- [Narrator] Inequality is one of the biggest issues
that has divided economists for as long as economics
has been studied and probably a good amount of time
before that as well.
One of the central questions that economists
are constantly trying to answer
is to whom the fundamentally limited resources of an economy
should be provided to.
There are no correct answers to this question
but there are some that are obviously wrong.
I think most of you watching would agree
that the wealth of an economy should not be hoarded
by authoritarian rulers that don't answer in any way
to their people.
On the opposite end of this argument,
the accumulation of resources
is one of the primary motivators for people to work harder,
innovate, and prescribe capital efficiently.
These actions by economic participants add value
to the entire economic system
but they are also difficult, risky, time consuming,
and not very fun.
So not rewarding these actions with a larger share
of resources will mean that they are not done
which will result in an economic system
that is worse off overall for everybody.
We've spent a lot of time on this channel talking about some
of the most unequal countries in the world
and the economic problems that are caused
by this inequality.
If a majority of people in an economy are too poor
to afford proper education, nutrition, and healthcare,
on top of these being terrible social issues,
it's actually bad for the economy overall,
even the wealthy elite of that economy
with a very large share of the wealth
because poorly educated, sickly,
and undernourished economic participants
make for a very bad labor force.
If workers can't perform at their best,
then there'll be less wealth generated overall,
which means even if the 1% of the 1% own a huge portion
of the economic pie, the pie will be smaller overall,
leaving them worse off in absolute terms
than if they were to share that wealth more equitably.
So even if they didn't care about their country
being plagued by poverty, there is still an argument
that some level of equality is in their best interest.
So, instead of learning from the mistakes
of economies that have got this balance wrong,
it's perhaps more insightful to look
at the most equal country in the world
to work out what they are doing right.
So how do economists work out what the most equal country
in the world is?
What tools do these countries employ
to manage that equality?
And finally, are there any economic drawbacks
caused by this equality?
There are lots of ways that economists measure inequality.
The most popular is something called the Gini Coefficient.
The Gini Coefficient works by plotting out something called
a Lorenz Curve.
The Lorenz Curve named after the economist, Max Otto Lorenz,
is made by breaking the economy down into percentiles
and then graphing out the cumulative share of resources
that each percentile owns in that economy.
If we are looking at income inequality, the lowest 1%
of earners might only make a 10th of a percent
of the total national income in the economy.
The next 1% will make 0.2 of a percent, which adds together
to make a running total of 0.3% and so on until we get
to the top 1% of earners, which might make 10%
of the total national income in an economy.
If we run a line through each of these percentiles
we get the Lorenz Curve for that particular economy.
We can then imagine an economy that is perfectly fair.
The lowest 1% of earners makes 1% of the income.
The lowest 2% also makes 1%, and the top 1% of earners
if you can call them that still only makes 1% of the income.
If we follow the cumulative total of these data points,
we make a 45 degree line.
No economy in the real world is ever going to look like this
because there will always be
some level of income inequality.
But if we lay out the Lorenz Curve from that real economy
over this perfectly equal hypothetical,
the graph will have two areas on it,
the area above the Lorenz Curve
and the area below the Lorenz Curve.
The Gini Coefficient is simply calculated
by looking at the percentage of the area
that is above the Lorenz Curve.
So in this economy, let's say roughly 40% is above the line
and 60% is below the line.
That would give the economy a Gini Coefficient of 0.4,
which is pretty good by global standards.
If for example, nobody made any money at all in this economy
other than the top 1%, then the curve wouldn't really
be a curve at all.
It would be a 90 degree angle at the end of the chart,
which means that the area above this line angle thing
is 100% of the area with nothing existing below it.
This would be a Gini Coefficient of one,
which is perfect inequality.
If we had that perfectly equal economy from earlier,
it would match the 45 degree line exactly
meaning that 0% of the area would be above the line
and 100% of the area would be below the line.
This would give the economy a Gini coefficient of zero.
Now, I know I've just thrown a lot of graphs and numbers
at you so if you don't completely understand it,
don't worry.
All you really need to know
and all that most professional macroeconomists know,
for that matter, is that the closer to zero
a Gini coefficient score is the more equal the country.
In the real world, all economies
are going to exist somewhere between these two extremes,
but the most equal country in the world would simply
be the one with the lowest Gini number
and we know exactly which one that is.
It's Iceland with an income Gini coefficient of 0.369
according to the 2022 OECD report.
So there we go.
Video done, well done to the People's Republic of Iceland.
Except of course it's not that simple.
There is a lot of interesting economics
behind what makes Iceland so equal
and the first is that they just don't have that many people.
Iceland only has a population of 370,000,
which is smaller than most medium towns.
Two thirds of the entire country's population could fit
in the Indianapolis Motor Speedway.
A small population by itself doesn't mean
there can't be inequality.
Any population of two or more will have some level
of inequality if we chart it out on a Lorenz Curve.
But Iceland's low population helps it in other ways.
Iceland is a country rich in geothermal energy,
which means electricity there is extremely cheap,
which makes energy intensive industries
like aluminum smelting and even cryptocurrency mining,
very globally competitive.
The country also has a surprisingly
strong financial services sector,
which is part of the reason
that it got into so much trouble in the GFC.
It's also a major commercial fishing hub
and I know fishing doesn't sound
that glamorous or profitable, but Icelandic fishing is done
on huge boats employing state-of-the-art equipment
to make billions of dollars every year.
On top of that, the country is beautiful,
which is why outside of global pandemics,
the country had more tourists arriving every year
than it had citizens.
If we remember our factors of production, land, labor,
and capital, Iceland has very productive land,
a good amount of capital, but only a tiny pool of labor,
which means the workers that it does have are very valuable
and even average workers can demand very high salaries
because employers just don't have that many options
to choose from.
Combine this with a very egalitarian culture
and political system, and it makes sense
that Iceland would top the list for income inequality.
But remember when I said it wasn't that simple?
Well, it isn't that simple.
Iceland's Gini coefficient of 0.369 is measured
before taxes and transfers.
What this means is that it only measures people's
before tax incomes and excludes any money
they might have received
through government assistance programs.
These are two of the three biggest ways
that the government can control income inequality
in their economies.
We'll get to a third one soon, but for now,
see if you can guess it along the way.
Typically, taxes reduce the net income
of higher income earners and government assistance
increases the income of lower income earners.
So, high taxes and high levels of government assistance
will make the economy more equal.
Actually, almost any type of taxes and government assistance
will usually improve income inequality,
with the exception being government assistance
programs that specifically help businesses.
Even still the Gini coefficient of all of the countries
that the OECD monitors improved
when including taxes and transfers.
Some improved quite significantly, like Slovakia,
which has a Gini coefficient of just 0.222 after taxes
and transfers which then makes it the most equal country
in the world.
Slovakia's Gini coefficient before these interventions
is still good.
I mean, just falling behind Iceland at 0.383,
which means it was fairly equal before taxes and welfare
and it was even more equal after them.
But Slovenia, the runner up after tax equality
is a little bit more interesting.
Slovenia before taxes had an income Gini coefficient
of 0.444, which while certainly not terrible
by global standards, leaves a very big gap
between its coefficient of 0.246 after taxes and welfare.
This just means that Slovenia has very high taxes,
which it does, especially for individuals.
Income taxes top out at 50%, which is high
but isn't crazy by itself.
There are countries like Finland
that have a top marginal tax rate of 57%
but the difference is that Finnish residents need
to earn a lot more before they start paying that.
In Slovenia, people start paying 50% of their income
on everything they earn over 72,000 euro,
which is an extremely low top marginal tax bracket.
That goes on to fund generous welfare and retirement schemes
which is why the country has such low income inequality,
which is great, but it can cause problems.
The economist Arthur Laffer devised yet another curve
to consider when it comes to national income equality.
The Laffer Curve is the theoretical relationship
between total government revenue and the effective tax rate
of the nation, and it charts this relationship out
between the extremes of a 0% tax rate and a 100% tax rate.
Government tax revenue at a 0% effective rate
will obviously be zero and then it will increase
as the government increases the rate.
That's pretty simple so far but Laffer added
that at a certain tax rate, any further increases
will actually result in the government generating
less tax revenue for the economy.
The reason this happens is because if taxes get high enough,
then people will have less incentive to work,
and a greater incentive to find ways to avoid taxes,
either through legal loopholes or illegal dodging.
People with high incomes and highly marketable skills
will also start to move out of the country
to other countries with lower tax rates
where they can enjoy a higher quality of life.
This not only results in lost revenue directly
from those people who will no longer be paying taxes
directly to the government but it also hurts the economy
in other ways by removing highly skilled workers
from the labor force because they are the ones
most likely to move to secure higher incomes
with lower taxes elsewhere.
The exact shape of the Laffer Curve is highly debated
and almost all countries exist on the left-hand side
of the curve but that doesn't mean the countries
can just solve the issue of inequality
through this kind of intervention
without causing other economic problems.
Income taxes and welfare payments also don't directly
impact the arguably more important metric for inequality
and that is wealth inequality.
Income inequality is the difference between the income
of the lowest and highest earners in an economy
where wealth inequality is the difference
between the net worth of the richest and poorest
in an economy.
We can still chop this out on a Lorenz curve
and create Gini coefficients
but wealth inequality is almost always greater
than income inequality because people on higher incomes
will have more money left over after covering essentials
to make investments.
Those investments will start to make their own returns
which means that wealth can accumulate
to a larger degree than incomes.
For reference, Iceland has a wealth inequality
Gini coefficient of 0.69.
Nice.
Where its income inequality was only 0.37.
Improving income inequality doesn't always improve wealth
inequality like you might expect either
because a lot of the wealthiest people in economy
don't make their fortunes through earned income.
Their wealth comes from their assets accumulating in value.
In certain conditions, improving income inequality
can actually worsen wealth inequality
because as the lowest earning people in an economy
earn more money, they will spend more at businesses
or maybe even invest into those businesses.
Either way, this will increase the value
of those businesses, which disproportionately benefits
the people that already own them as in very wealthy people.
If you wanna see this counterintuitive process
of improved income inequality resulting
in worse wealth inequality, then just look
at the global economy between 2020 and 2022.
Generous stimulus measures made with the best intentions
to help struggling households
through an unprecedented economic shakeup leveled
the income playing field a bit
but it made people who were already very wealthy
even wealthier because most of this money was channeled
into companies that they already owned,
either through investments or product purchases.
How many people do you know that either bought Tesla shares
or an actual Tesla car?
All other things been equal, however, over the long term,
more equal incomes should result
in a more equal wealth distribution.
So, then what country is the most equal
by wealth inequality metrics?
Again, this is a very simple question that you can find out
by just looking at a list of countries
by wealth inequality Gini coefficient figures.
The answer is either Slovakia, again, Belgium, Myanmar,
or East Timor.
Yeah, these ones get a little bit harder to explain.
Using the Gini coefficient is still possible
to measure wealth inequality but there are some reasons
that the results that we get might not be as easy
to compare country to country as income inequality figures.
For starters, the data is just not as easy to collect.
Almost every major economy in the world taxes income
in one form or another and if your tax income,
you need to track income.
So figuring out how much people earn is as simple
as using tax agency databases.
Only a tiny handful of countries have wealth taxes
so most governments don't even bother tracking theirs.
The list we are working off for this video
is made of composite data from four different sources
that all use slightly different methodologies
and data collection techniques.
Wealth is also much more subjective.
It's difficult for people to agree on how much a house
or a car might be worth at any given time
but those assets will still make up a significant portion
of a significant number of people's total wealth.
Wealth can also go into the negatives
as people take on debt, but most economists would agree
that even though someone with a negative $50,000 net worth
because they have $10,000 in cash and $60,000
in student loans might technically fall into the bottom 1%
of people by net wealth, they are probably better off
than someone with only $5 in their pocket.
The person with only $5 might technically be
$50,000 wealthier but their earning potential
and quality of life will be much lower.
Countries like Myanmar and East Timor achieve their level
of wealth inequality, partly because it's very difficult
for people in these countries to go into debt
because they just aren't financial institutions set up there
to serve them.
Wealth inequality also gets a bit difficult
towards the top end with extremely wealthy people
that can skew results for entire countries.
If a group has one billionaire
and 999 people that are flat broke
then the average person in that group is a millionaire.
In the same way, just a few extremely wealthy people
can distort the Lorenz Curve enough
to make a very egalitarian economy look like an oligopoly.
According to the best available Gini coefficient statistics,
the Netherlands, Sweden, and Denmark
all technically have a higher level of wealth inequality
than Saudi Arabia and South Africa.
But any reasonable person would obviously much rather be
working class in Sweden than South Africa.
This also highlights another problem with wealth inequality,
which is that it's not necessarily a problem
unless it's making people poorer.
As the world has become richer
it has also become more unequal because the capacity
for extreme wealth generation has grown with it.
I would rather live in an economy where the average person
is worth a hundred thousand dollars
but there are a few billionaires
than an economy where everybody is equally worth $10,000.
That might sound like a facile argument
because the first economy just has more wealth overall
but the development of industry and innovation
in the modern world was largely pushed by the profit motive.
All of this is to say that wealth inequality is really,
really difficult for economists to measure
and that makes it really difficult to work with.
The popular solution of just limiting
the wealth of the extremely rich
doesn't necessarily improve living standards
for average people unless their wealth has been generated
by actively stealing from regular people through corruption.
In certain circumstances,
it can actually hurt the overall wealth of an economy
because it removes the incentive for already wealthy people
to reinvest their capital into risky endeavors
because there is no potential upside.
But I didn't promise you a list of all of the challenges
that economists face when working at inequality and economy.
I promised you the most equal country in the world
and that's probably Australia.
So this is a weird one because Australia does all right
in income Gini figures but not amazingly when compared
to Eastern European or Scandinavian countries.
It is also middle of the road by wealth inequality figures
but it wins out in arguably
the most important inequality metric, which is,
if you had to be a working class person in any country
on earth, where would you wanna be?
Now, obviously maybe unbiased
but I would argue you would probably
want it to be Australia.
To begin with, the average Australian is very wealthy,
trading back and forth with Switzerland
to be the wealthiest people in the world, so that helps.
The country does have a lot of wealthy people with 11.2%
of the population being millionaires, but even
the average Australian does very well by global standards.
The median Australian as in half of the population
is richer than them, and half of the population is poorer
than them, is worth $238,000.
The share of wealth owned by the bottom 80% of the country
is 27%, which might not sound amazing
but it's only 15% in the USA.
Obviously, Australia has a lot of advantages.
It's a globally desirable location for investment.
It has a large mining industry
and a relatively small population,
which as we learned earlier,
does help with these sorts of things.
But it also has policies in place
that both look after the average person
while not stifling entrepreneurship.
Remember when I said that there were three ways
that governments could control inequality?
Taxation, welfare, and one other?
Well, that other control is policies around minimum wages.
Congratulations to anybody that guessed it along the way.
Australia consistently has the highest minimum wage rate
of any country in the world, and on top of that,
employers are required to make mandatory payments
into their employees' retirement funds regardless
of their working arrangements.
Those forced retirement savings are part of the reason
that the average Australian is so rich.
Australians can't access this money
until they are 60 years old
and it turns out then forced to save 10%
of your paycheck for life builds up surprisingly fast
especially with wages that are world-leading.
This combined with a very low unemployment rate means
that the average working Australian can build a very
comfortable life for themselves
in some of the most livable areas in the world.
There are, of course still problems, housing affordability
in major cities, being chief among them
but having a wealthy population that is surprisingly
concentrated in just a few small areas of a massive country
will do that.
If you don't agree with me, then that's great
because it proves just how difficult the debate
about inequality can be and we can't even agree
on what country is getting inequality right
and there is a compelling argument
that at least a dozen countries could be
the most equal on earth.
I don't wanna get too philosophical here
but economics is a social science
and that often means that good economists need to look
beyond statistical numbers when trying
to work out optimal outcomes.
It's no good making an economy the most equal in the world
if everybody is equally miserable.
Thanks for watching mate.
Bye.