‘Strayan billionaires drive Banana Republic

From WaPo:

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You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.

Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.

A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.

Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.

Obviously we at MB completely agree given how much Australian wealth is tied up in the protected sectors of real estate, mining and banking. I’d still like to know the methodology, though, it’s an extraordinary result to rank us as one of the world’s great kleptocracies.

Comments

  1. Kleptocracy! I don’t think so.

    A modern developed economy with reasonable institutional frameworks, rule of law, welfare, free media, that regularly achieves top ten placings in global assessments across a raft of desirable measures cannot be considered a kleptocracy.

    However, like many developed nations, increasing regulatory constraints extend across the economy limiting new entrants to professions and industries and expanding the power of the regulatory making elite: government and bureaucracy – kleptocratic – not yet.

  2. The higher the inequality the lower the velocity of money – one of the reasons why economies around the world are struggling is because too much money is tied up in super which is passively invested instead of being recycled through the entire economy. Trillions of the country’s wealth goes no further than the Sydney/Melbourne CBD’s. This is leading to a geographical apartheid.

    • THIS

      Gimme my super now

      Bye bye mortgage

      Hello saving in cash/whatevs
      = reinvest in productive growth

      And my contribution to Tassie economy through purchase of Nant whiskey

    • Yes please, let me use my Super to pay out my HECS. Then stop taking super out forevermore. I don’t need the government to tell me how to save!

    • You are talking about a very complicated system of IOU’s.

      A young person has a HECS debt of $100,000 dollars. This is an IOU. The govt uses this to collect a % of the young person’s income each year to spend on less productive people.
      The same young person has $100,000 in super. This is an IOU. A skeptical person doubts the young person will ever get much from this.

      The young person wishes he could use his super to pay his HECS debt. Nice idea. But then how would the govt replace the money it currently spends on less productive people?

      The young person would like to buy a house, but a house costs $1,000,000. Examination reveals that these houses are not being bought with coin and note dollars, but with mortgages. A mortgage is an IOU.

      We like to think a dollar is a dollar, and perhaps an owed dollar is an owed dollar. But is this really the case? Is the super balance IOU equivalent to a HECS debt IOU and a mortgage IOU? Are they truly interchangeable? Can one replace the other without effecting the value of other IOU’s?

  3. Terror Australis

    Misleading post headline.

    We are a banana “constitutional monarchy”, pending a referendum to become a banana republic.

  4. 1% US? 65% Aus?
    Dividing billionaire asset value by GDP (an annum figure?), then some arbitrary definition of what defines political connection? LMAO

    This is clearly some designed study to show that US inequality is A-OK! even though it is clearly larger and IMO more societally damaging in the US than Aus.

    • It works a bit different in USA. A person doesn’t become a billionaire there because of political connections. Existing billionaires in USA elect politicians to keep regulatory and legal system status quo in which they are able to make big money. In that sense, they do not make money (at present) thanks to political connections.

      in reality they are as corrupt as us or Afganistan

      • i am thrilled Austalia can show global leadership in yet another arena. We’re beating Indonesia, and Columbia and India better watch out! Go for Gold!

        Any country where wealth is derived from political connection is doomed. The fact this comments thread is opened by a paid shill of the mining industry seeking to deflect the debate is evidence of our plight.

        Australia needs a Resource Super Profits Tax, a universal nil-exemption land tax and the removal of those 125 taxes Ken Henry was so rude about. We also need to jail a lot of executives for corrupting pollies.

      • That’s right. In the US, the power of billionaires trumps the power of politician, so they don’t need political connections to be successful.

    • You beat me too it. Anything that places Saudi Arabia lower than Australia on this scale has to be crap. Almost the entire wealth of that country is owned by the House of Saud, who coincidentally run the show.

    • The study is flawed, because the corruption in the US and the UK is much subtler and harder to prove. They have worked hard to make it difficult for researchers and journalists to trace the favour-swapping that goes on. Australia has a lot more disclosure in the rules (for now), compared to the US. And those other countries (Indonesia, Saudi, etc.) well they just don’t care if people know because the culture tolerates it. Not saying that the US is just as corrupt as Indonesia, but there’s definitely limitations in their methodology.

    • Would love to see a breakdown of rentier billionaires V those who built companies that provide a service (tech heavy maybe)

      • Is there actually a difference?

        Into which category would you put the Waltons? Gina (she started a mine)?
        Rupe?
        Pratt (built a manufacturing company…around the ultimate ticket clipping physical good, packaging) ?

        What is being the world’s biggest purveyor of computer operating systems and basic productivity software other than an exercise in clipping the ticket on the sales of the majority of the world’s computers (maybe didn’t start out that way, but got that way due to dominance of market share)?

  5. I’m no follower of the Christain Faith, but the Bible has many time tested examples of good business practice, As you sow, so shall ye reap.
    The parable of the talents tells us to take money from those who least can manage and pass it to those who can. Good time tested advice. It has been proven time and time again, the poor piss opportunities and money into the wind. If you are behind or poor, time to wise up.WW


    • The parable of the talents tells us to take money from those who least can manage and pass it to those who can.

      No it doesn’t.

      It says those who use their skills (wisely) will be rewarded (by God) and those who don’t employ their skills will be punished (also by God). Note that the master gave all three servants money to look after, in the clear knowledge the third servant was less able, or at least unlikely to use the money wisely.

      That said, the following, cribbed from Wikipedia, seems like an interpretation for our times:

      “William R. Herzog II presents a liberation theology interpretation of the “Parable of the Talents”, wherein the absentee landlord reaps where he didn’t sow, and the third servant is a whistle-blower who has “unmasked the ‘joy of the master’ for what it is—the profits of exploitation squandered in wasteful excess.”[19] Hence, the third servant is punished for speaking the truth, and not for failing to make a profit. From the critical perspective of liberation theology, the message of the “Parable of the Talents” is that man must act in solidarity with other men when confronting social, political, and economic injustices”

      • SS, whowever penned that article for the Bible and those who allowed its reprints, have considered its merits.
        However as you , and others, now point out, the bulk of funds in society are now tied up in “non productive assets”. Those assets in time will diminish in value and the owners of those funds will lose out.
        Seems to me the money is going to return to the few owners of robotics and automation, and that the “others ” will be left to fend for themselves. What is certain is that we are going back to the Feudal system, and generally the population are dumbing themselves down to make that transition easier.
        If ever you have seen the shepherd and sheep you will get the picture WW

      • Jesus said ‘ Keep yourselves from covetousness, for a man’s life doesn’t consist of the abundance of the things which he possesses.’

        A message for both the owners of the non-productive assets – who have something in common with the Rich Fool of the eponymous parable – and the future owners of robotics, for whom that parable seems especially intended (although possibly of little comfort for those who now and in the future are forced to do without).

    • So…..compelling working stiffs to save into a rentier system such as super so the “smart” (read: those in position of influence) can clip tickets and rob people (no link to performance) regardless of how they manage the poor working stiff’s life savings?

      I wish I had it to hand, but I recall seeing the average man’s investment capability was not that much worse than the general investment fund’s.

      People are always going to p!ss money against the wall, it doesn’t matter how “rich” they are. I know plenty of people on 200k who spends way too much money on expensive road bikes. And even on 100k who own multiple Cannondales. But still rents “can’t afford mortgage”. And all the cool kids on the block on big $ (but no savings) buying all the cool toys.

      I make particular reference to your “poor” statement.

      The poor aren’t necessarily stupid.

      The system is stacked against outsiders, you know this. Even for smart people to get capital for new ideas, IP, inventions: very hard.

      Tim

      • Marshy :The system is stacked against outsiders, you know this. Even for smart people to get capital for new ideas, IP, inventions: very hard.: Correct but not impossible.
        The recent example of the easy path to riches was mining of irreplaceable natural resources,;promoting a service sector of dubious benefit but handed cash out to many, and of course real estate speculation.
        All of these business gave no benefit to the nation, Mining primarily as the companies were owned and managed from off shore, cept for Gina.
        Bease everyone thinks they have an equal opportunity to wealth, those who facilitate that opportunity, the people who front the cash and networking, need to know that the person they have backed is a champion, who will repay their investment and provide profits.
        99 times out of a 100 champions don’t walk off the streets. the contenders have to be filtered, similar to TV reality shows. For every champion there are 99 who lose. That’s a universal law.
        But because of the social security nets we now have even the losers are mandated to have a quality of life, which is expensive in dollar terms, And guess who is fingered to pay, the winners. So the winners are taking their money off the table, out of harms way, for them, but it is still available for the right person,with the right concept proposal.
        Its not easy but it is possible, with a bit of the correct application. WW

      • TM,

        I’ve given up banging on about the effect of fees here.

        However, I’m glad it’s becoming mainstream nonetheless.

        Moving right along, the often unrealised problem with gross levels of inequality is the complete dissociation of a society’s rulers from the ruled.

        As that level of dissociation increases, so does that level of communication both up and down that is needed for a flexible and adaptive society. It doesn’t need to get to the levels of pre revolution France and Russia. Just lots of passive resistance and ignorance can cripple economic performance.

    • It has been proven time and time again, the poor piss opportunities and money into the wind.

      [Citation needed.]

  6. I just read the same article on Reddit and quickly went here to see if MB has something similar to it and VOILA.

    The bubble has not popped and has been given resuscitation almost every quarterly its due to the political connection.
    Reddit even has a list of Top Donating corporations/individuals for the Liberal and Labour and its amazingly ridiculous the industries/entities the money comes from. Even Chinese companies….

    Australia is “implied” to be corrupted by that study.

    What’s the chances of Australia starting a war with New Zealand on the day the bubble is about to pop, so that the masses have their attention somewhere else lol.

  7. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity,

    In what world financing is done from someone’s savings? … and they call them-self economists?

    on the other note I’m not surprised by Australian rankings, we are one of the most corrupt societies looking from the top. This is all result of the old British feudal relations surviving in Australia, primarily within our private educational system.
    Australians mostly ignore this because “we are all becoming millionaires” via property bubble price inflation, we call corruption “connections” and we ignore the fact that Australian rich class is the among the fastest growing in the world.

    • St JacquesMEMBER

      NZ! Are you mad? Better to bomb a small country that is in ruins from civil war, is over-run by foreign jerks, is on the far side of the planet, and has absolutely nothing to do with us at all. Just ask our Glorious Leader. But NZ, whoa! They’ll hakka us to death.

  8. The data on Singapore and the UK stretches credibility as even within the terms of political connection as applied in the study – “Just benefiting from a government that was pro-business, like those in Singapore and Hong Kong, wasn’t enough. Rather, the researchers were looking for a situation like Indonesia under Suharto, where political connections were usually needed to secure import licenses, or Russia in the mid-1990s, when some state employees made fortunes overnight as the state privatized assets.” the reality de facto in both Singapore and the UK means a zero result is not believable. The ruling PAP in Singapore runs the state as a kleptocracy anyway and those captains of industry or Lords in the Establishment in the UK do profit by old school connections which leads to preferential terms in commercial arrangements.

    • Yep.. it’s a question of subtlety really. The US is probably not as corrupt as Indonesia, or Australia, but it’s definitely not 1% vs. 68% for example.

  9. “They say that since the rich are able to save the most, they can actually afford to finance more business activity”

    Except increasingly we’re seeing rent seeking shenanigans and massive unproductive asset bubbles. Which is nice and all, but it doesn’t seem to be producing much in the way of sustainable economic growth.

    Also, and you’ll have to excuse my high school economics here, but surely you also need the rest of the population to have sufficient income and wealth to consume all the goods and services being produced? Borrowing to consume (which as propped up growth in the past few decades) is no longer a viable option for many in the developed world. It seems to me the global economy is f’d and nobody actually knows how to fix it.

  10. Rank Country / Region Number of billionaires Richest of the Country / Region
    1 United States 535 Bill Gates
    2 China 213 Wang Jianlin
    3 United Kingdom 117 Hinduja brothers
    4 Germany 103 Georg Schaeffler
    5 India 90 Mukesh Ambani
    6 Russia 88 Vladimir Potanin
    7 Hong Kong 55 Li Ka-shing
    8 Brazil 54 Jorge Paulo Lemann
    9 France 47 Liliane Bettencourt and family
    10 Canada 39 David Thomson and family
    11 Italy 39 Maria Franca Fissolo and family
    12 Taiwan 33 Tsai Eng-Meng
    13 Turkey 32 Murat Ülker
    14 South Korea 30 Lee Kun-Hee
    15 Switzerland 29 Ernesto Bertarelli and family
    16 Australia 27 Gina Rinehart
    17 Japan 24 Tadashi Yanai and family

    Skippy…. and what is the defining observation wrt billionaires, privatization.

  11. Australian billionaires are certainly a dubious bunch but certainly not the major cause of inequality in this country.

    If I may explain the worst form of inequality in Australia is the mom and dad investors relying on borrowed money backed by “ill deserved equity gains” and negative gearing who sponge off another mans labour for own personal gain.

    This is the worst, ground floor form of inequality in Australia today and if I may relate back to the main discussion of this article it is that this form of inequality has been totally driven by all levels of goverment.

    I for one am of the opinion that the ownership of another mans/womans home should be borderline illegal. Houses are relatively cheap to build whilst building a home and cushioning a BMW drivers ass is not.

    My perspective is purely one made apon moral grounds.

  12. From a June 2015 report from the OECD “Over the past fifty years, credit by banks and other intermediaries to households and businesses has grown three times as fast as economic activity.” and goes on to conclude “Financial expansion fuels greater income inequality because higher income people can benefit more from the greater availability of credit and because the sector pays high wages.”
    See the short report here ” http://www.oecd-ilibrary.org/economics/finance-and-inclusive-growth_5js06pbhf28s-en;jsessionid=gqjkgk3gc3o6l.x-oecd-live-02

  13. @UE

    Obviously we at MB completely agree given how much Australian wealth is tied up in the protected sectors of real estate, mining and banking. I’d still like to know the methodology, though, it’s an extraordinary result to rank us as one of the world’s great kleptocracies.

    This is how the authors determine political influence.

    We identify the fraction of billionaire wealth that has been generated through the use of political connections by classifying each billionaire into one of two categories: those who benefited from political connections and those who did not. We start by creating a dummy variable called “Political connections” and set it equal to 1 when we conclude through an extensive search on Factiva and LexisNexis using news sources from around the world that political connections had a material part to lay in the success of the billionaire. We set this variable equal to 0 when we conclude that political connections have not been crucial to the billionaire’s rise to riches even though he may have had prior political connections. The criterion we use for classifying billionaires as having benefited from political connections is that our extensive review of evidence indicates that the person would not have become a billionaire in the absence of political connections that resulted in favoritism and/or explicit government support.

    No further data is given. Could the data be skewed against Aus given possible low number of billionaires compared to nations with larger populations?

    • Seems like the extent of media coverage of the billionaire’s activities, especially in their pre-billionaire phase is going to play a massive part in determining who’s identified as a political billionaire and who’s not.

      If you are a nation of only three or four billionaires, it seems plausible that extra coverage may be given, compared to a nation with 100 or more, for example. Greater than 200 or 500 billionaires in a country surely means that the media of that country can only have given very limited coverage to 80-90% of them. And if there a several people with more than $10 billion is anyone going to give a second glance to the people in the $1-$5 billion bracket?