels of underpayment require foreclosure. No individual favours or punishments. No human interactions. No guilt. Just transactions, payments and foreclosures. The way it should be.

Dr Nelson said people should stop criticising banks and they should be encouraged to make profits. Isn't he just encouraging us to support banks making a profit?, you respond.

Well, yes he is. And in general, we can all support banks making a profit. It's good for the economy. Any company making a profit, in general, is good for the economy. No argument here.

But to encourage the pursuit of profit, blindly, with no other considerations would lead to many horrible outcomes. Imagine a world in which car manufacturers chased profits with no fear of the repercussions of bad safety standards and no adherence to pollution level guidelines. Imagine if we were encouraged to support housing developers profits in the face of buildings that fell down within a few years of being built.


The Solution?

Maybe the people who can no longer afford to pay their mortgages should never have been loaned money in the first place (they might be better off now if they hadn't). And maybe, just maybe, the banks should have to take some responsibility for the (bad) decision to lend them money when they did. Perhaps we could find a way of minimally fining, or otherwise disadvantaging banks for foreclosing on loans. Maybe then we wouldn't have as many foreclosures as less risky loans were avoided.

Maybe then we wouldn't have so many sad banks to be sympathetic for.

Maybe then less people would only be able to put petrol in their car in $5 increments.

Hey - maybe Brendan Nelson's got a point after all.

Then again... maybe not.

The French and the US - social security vs. efficiency?

Due to the political makeup of my extended family, the fact that many of them are French or live in France and our collective passion for politics, I often find myself debating the positives (or otherwise) of the American and European styles of social security.

Long before Michael Moore's famous comparison between the French health care system and the American - the French welfare system was the whipping boy of pro-American style economies. After all, the Americans love to hate the French, so they have to find a way of diminishing their, otherwise apparent, achievements.

Basic claims, from defenders of the American welfare system, range from "But everyone knows the Europeans can't afford their welfare system" to "but you know the French are going broke don't you". I was on the lookout, recently, for statistics and/or information from reputable sources that would refute such assumptions, without simply saying "go on, prove it".

So, I was very happy to hear this quote, today on Radio National, from Princeton Professor of Economics, Paul Krugman:

"So we say, Well, American equality is essential to our productivity, and then you compare it with France, which has much less and is much more generous a social welfare state, and it turns out that the French problem is they screwed up their retirement policy. It's not something cosmic , it's not a basic fundamental flaw of trying to have a more equal society. And they have health care, that is as good as or better than ours, and it covers everybody at 65% of the cost of the US system. In many ways they do better, but of course everybody knows that we're at the cutting edge of technology. So just look at the future, except it ain't true. Turns out that broadband is now more widely available and faster in France than it is in the United States. We're actually losing that edge too. So the whole notion that the US have done so wonderfully and that justifies all of the brutality of our society, is just based on ignorance.

I think a lot of political rhetoric in the United States depends on the notion that Americans have no idea what life is actually like in other countries."

Well! What else can I say? There it is, from a Princeton Professor of Economics none-the-less.

He has a lot of other very interesting points to make about the death of the middle class since the 1970s. The only point I disagree with him on is - he says the phenomenon is "unique to the United States" and that "the closest thing you can see this unequalisation that's taken place in the United States is in Britain during the Thatcher years". I would like to invite professor Krugman to investigate the progress of wealth distribution across Australia, over the last decade, and ask him if he can see the same process here as well.

Before I let this one go, there's one other quote from him that I would like to point out:

"... prime age working years in France, 25-54; 80% of French adults between the age of 25 and 54 are working, which is exactly the same as the United States. So if your vision is that there are huge numbers of unemployed French people, with no employment for middle-aged French people and with no job prospects, it's just not true. They're exactly as likely to be working as we are."

For a full transcript of his whole talk on how the New Deal society has been dismantled in America, and the reasons for it, see here - or for the full audio, see here.

Don't believe the hype.

Aussies go to Bali, court the Americans

For a history of this log of Labor Party successes see:

Bring the troops home
Thing that make me happy
The national conversation

Climate Change, Bali negotiations and economic conservatism. This is why we voted for you Kev.

Kevin Rudd goes to Bali and promises not to make any commitments to reductions until the report they insisted on (in opposition) is ready. He stops off to talk with his "old friend" Al Gore. Peter Garrett talks with John Kerry on Climate change too - baby steps for Peter, but he's getting back in the game.

http://www.abc.net.au/news/stories/2007/12/10/2114664.htm
http://www.abc.net.au/news/stories/2007/12/10/2114879.htm