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How The Dutch Economy Shows We Can't Reduce Wealth Inequality With Taxes | Economics Explained - YouTube
Channel: Economics Explained
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this is the netherlands a picturesque
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nation filled with windmills tulip
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fields and
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coffee shops the nation is looked to by
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many as an extremely forward-thinking
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place that practices some pretty
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progressive policies
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the nation has an incredibly strong
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social security system with universal
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health care robust retirement pensions
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as well as allowances for maternity
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leave
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and these kinds of policies are mirrored
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in other areas as well the nation is
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home to some relatively high tax rates
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and the predictions for employees are
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very strong almost to the point that
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people joke it's impossible to be fired
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in the netherlands
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so this kind of looks like a liberal
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paradise right
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well it would be if it were not hiding a
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dirty little secret
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this postcard perfect little nation is
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according to the world bank
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the most unequal place on earth and the
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extent of the inequality
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is simply staggering we have explored
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south africa on the channel before
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which normally gets this less than
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desirable title
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and if you would oppose this question to
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google it's what you would walk away
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thinking
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but it isn't the whole story in terms of
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wealth inequality in recent years
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south africa has been pretty tame the
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netherlands by contrast
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is the only country on earth that is
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more unequal than the world itself
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so what is going on here similar
[80]
policies to the ones that have been
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commonplace in the netherlands for
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decades are being proposed by
[84]
politicians in places like the united
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states
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as a way to curb the issue of wealth
[88]
inequality but if we look at the results
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it doesn't look like they'll do that at
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all so to really understand what is
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going on here as always we have to look
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at a few key
[97]
issues how did the netherlands of all
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place become the land of inequality
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what does this teach us about the nature
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of wealth in the modern world and
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how can this help us create more robust
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economic policies that will work to
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benefit
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everyone oh and of course while we're
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here we will call this a country video
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and put the netherlands on the economics
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explained
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leaderboard this episode of economics
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explained was made possible by our fans
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on patreon
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if you would like to gain early access
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sessions which are now held every
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please consider supporting our channel
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at patreon.com
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economics explained now inequality
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is a strange thing there are many
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different ways to quantify it and
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metrics that we use to make sense of it
[143]
but outside of the figures there is no
[145]
getting around the fact that it is a
[147]
controversial issue
[148]
the last time we explored wealth
[150]
inequality on this channel we attempted
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to objectively explore if it was
[153]
something that had negative impacts on
[155]
long-term growth
[156]
in the economy our conclusion was yes
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maybe depending on a set list of factors
[161]
and conditions
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so basically the most fenced city answer
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we could have possibly given based on
[166]
existing research
[167]
and it is still the most disliked video
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on the channel by a fair margin
[171]
to say people take this topic seriously
[173]
is a bit of an understatement
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but fair enough it is a real issue that
[177]
deserves proper attention by government
[179]
all around the world
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but the key to getting that attention is
[182]
to understand what these decision makers
[184]
will be looking at
[185]
the equality of countries is measured
[187]
with something called the genie
[188]
coefficient
[189]
now people might have heard this term
[190]
before or seen graphs like these ones
[192]
but still not truly understand what it
[195]
actually shows
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so to keep it simple let's imagine an
[198]
economy with three people
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and three dollars to be gained in income
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each year
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a perfectly even system would have each
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of those participants earn one dollar
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each year and if we looked at that
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cumulative total for each person we
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would have a perfect
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y equals x line the income of person one
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is one dollar
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the second person plus the first person
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is two dollars and the income of the
[218]
third person
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plus the second person plus the first
[221]
person is three dollars
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mind-blowing stuff i know this perfect
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world of equality
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would have a genie coefficient of zero
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meaning that everybody earns
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exactly the same amount cool but now
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let's look at the opposite where all
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three dollars go to just one of the
[237]
three people well this hypothetical
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economy would have a genie coefficient
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of one
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meaning the system could not get more
[244]
unequal because one person controls
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all of the income now in reality real
[249]
economies have a lot more people
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and a lot more dollars to go around so
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the actual figure
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normally has a lot more decimal places
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but will always be somewhere within this
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range of zero to one
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cool so that's the genie coefficient and
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for most people watching i'm sure there
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were no huge surprises there
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but this figure can be used to measure
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two things
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income equality and wealth inequality
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naturally
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income inequality tends to get a lot of
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the attention people riling over how a
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ceo has earned 300 times more than their
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average worker or whatever
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but if anything income inequality is
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just the driver of
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wealth inequality people who earn more
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can naturally save more
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and their savings compound over time if
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well invested
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but if incomes were more even then this
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should stop
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the process at the beginning it should
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cut off the flow of money
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building this wealth divide right well
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maybe
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but that theory may need to hold up to
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the lessons of the dutch
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the netherlands is very similar to
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nations like sweden denmark finland and
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yes of course norway in the sense that
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social policies are
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quite strong and are funded by taxes
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that are quite high
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that is why if we look at the world
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bank's records on income inequality
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all of these nations rank very low yet
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despite the obvious connections between
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income and wealth all of these nations
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have very high
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wealth inequality of course none quite
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to the extent of the netherlands but
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even a nation like sweden
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the poster child of democratic socialism
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has a higher level of wealth inequality
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than the united states
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brazil or india so how is this possible
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how are rich people hoarding such a huge
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share of the nation's wealth
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despite sharing in a comparatively
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modest portion of the nation's total
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income
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well to answer that question we actually
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have to look at the side that normally
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gets the least attention
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the poorest households unlike income
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where the least you can earn in a given
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year after taxes is
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zero dollars your net worth can be
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negative
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for example someone with huge student
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loan debts that doesn't own a house or a
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car or has minimal savings
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might have a negative net worth now in
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the netherlands this
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isn't so much of an issue schooling is
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heavily subsidised
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but that doesn't mean that people don't
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take on other types of debt
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in fact they seek out debt on an even
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larger scale
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through a home loan now to viewers in
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most countries getting a home loan
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requires saving up a deposit so that you
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own a portion of the property
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most banks around the world would like
[399]
you to put at least 20 or at a bare
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minimum 5
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down so that you have skin in the game
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and will be more likely to pay back that
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mortgage
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this means that if you own a home even
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if you have a big mortgage on it
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you still probably have a positive net
[412]
worth because your house is an asset
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and it is worth more than the liability
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of the home loan
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so as long as you don't have any other
[419]
debts or the value of the property
[420]
hasn't depreciated
[422]
you should be in the green this is not
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the case in the netherlands though
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where borrowers can and in fact are
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encouraged to borrow
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over 100 of the value of their home as a
[433]
mortgage
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the national mortgage guarantee is a
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government program that ensures bank
[437]
loans on homes
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so if the borrower doesn't repay the
[440]
bank and the bank can't make all of the
[442]
money it needs back from repossessing
[444]
the home
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oh well it can just get a check from the
[446]
government for the difference
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essentially making home loans completely
[450]
risk-free
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this is actually accelerated by the fact
[453]
that mortgage repayments in the
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netherlands
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are tax-deductible what that means is
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that if you earn 100 000 euros in a year
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but you are paying 40 000 euros in
[462]
interest to the bank on your home loan
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you would only pay tax as if you were
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earning 60 000 euros
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this does two things to our wealth
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inequality metric for starters it skews
[472]
the influence of those high taxes
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if people can claim significant
[476]
deductions on high incomes by having
[478]
large mortgages
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then it doesn't really matter what the
[480]
tax rate is because it can just be
[482]
redirected into building up a real
[483]
estate portfolio
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the other thing it does is encourage
[486]
people to take on debt
[488]
up until recently people were able to
[490]
borrow as much as 110
[492]
of the value of their house as a
[493]
mortgage that means if a young couple
[495]
was just starting out with a brand new
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300 000 euro family home they could
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borrow an extra 30
[500]
000 euros on top of it and suddenly find
[502]
themselves with a negative net worth
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of 30 000 euros this means that a good
[507]
chunk of the population is under water
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on their homes and
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that's perfectly fine this is one of the
[513]
failings of the genie coefficient as a
[514]
simple metric
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dutch people even the dutch people who
[518]
might find themselves with a negative
[519]
net worth
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all live very comfortable lives and yet
[523]
the figures by themselves would suggest
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that this is some kind of tyrannical
[526]
dystopia
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with a population of peasants struggling
[528]
to get by with a class of billionaire
[530]
overlords watching over them
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but of course simply isn't the case
[535]
credit
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and access to it for responsible
[537]
purposes can actually be one of the
[539]
greatest determinants of social mobility
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in an economy
[542]
but it can at the same time be something
[544]
that accelerates wealth inequality
[545]
metrics beyond the control of regular
[547]
government intervention
[548]
like we see here for an extreme example
[551]
donald trump once joked that a homeless
[553]
man on the street was 900 million
[555]
richer than he was because at the time
[557]
he was in crippling debt
[558]
despite this his lifestyle was obviously
[561]
far more comfortable than the homeless
[562]
man's and no rational economist would
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call him the poorest man in america
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although i'm sure the comments section
[568]
will and i already regret using this
[570]
example
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but anyway the takeaway here is that
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negative net worth does not necessarily
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mean poor
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but it does make figures look that way
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cool
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so does that solve the riddle of dutch
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inequality well
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no it's certainly a contributing factor
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but it's not the whole story in fact
[589]
this extreme wealth inequality
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might actually be the outcome of matured
[594]
capitalism
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the netherlands was the first nation in
[596]
history that economists could really
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point to and say
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this is capitalism as we know it in the
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modern day and yes there were systems of
[603]
trade that stretched back
[604]
thousands of years throughout human
[606]
history but most of those societies
[608]
still had productive potential decided
[611]
on by rulers
[612]
rather than consumers in our video on
[614]
the dutch east india company
[616]
we found that the netherlands pioneered
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incredibly modern ideas like stock
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markets limited liability companies
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and speculative assets as far back as
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the 1600s
[625]
beyond this the netherlands has not
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really experienced much in the way of a
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shake-up of this system in the past 400
[630]
years
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that's not to say that there wasn't wars
[633]
and coups and all of that good stuff
[635]
this is modern history europe we're
[636]
talking about i mean come on
[638]
but it's more so that if you were
[640]
wealthy in the nation you could continue
[642]
to pass this money down and down
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generations without the same fear of it
[645]
being guillotined somewhere in the
[647]
family tree
[648]
that's why the money in the netherlands
[650]
is old money
[652]
the people that are rich are to be
[653]
honest not that rich
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not compared to american chinese or
[657]
russian billionaires anyway
[659]
but if we were to look at the nation's
[660]
wealthiest person charlene de cavallo
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heineken
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we can learn a lot about the nature of
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wealth in the country
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this lady is 66 years old and his
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surprise surprise in the beer business
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although she didn't found the company
[674]
neither did her father
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or his father and in fact even her
[677]
great-grandfather
[678]
didn't actually found the heineken brand
[680]
as we know it today
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he simply convinced his already wealthy
[684]
parents to buy a brewery with a family
[686]
fortune that he just slapped his name
[688]
on that family fortune dated back to the
[691]
dutch east india company
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what this means is that income taxes
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will do absolutely nothing to control
[697]
this wealth
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income this family hasn't earned an
[702]
income since napoleon was in diapers
[705]
wealth begets wealth and the most
[706]
powerful variable in compounding money
[708]
is time normally this is controlled by
[711]
having to split wealth between multiple
[713]
heirs who will inevitably squander the
[714]
family fortune but
[716]
european elites tend to do things a
[718]
little bit differently
[719]
this is a massive generalization of
[721]
course but a majority of the family
[723]
fortune
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will be left to a selected child who
[726]
will be trained in keeping the family's
[728]
assets as protected and low-key
[730]
as possible the other children will
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still live a very comfortable lifestyle
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but the fortune does not get split up
[736]
equally like it did with the waltons
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let's say
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this family structure combined with a
[741]
massive time frame can generate some
[743]
pretty funky
[744]
results consider this would you rather
[746]
get 100
[747]
returns on your portfolio that is
[749]
doubling it every year for 10 straight
[751]
years
[752]
or just 10 returns which is closer to
[755]
the market rate of return over the last
[757]
century
[757]
for 100 years let's assume that these
[760]
are all compounded annually and
[761]
both examples are starting with 10 000
[764]
for simplicity's sake
[766]
well our investor with a 10 year outlook
[768]
turned that 10 000
[770]
into 10 million 240 000
[773]
those are some serious attendees but our
[776]
more conservative investor with a 100
[779]
year outlook
[779]
will be walking away with 137 million
[783]
eight hundred and six thousand one
[784]
hundred and twenty three dollars and
[786]
forty cents
[787]
which even accounting for inflation is
[789]
significantly better than that first
[790]
portfolio
[791]
who had an unrealistic return
[793]
expectation anyway
[795]
time in the markets beats timing the
[797]
market and when you have had 400 years
[800]
in the market
[801]
well it's going to create some serious
[803]
wealth concentrations
[805]
so does this mean that capitalism is
[807]
inevitably going to grow more and more
[809]
unequal as time passes
[810]
well yeah probably this effect will be
[814]
less severe in countries that don't
[815]
quite have the same dynastic inheritance
[817]
scheme and
[818]
things like the giving pledge amongst
[819]
big ticket billionaires will certainly
[821]
make a difference
[822]
but as we've seen with the netherlands
[823]
it's not the top 10 on the forbes list
[825]
that is going to change these figures
[827]
it's the hundreds of other families that
[829]
intentionally slip below the radar that
[831]
will
[832]
now is this a problem well maybe but
[836]
maybe not i would much rather be in the
[838]
bottom 10 of the netherlands than the
[839]
bottom 10
[840]
of ethiopia which is comparatively a far
[843]
more equal country by genie coefficient
[845]
metrics
[846]
in fact i would rather be in the bottom
[848]
10 of the netherlands than the top 10 of
[850]
ethiopia
[851]
but that goes to show that inequality
[853]
doesn't always cause issues so long as
[855]
there are equitable systems in place to
[856]
make sure that everyone
[858]
genuinely has the ability to rise up and
[860]
that comfort
[861]
safety and the well-being of average
[862]
people is not sacrificed in the name of
[865]
the profits for a few
[866]
i think i somehow managed to make
[868]
everybody on the left and right angry
[870]
with that sentence
[871]
please like the video i feel like i'm
[873]
gonna need it to balance out the
[874]
dislikes
[875]
okay the fun stuff time to put the
[877]
netherlands on our economics explained
[879]
national leader board but before that
[881]
i'm going to take california off here
[883]
because american states are getting
[884]
their own list
[885]
also our video on texas was one of the
[887]
worst performing videos we have ever
[888]
released this year so
[889]
don't go recommending your home state
[891]
for a video until that one reaches 200
[893]
000 views
[894]
i gotta follow market demand here okay
[896]
self-pity aside
[897]
the netherlands has a large advanced
[899]
economy with a gdp of 914 billion us
[902]
dollars it gets a seven out of ten
[904]
falling just short of the trillion
[906]
dollar club gdp per capita
[909]
is very impressive at just under sixty
[911]
thousand dollars per person as of 2019.
[914]
what's more is that the income is
[916]
actually spread very evenly
[918]
it's within the top 15 countries in the
[920]
world for income equality
[922]
which makes the wealth inequality all
[924]
the more interesting
[925]
either way it gets an 8 out of 10. in
[927]
the weekend category
[929]
stability and confidence well that's a
[931]
no-brainer 10 out of 10
[933]
any economy that has harbored wealth for
[934]
over 400 years is obviously doing
[937]
something right
[938]
growth is a bit meh like most european
[942]
nations it has not really made much
[944]
progress since 2008 and the eurozone
[946]
crisis
[947]
i can't imagine the fallout of the
[948]
coronavirus is going to do the many
[949]
failures either
[950]
so it gets a two out of ten because at
[953]
least it hasn't gone backwards
[955]
finally industry well the nation is
[957]
quite impressive here
[958]
it has always been on the cutting edge
[960]
of capitalism and even today it's the
[962]
center of advanced financial services
[963]
that are used all over the world
[965]
it gets a 9 out of 10. altogether it
[968]
gets an average score of 7.2 out of 10
[970]
only really been bought down by
[972]
lackluster growth even still
[974]
very impressive and it claims a solid
[976]
spot on the economics explained
[978]
leaderboard hi guys i hope you enjoyed
[980]
the latest video
[981]
if you did please consider liking and
[982]
subscribing this video is made possible
[984]
by our patrons over on patreon so if you
[986]
enjoy this video please consider
[988]
supporting the channel
[989]
like these awesome people did thanks
[991]
guys bye
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