Social Trends – Page 127 – Digital Finance Analytics (DFA) Blog

People on low incomes are sacrificing basic goods to take out insurance

[Insurance] is the one thing I will not skimp on, because we don’t know what’s around the corner with my husband being unwell and a disabled son. And now I’ve hurt my foot. I mean, accidents happen. I don’t know what’s around the corner. That’s the first thing that gets paid.

Maggie (all names in this article are psuedonyms), is a single woman in her 50s who lives with her husband and son with disability. She feels health insurance is essential to prepare for seemingly inevitable risks.

To afford insurance, Maggie cuts down on expenses by not buying clothes; she gets free clothes from charity organisations. She also saves money by only purchasing the cheapest marked-down foods that will expire soon and avoiding public transport to save money. And when things are tight she skips meals to make do.

Some people on low incomes put insurance cover first – even if it means doing without basic goods, our research finds. Yet low-income households are the most likely to lack private insurance cover.

Insecure work, low and unstable incomes, and increasingly haphazard and unreliable social protections in education, health, transport and housing continue to make the lives of low-income households risky. Insurance can mitigate some of the harms low-income people face.

To understand how households with low or precarious incomes manage short and longer-term risks, we surveyed 70 people in three areas of suburban Melbourne that experience high levels of financial insecurity. We asked questions about household income and expenditure and how they coped with unexpected expenses.

We found that in order to pay for insurance people were cutting down on heating, food and outings.

Weighing up the odds

The financial problems faced by people on a low income are often explained by poor financial skills, knowledge and behaviours. Yet our research shows that low-income households are also constrained by uncertain and inadequate incomes, unaffordable housing and unexpected high energy costs.

Some of the people we surveyed weighed up their risk of serious incidents and went without insurance because the everyday risks they experienced were more pressing than potential future risks.

Ted, a single man in his fifties receiving the Newstart Allowance, would have liked to have insurance but explained that it was:

just cost prohibitive. I’d rather try and get a roof over my head…than being insured should something happen down the track.

Malcolm, a casually employed factory worker also receiving the Newstart Allowance, said his car was “not worth insuring” for property damage, even though not having insurance exposed him to risk if he damaged another person’s car.

It’s a financial balancing act. Most things that could get damaged on my car I could fix myself…It’s just unnecessary for me. And if it gets written off, it gets written off, and I move on.

Mending the safety net to reduce avoidable risks

Increasingly, private insurance is filling the gaps left by government policies. Instead of enduring the indignities of income support, people are encouraged to take out income protection insurance.

Private health insurance is promoted as a way of avoiding the queue for health care. Inadequate public transport means an increased reliance on private transport – with all the risks and costs that entails.

Insurance providers are aware of the increased risks of inequality. The data insurance companies gather provides fine grained information about the nature of risks to which individuals and insurance companies are exposed.

Research commissioned by the Actuaries Institute notes that because of this data gathering, a growing proportion of the population will be deemed so risky that the price of insurance will become too great for them.

Poor people who already lead risky lives will then be faced with even more risk. The Actuaries Institute report argues that there will be a greater need for government subsidised compulsory insurance to protect those who are exposed to risk beyond their control. But greater access to insurance isn’t the only answer.

Our research suggests that investment in the social safety net could reduce some of the avoidable risks that come with poverty. The government should be ensuring low-income households have access to adequate, predictable income; affordable, quality housing, accessible, affordable public transport and health care. All of these things reduce risks for individuals and contribute to a less divided and risky society.

Authors: Dina Bowman, Principal Research Fellow, Research & Policy Centre, Brotherhood of St Laurence and Honorary Senior Fellow, University of Melbourne; Marcus Banks, Senior Research Fellow, Work & Economic Security, Research & Policy Centre, Brotherhood of St Laurence. Social policy and consumer finance researcher, School of Economics, Finance and Marketing, RMIT University

GOP tax plan doubles down on policies that are crushing the middle class

From The Conversation.

The U.S. middle class has always had a special mystique.

It is the heart of the American dream. A decent income and home, doing better than one’s parents, and retiring in comfort are all hallmarks of a middle-class lifestyle.

Contrary to what some may think, however, the U.S. has not always had a large middle class. Only after World War II was being middle class the national norm. Then, starting in the 1980s, it began to decline.

President Donald Trump has portrayed the tax plan Congress is wrapping up as a boon for the middle class. The sad reality, however, is that it is more likely to be its final death knell.

To understand why, you need look no further than the history of the rise and decline of the American middle class, a group that I’ve been studying through the lens of inequality for decades.

The middle class rises

The middle class, which Pew defines as two-thirds to two times the national median income for a given household size, began to grow after World War II due to a surge in economic growth and because President Franklin Delano Roosevelt’s New Deal gave workers more power. Before that, most Americans were poor or nearly so.

For example, legislation such as the Wagner Act established rights for workers, most critically for collective bargaining. The government also began new programs, such as Social Security and unemployment insurance, that helped older Americans avoid dying in poverty and supported families with children through tough times. The Home Owners’ Loan Corporation, set up in 1933, helped middle-class homeowners pay their mortgages and remain in their homes.

Together, these new policies helped fuel a strong postwar economic boom and ensured the gains were shared by a broad cross-section of society. This greatly expanded the U.S. middle class, which reached a peak of nearly 60 percent of the population in the late ‘70s. Americans’ increased optimism about their economic future prompted businesses to invest more, creating a virtuous cycle of growth.

Government spending programs were paid for largely with individual income tax rates of 70 percent (and more) on wealthy individuals and high taxes on corporate profits. Companies paid more than one-quarter of all federal government tax revenues in the 1950s (when the top corporate tax was 52 percent). Today they contribute just 5 percent of government tax revenues.

Despite high taxes on the rich and on corporations, median family income (after accounting for inflation) more than doubled in the three decades after World War II, rising from $27,255 in 1945 to nearly $60,000 in the late 1970s.

The fall begins

That’s when things started to change.

Rather than supporting workers – and balancing the interests of large corporations and the interests of average Americans – the federal government began taking the side of business over workers by lowering taxes on corporations and the rich, reducing regulations and allowing firms to grow through mergers and acquisitions.

Since the late 1980s, median household incomes (different from family incomes because members of a household live together but do not need to be related to each other) have increased very little – from $54,000 to $59,039 in 2016 – while inequality has risen sharply. As a result, the size of the middle class has shrunk significantly to 50 percent from nearly 60 percent.

One important reason for this is that starting in the 1980s the role of government changed. A key event in this process was when President Ronald Reagan fired striking air-traffic control workers. It marked the beginning of a war against unions.

The share of the labor force that is organized has fallen from 35 percent in the mid-1950s to 10.7 percent today, with the largest drop taking place in the 1980s. It is not a coincidence that the share of income going to earners in the middle fell at the same time.

In addition, Reagan cut taxes multiple times during his time in office, which led to less spending to support and sustain the poor and middle class, while deregulation allowed businesses to cut their wage costs at the expense of workers. This change is one reason workers have received only a small fraction of their greater productivity in the form of higher wages since the 1980s.

Meanwhile, the real buying power of the minimum wage has been allowed to erode since the 1980s due to inflation.

While the middle class got squeezed, the very rich have done very well. They have received nearly all income gains since the 1980s.

In contrast, household median income in 2016 was only slightly above its level just before the Great Repression began in 2008. But according to new unpublished research I conducted with Monmouth University economist Robert Scott, the actual living standard for the median household fell as much as 7 percent due to greater interest payments on past debt and the fact that households are larger, so the same income does not go as far.

As a result, the middle class is actually closer to 45 percent of U.S. households. This is in stark contrast to other developed countries such as France and Norway, where the middle class approaches nearly 70 percent of households and has held steady over several decades.

The Republican tax plan

So how will the tax plan change the picture?

France, Norway and other European countries have maintained policies, such as progressive taxes and generous government spending programs, that help the middle class. The Republican tax package doubles down on the policies that have caused its decline in the U.S.

Specifically, the plan will significantly reduce taxes on the wealthy and large companies, which will have to be paid for with large spending cuts in everything from children’s health and education to unemployment insurance and Social Security. Tax cuts will require the government to borrow more money, which will push up interest rates and require middle-income households to pay more in interest on their credit cards or to buy a car or home.

The benefits of the Republican tax bill go primarily to the very wealthy, who will get 83 percent of the gains by 2027, according to the Tax Policy Center, a nonpartisan think tank.

Meanwhile, more than half of poor and middle-income households will see their taxes rise over the next 10 years; the rest will receive only a small fraction of the total tax benefits.

Trump touts the GOP tax plan with a group of ‘middle-class families.’ Reuters/Kevin Lamarque

From virtuous to vicious

While Republicans justify their tax plan by claiming corporations will invest more and hire more workers, thereby raising wages, companies have already indicated that they will mainly use their savings to buy back stock and pay more dividends, benefiting the wealthy owners of corporate stock.

So with most of the gains of the $1.5 trillion in net tax cuts going to the rich, the end result, in my view, is that most Americans will face falling living standards as government spending goes down, borrowing costs go up, and their tax bill rises.

This will lead to less economic growth and a declining middle class. And unlike the virtuous circle the U.S. experienced in the ‘50s and ’60s, Americans can expect a vicious cycle of decline instead.

Author: Steven Pressman, Professor of Economics, Colorado State University

Global inequality is on the rise – but at vastly different rates across the world

From The Conversation.

Inequality is rising almost everywhere across the world – that’s the clear finding of the first ever World Inequality Report. In particular, it has grown fastest in Russia, India and China – places where this was long suspected but there was little accurate data to paint a reliable picture.

Until now, it was actually very difficult to compare inequality in different regions of the world because of sparse or inconsistent data, which lacked credibility. But, attempting to overcome this gap, the new World Inequality Report is built on data collection work carried out by more than a hundred researchers located across every continent and contributing to the World Wealth and Income Database.

Europe is the least unequal region of the world, having experienced a milder increase in inequality. At the bottom half of the table are Sub-Saharan Africa, Brazil and India, with the Middle East as the most unequal region.

Since 1980, the report shows that there has been rising inequality occurring at different speeds in most parts of the world. This is measured by the top 10% share of income distribution – how much of the nation’s income the top 10% of earners hold.

Places where inequality has remained stable are those where it was already at very high levels. In line with this trend, we observe that the Middle East is perhaps the most unequal region, where the top 10% of income earners have consistently captured over 60% of the nation’s income.

Inequality is always a concern

Even in Europe, where it is less pronounced, equality always raises ethical concerns. For example, in Western Europe, many do not receive a real living wage, despite working hard, often in full-time employment. Plus, the data shows that the top 10% of earners in Europe as a whole still hold 37% of the total national income in 2016.

Rising income inequality should be focal to public debate because it is also a factor which motivates human behaviour. It affects how we consume, save and invest. For many, it determines whether one can access the credit market or a good school for our children

This, in turn, may affect economic growth, raising the question of whether it is economically efficient to have unequal societies.

Going into the details of what drives the rise in income inequality, the report shows that unequal ownership of national wealth is an important force. National wealth can be either publicly owned (for example, the value of schools, hospitals and public infrastructure) or privately owned (the value of private assets).

Since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries. In particular, the UK and the US are countries with the lowest levels of public capital.

Arguably, this limits the ability of governments to tackle inequality. Certainly, it has important implications for wealth inequality among citizens. It also indicates that national policies shaping ownership of capital have been a major factor contributing to the rise of inequality since 1980.

Inequality in the developing world

Resource rich economies are traditionally considered to be prone to conflict or more authoritarian in terms of how they are governed. What this new report tells us is that some resource rich economies, such as “oil economies”, are also extremely unequal. This was often suspected because natural resources are often concentrated in the hands of a minority. Until this report, however, there was no clear evidence.

The World Inequality Report appears to show us that the Middle East region may be even more unequal than Central and South America, which have long been held up as some of the most unequal places on Earth.

Another significant finding is that countries at similar stages of development have seen different patterns of rising inequality. This suggests that national policies and institutions can make the difference. The trajectories of three major emerging economies are illustrative. Russia has an abrupt increase, China a moderate pace and India a gradual one.

The comparison between Europe and the US provides an even more striking example – Western Europe remains the place with the lowest concentration of national income among the top 10% of earners.

Compared with the US, the divergence in inequality has been spectacular. While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe, while it shot up to 20% in the US. This might help explain the rise in populism. Those left behind grow impatient when they do not see any tangible improvement (or even a worsening) in their living conditions.

It is not just important to reduce inequality to make society more fair. Equal societies are associated with other important outcomes. As well as political and social stability, education, crime and financial stability may all suffer when inequality is high.

With this new data at our fingertips, we can now act to learn from the policies of more equal regions and implement them to reduce inequality across the world.

Author: Antonio Savoia, Lecturer in Development Economics, University of Manchester

Digital Transformation IS Revolutionary

An excellent article from Mckinsey which makes the point that if Digital Transformation this isn’t on your agenda, then you’ve got the wrong agenda! Its not about new shiny tech things. Rather, all value chains will be disrupted, it is revolutionary. The benefits are breathtaking.

Digital transformation is about sweeping change. It changes everything about how products are designed, manufactured, sold, delivered, and serviced—and it forces CEOs to rethink how companies execute, with new business processes, management practices, and information systems, as well as everything about the nature of customer relationships. I’m seeing leaders who get this. They’re all over it: they want to launch five transformation initiatives right now; they’re talking to me and every digital leader they know about where the technology threats are coming from; and they’re hiring the best people to advise them. Yet I’m shocked by—even fearful for—the many CEOs I know who seem to be asleep at the switch. They just don’t see the massive disruption headed their way from digital threats, seen or unseen, and they don’t seem to understand it will happen very quickly.

So when I see CEOs who may be experimenting here and there with AI or the cloud, I tell them that’s not enough. It’s not about shiny objects. Tinkering is insufficient. My advice is that they should be talking about this all the time, with their boards, in the C-suite—and mobilizing the entire company. The threat is existential. For boards, if this isn’t on your agenda, then you’ve got the wrong agenda. If your CEO isn’t talking about how to ensure the survival of the enterprise amid digital disruption, well, maybe you’ve got the wrong person in the job. This may sound extreme, but it’s not.

It’s increasingly clear that we’re entering a highly disruptive extinction event. Many enterprises that fail to transform themselves will disappear. But as in evolutionary speciation, many new and unanticipated enterprises will emerge, and existing ones will be transformed with new business models. The existential threat is exceeded only by the opportunity.

When Holding Cash Beats Paying Debt

From The US On The Economy Blog.

For families who are struggling financially, there are times when it is better to keep some cash on hand, even if they hold high-interest debt.

A recent In the Balance article highlights the importance of emergency savings to the financial stability of struggling households. It was authored by Emily Gallagher, a visiting scholar at the St. Louis Fed’s Center for Household Financial Stability, and Jorge Sabat, a research fellow at the Center for Social Development at Washington University in St. Louis.

The Struggle to Make Ends Meet

Many families continue to struggle to make ends meet, the authors said, noting a recent Federal Reserve survey that estimated that almost half of U.S. households could not easily handle an emergency expense of just $400.

Given this, they asked: “Should more families be encouraged to hold a liquidity buffer even if it means incurring more debt in the short-term?”

In explaining why it might make sense, for example, to keep $1,000 in a low-earning bank account while owing $2,000 on a high-interest-rate credit card, Gallagher and Sabat’s research suggests this type of cash buffer greatly reduces the risk that a family will:

Miss a rent, mortgage or recurring bill payment

Be unable to afford enough food to eat

Be forced to skip needed medical care within the next six months

Linking Balance Sheets and Financial Hardship

Gallagher and Sabat investigated which types of assets and liabilities predicted whether a household would experience financial hardship over a six-month period.

Their survey encompassed detailed financial and demographic results that covered two time-period observations for the same household: one at tax time, and the other six months after tax time.

“This feature of our data set is ideal for capturing the probability that a household that is currently financially stable falls into financial hardship in the near term,” the authors explained. “Furthermore, the survey samples only from low-to-middle income households, our population of interest for understanding the antecedents of financial hardship.”

They tracked families in the first survey who said they hadn’t recently experienced any of these four main types of financial hardship:

Delinquency on rent or mortgage payments

Delinquency on regular bills, such as utility bills

Skipped medical care

Food hardship (going without needed food)

Gallagher and Sabat also asked if the family had any balances in:

Liquid assets, such as checking and saving accounts, money market funds and prepaid cards

Other assets, including businesses, real estate, retirement or education savings accounts

High-interest debt, such as that from credit cards or payday loans

Other unsecured debt, such as student loans, unpaid bills and overdrafts

Secured debt, including mortgages or debts secured by businesses, farms or vehicles

Controlling for factors such as income and demographics, they then tracked whether the 5,000 families in the survey had suffered a financial shock that would affect the results.

Cash on Hand Matters Most

The authors found that having liquid assets or other assets always predicted lower risk of encountering hardship of any kind, while having debts generally increased the risk of hardship.

Liquid assets had the most predictive power, Gallagher and Sabat said. They noted that a $100 increase (from a mean of $6) was associated with a 4.6 percentage point reduction in a household’s probability of rent or mortgage delinquency.

Liquid assets also significantly reduced the likelihood of entering into more common forms of hardship. A $100 increase in liquidity was associated with declines in the rates of:

Regular bill delinquency (by 8.3 percentage points)

Skipped medical care (by 6.3 percentage points)

Food hardship (by 5.2 percent percentage points)

“These estimated effects are substantial relative to the probability of encountering each hardship,” they said.

Conclusion

“Our findings suggest that households should be encouraged to maintain at least a small buffer of liquid savings, even if the cash in that buffer is not being used to pay down high-interest debt,” Gallagher and Sabat concluded.

Home Renovation Spending On The Slide Too

According to the HIA, in the December 2017 edition of their Renovations Roundup report which is released today, low wage growth and fewer home sales resulted in a slowing in renovations activity in 2017.

The HIA Renovations Roundup is the most comprehensive regular review of Australia’s $33 billion home renovations market. The report also includes the exclusive results of a survey of 595 renovations firms right across the country.

“The near term outlook for home renovations demand is being held back by sluggish wages growth. Because renovations activity is often initiated by the new owners of older homes, the dip in established house turnover over the past 12 months has not accelerated renovations activity this year,”

“During 2017, home renovations work contracted by 3.1 per cent. A further decline of similar magnitude is projected for 2018.

“The medium term holds better prospects for renovations activity. Interest rates are set to remain lower for longer than previously expected. The ageing of Australia’s dwelling stock will also work in favour of renovations demand – the number of houses in the key renovations age bracket of 30-35 years is going to rise substantially until the early part of the 2020s decade.

“Even though current conditions in the renovations market are marking time, the HIA renovations market survey suggests that 40 per cent of firms still intend to take on extra employees over the next 12 months.” said Shane Garrett, HIA’s Senior Economist.

HIA forecasts that renovations activity will suffer a 3.1 per cent decline during 2018 but that a 3.2 per cent recovery will take hold during 2019. In 2020, the pace of expansion is set to accelerate to 5.7 per cent.

Further growth of 0.9 per cent in 2021 is expected to bring the value of the home renovations market to $35.57 billion – compared with $33.36 billion in 2017.

Being middle class depends on where you live

From The Conversation.

Politicians are fond of pitching to the “average Australian” but judging by the income of Australians, whether you are middle class depends on where you live. And where we live tells a rich story of who we are as a nation – socially, culturally and economically.

Income is at the heart of access to services and opportunities, which are differing and unequal based on where you live.

Our ability to afford housing that meets our needs largely determines where we live. In turn, where we live influences access to other important features of our lives which shape lifelong and intergenerational opportunities. For example, student performance is associated with everything from where a student lives to their parent’s occupation.

Household incomes in capital cities are typically among the highest, with incomes declining the further you live from major cities. So it’s understandable why Australians living outside or on the fringes of cities might feel somewhat left behind.

The Australian Bureau of Statistics presents “average” income as a range based on where you live. This range is marked by a lower number (30% of incomes) at the beginning and the higher number (80% of incomes) at the top.

This “average” income varies substantially between different rural areas from A$78,548 – A$163,265 in Forrest (ACT) to A$10,507 – A$26,431 in Thamarrurr (NT). This is actually an equivalised household income which factors in the economic resources like the number of people and their characteristics, between households.

The difference between the top and bottom of this range of “average” household income also shows greater inequality within areas.

Even within the greater Sydney metropolitan area, there’s significant differences in household income between areas. The average household equivalised income in Lavender Bay is around A$40,000 – A$95,000 higher than it is in Marayong.

The difference in income is marked, and there are other differences too. People in Marayong are on average younger than Lavendar Bay. Family size is smaller in Lavendar Bay. Over half of the Lavendar Bay residents hold university degrees, compared to a more skill-based workforce in Marayong.

Why there is no one “average” Australian

Cities offer access to myriad employment options. Industries associated with relatively high incomes are typically concentrated in cities to take advantage of global connections.

Sydney, Melbourne and Canberra are notable standouts based on household income. So if you live close to these major cities you’d be getting the most opportunities in terms of employment and income, given the you’re the right candidate.

But not everyone wants to live in the centre of cities. Housing, lifestyle and neighbourhood preferences also play a role in where we live, but are still influenced by income and proximity to such things as employment and family and friends.

Also, infrastructure which supports social and economic wellbeing is essential in communities, regardless of where we live.

What politicians should be talking about instead

Improving the different and unequal access across areas requires better internet connectivity and advances in the way we work. Policies around housing and family-friendly workplaces go some way to supporting Australians in work.

Any measures to redress inequalities require understanding the needs and wants of communities. Proposed planning to reconfigure the greater city of Sydney around population and socioeconomic infrastructure offers an example of a data-driven approach to planning. Whether the proposed reconfiguration of Sydney leads to improvements or greater segmentation will be revealed in practice.

Politicians rarely reflect the characteristics of the people they represent, particularly when we consider the remuneration, entitlements and perks of political office. The longer politicians are in office, and somewhat removed from the people they represent, the further they potentially become from gauging their electorate.

Yet politicians profess to know what the average Australians they represent needs and wants. They apply this to a range of things from service delivery to representation on political matters. And this is within reason.

But without current experience we struggle to see things from perspectives other than our own. Take for example the way some have come to label themselves outsiders from the social and political elite to advance their credibility with average Australians.

Bringing politicians in touch with the diversity of needs and wants of Australians starts with a self-check and recognition of individual bias (conscious or unconscious). This is the first step toward really understanding and connecting with Australians – be it in the “average” or otherwise.

Author: Liz Allen, Demographer, ANU Centre for Social Research and Methods, Australian National University