How The Dutch Economy Shows We Can’t Reduce Wealth Inequality With Taxes | Economics Explained
Jason 0 Comments Retire Wealthy
this is the netherlands a picturesque nation filled with windmills tulip fields and coffee shops the nation is looked to by many as an extremely forward-thinking place that practices some pretty progressive policies the nation has an incredibly strong social security system with universal health care robust retirement pensions as well as allowances for maternity leave and these kinds of policies are mirrored in other areas as well the nation is home to some relatively high tax rates and the predictions for employees are very strong almost to the point that people joke it's impossible to be fired in the netherlands so this kind of looks like a liberal paradise right well it would be if it were not hiding a dirty little secret this postcard perfect little nation is according to the world bank the most unequal place on earth and the extent of the inequality is simply staggering we have explored south africa on the channel before which normally gets this less than desirable title and if you would oppose this question to google it's what you would walk away thinking but it isn't the whole story in terms of wealth inequality in recent years south africa has been pretty tame the netherlands by contrast is the only country on earth that is more unequal than the world itself so what is going on here similar policies to the ones that have been commonplace in the netherlands for decades are being proposed by politicians in places like the united states as a way to curb the issue of wealth inequality but if we look at the results it doesn't look like they'll do that at all so to really understand what is going on here as always we have to look at a few key issues how did the netherlands of all place become the land of inequality what does this teach us about the nature of wealth in the modern world and how can this help us create more robust economic policies that will work to benefit everyone oh and of course while we're here we will call this a country video and put the netherlands on the economics explained leaderboard this episode of economics explained was made possible by our fans on patreon if you would like to gain early access to these videos before they're uploaded to youtube as well as participate in exclusive q a sessions which are now held every saturday at 9 30 eastern standard time please consider supporting our channel at patreon.com economics explained now inequality is a strange thing there are many different ways to quantify it and metrics that we use to make sense of it but outside of the figures there is no getting around the fact that it is a controversial issue the last time we explored wealth inequality on this channel we attempted to objectively explore if it was something that had negative impacts on long-term growth in the economy our conclusion was yes maybe depending on a set list of factors and conditions so basically the most fenced city answer we could have possibly given based on existing research and it is still the most disliked video on the channel by a fair margin to say people take this topic seriously is a bit of an understatement but fair enough it is a real issue that deserves proper attention by government all around the world but the key to getting that attention is to understand what these decision makers will be looking at the equality of countries is measured with something called the genie coefficient now people might have heard this term before or seen graphs like these ones but still not truly understand what it actually shows so to keep it simple let's imagine an economy with three people and three dollars to be gained in income each year a perfectly even system would have each of those participants earn one dollar each year and if we looked at that cumulative total for each person we would have a perfect y equals x line the income of person one is one dollar the second person plus the first person is two dollars and the income of the third person plus the second person plus the first person is three dollars mind-blowing stuff i know this perfect world of equality would have a genie coefficient of zero meaning that everybody earns exactly the same amount cool but now let's look at the opposite where all three dollars go to just one of the three people well this hypothetical economy would have a genie coefficient of one meaning the system could not get more unequal because one person controls all of the income now in reality real economies have a lot more people and a lot more dollars to go around so the actual figure normally has a lot more decimal places but will always be somewhere within this range of zero to one cool so that's the genie coefficient and for most people watching i'm sure there were no huge surprises there but this figure can be used to measure two things income equality and wealth inequality naturally income inequality tends to get a lot of the attention people riling over how a ceo has earned 300 times more than their average worker or whatever but if anything income inequality is just the driver of wealth inequality people who earn more can naturally save more and their savings compound over time if well invested but if incomes were more even then this should stop the process at the beginning it should cut off the flow of money building this wealth divide right well maybe but that theory may need to hold up to the lessons of the dutch the netherlands is very similar to nations like sweden denmark finland and yes of course norway in the sense that social policies are quite strong and are funded by taxes that are quite high that is why if we look at the world bank's records on income inequality all of these nations rank very low yet despite the obvious connections between income and wealth all of these nations have very high wealth inequality of course none quite to the extent of the netherlands but even a nation like sweden the poster child of democratic socialism has a higher level of wealth inequality than the united states brazil or india so how is this possible how are rich people hoarding such a huge share of the nation's wealth despite sharing in a comparatively modest portion of the nation's total income well to answer that question we actually have to look at the side that normally gets the least attention the poorest households unlike income where the least you can earn in a given year after taxes is zero dollars your net worth can be negative for example someone with huge student loan debts that doesn't own a house or a car or has minimal savings might have a negative net worth now in the netherlands this isn't so much of an issue schooling is heavily subsidised but that doesn't mean that people don't take on other types of debt in fact they seek out debt on an even larger scale through a home loan now to viewers in most countries getting a home loan requires saving up a deposit so that you own a portion of the property most banks around the world would like you to put at least 20 or at a bare minimum 5 down so that you have skin in the game and will be more likely to pay back that mortgage this means that if you own a home even if you have a big mortgage on it you still probably have a positive net worth because your house is an asset and it is worth more than the liability of the home loan so as long as you don't have any other debts or the value of the property hasn't depreciated you should be in the green this is not the case in the netherlands though where borrowers can and in fact are encouraged to borrow over 100 of the value of their home as a mortgage the national mortgage guarantee is a government program that ensures bank loans on homes so if the borrower doesn't repay the bank and the bank can't make all of the money it needs back from repossessing the home oh well it can just get a check from the government for the difference essentially making home loans completely risk-free this is actually accelerated by the fact that mortgage repayments in the netherlands are tax-deductible what that means is that if you earn 100 000 euros in a year but you are paying 40 000 euros in interest to the bank on your home loan you would only pay tax as if you were earning 60 000 euros this does two things to our wealth inequality metric for starters it skews the influence of those high taxes if people can claim significant deductions on high incomes by having large mortgages then it doesn't really matter what the tax rate is because it can just be redirected into building up a real estate portfolio the other thing it does is encourage people to take on debt up until recently people were able to borrow as much as 110 of the value of their house as a mortgage that means if a young couple was just starting out with a brand new 300 000 euro family home they could borrow an extra 30 000 euros on top of it and suddenly find themselves with a negative net worth of 30 000 euros this means that a good chunk of the population is under water on their homes and that's perfectly fine this is one of the failings of the genie coefficient as a simple metric dutch people even the dutch people who might find themselves with a negative net worth all live very comfortable lives and yet the figures by themselves would suggest that this is some kind of tyrannical dystopia with a population of peasants struggling to get by with a class of billionaire overlords watching over them but of course simply isn't the case credit and access to it for responsible purposes can actually be one of the greatest determinants of social mobility in an economy but it can at the same time be something that accelerates wealth inequality metrics beyond the control of regular government intervention like we see here for an extreme example donald trump once joked that a homeless man on the street was 900 million richer than he was because at the time he was in crippling debt despite this his lifestyle was obviously far more comfortable than the homeless man's and no rational economist would call him the poorest man in america although i'm sure the comments section will and i already regret using this example but anyway the takeaway here is that negative net worth does not necessarily mean poor but it does make figures look that way cool so does that solve the riddle of dutch inequality well no it's certainly a contributing factor but it's not the whole story in fact this extreme wealth inequality might actually be the outcome of matured capitalism the netherlands was the first nation in history that economists could really point to and say this is capitalism as we know it in the modern day and yes there were systems of trade that stretched back thousands of years throughout human history but most of those societies still had productive potential decided on by rulers rather than consumers in our video on the dutch east india company we found that the netherlands pioneered incredibly modern ideas like stock markets limited liability companies and speculative assets as far back as the 1600s beyond this the netherlands has not really experienced much in the way of a shake-up of this system in the past 400 years that's not to say that there wasn't wars and coups and all of that good stuff this is modern history europe we're talking about i mean come on but it's more so that if you were wealthy in the nation you could continue to pass this money down and down generations without the same fear of it being guillotined somewhere in the family tree that's why the money in the netherlands is old money the people that are rich are to be honest not that rich not compared to american chinese or russian billionaires anyway but if we were to look at the nation's wealthiest person charlene de cavallo heineken we can learn a lot about the nature of wealth in the country this lady is 66 years old and his surprise surprise in the beer business although she didn't found the company neither did her father or his father and in fact even her great-grandfather didn't actually found the heineken brand as we know it today he simply convinced his already wealthy parents to buy a brewery with a family fortune that he just slapped his name on that family fortune dated back to the dutch east india company what this means is that income taxes will do absolutely nothing to control this wealth income this family hasn't earned an income since napoleon was in diapers wealth begets wealth and the most powerful variable in compounding money is time normally this is controlled by having to split wealth between multiple heirs who will inevitably squander the family fortune but european elites tend to do things a little bit differently this is a massive generalization of course but a majority of the family fortune will be left to a selected child who will be trained in keeping the family's assets as protected and low-key as possible the other children will still live a very comfortable lifestyle but the fortune does not get split up equally like it did with the waltons let's say this family structure combined with a massive time frame can generate some pretty funky results consider this would you rather get 100 returns on your portfolio that is doubling it every year for 10 straight years or just 10 returns which is closer to the market rate of return over the last century for 100 years let's assume that these are all compounded annually and both examples are starting with 10 000 for simplicity's sake well our investor with a 10 year outlook turned that 10 000 into 10 million 240 000 those are some serious attendees but our more conservative investor with a 100 year outlook will be walking away with 137 million eight hundred and six thousand one hundred and twenty three dollars and forty cents which even accounting for inflation is significantly better than that first portfolio who had an unrealistic return expectation anyway time in the markets beats timing the market and when you have had 400 years in the market well it's going to create some serious wealth concentrations so does this mean that capitalism is inevitably going to grow more and more unequal as time passes well yeah probably this effect will be less severe in countries that don't quite have the same dynastic inheritance scheme and things like the giving pledge amongst big ticket billionaires will certainly make a difference but as we've seen with the netherlands it's not the top 10 on the forbes list that is going to change these figures it's the hundreds of other families that intentionally slip below the radar that will now is this a problem well maybe but maybe not i would much rather be in the bottom 10 of the netherlands than the bottom 10 of ethiopia which is comparatively a far more equal country by genie coefficient metrics in fact i would rather be in the bottom 10 of the netherlands than the top 10 of ethiopia but that goes to show that inequality doesn't always cause issues so long as there are equitable systems in place to make sure that everyone genuinely has the ability to rise up and that comfort safety and the well-being of average people is not sacrificed in the name of the profits for a few i think i somehow managed to make everybody on the left and right angry with that sentence please like the video i feel like i'm gonna need it to balance out the dislikes okay the fun stuff time to put the netherlands on our economics explained national leader board but before that i'm going to take california off here because american states are getting their own list also our video on texas was one of the worst performing videos we have ever released this year so don't go recommending your home state for a video until that one reaches 200 000 views i gotta follow market demand here okay self-pity aside the netherlands has a large advanced economy with a gdp of 914 billion us dollars it gets a seven out of ten falling just short of the trillion dollar club gdp per capita is very impressive at just under sixty thousand dollars per person as of 2019.
what's more is that the income is actually spread very evenly it's within the top 15 countries in the world for income equality which makes the wealth inequality all the more interesting either way it gets an 8 out of 10. in the weekend category stability and confidence well that's a no-brainer 10 out of 10 any economy that has harbored wealth for over 400 years is obviously doing something right growth is a bit meh like most european nations it has not really made much progress since 2008 and the eurozone crisis i can't imagine the fallout of the coronavirus is going to do the many failures either so it gets a two out of ten because at least it hasn't gone backwards finally industry well the nation is quite impressive here it has always been on the cutting edge of capitalism and even today it's the center of advanced financial services that are used all over the world it gets a 9 out of 10.
altogether it gets an average score of 7.2 out of 10 only really been bought down by lackluster growth even still very impressive and it claims a solid spot on the economics explained leaderboard hi guys i hope you enjoyed the latest video if you did please consider liking and subscribing this video is made possible by our patrons over on patreon so if you enjoy this video please consider supporting the channel like these awesome people did thanks guys bye.
Posted in Retire Wealthy