The great grey gouge of the West

By Leith van Onselen

There’s an inter-generational war going on in the UK, which is also being played-out across most developed nations, whereby older generations are ‘making out like bandits’ at the expense of their children and grandchildren.

Here’s the Financial Times:

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Average twentysomethings have seen their living standards slip from a position of comparative affluence to well below par over the past 35 years as average pensioners have enjoyed a rapid rise up the national league tables of incomes…

They come as David Cameron intensifies his efforts to woo older voters, pledging to protect pensioner benefits costing billions from any cuts if he wins the May election…

A major reason for the shift is the rise in house prices in recent decades.

And The Economist:

Since 2010 the basic state pension has risen by 16%—5% in real terms—under a formula that guarantees generous increases whatever the economic weather. Pensioners also enjoy free TV licences, free bus passes and a handout to help pay winter fuel bills. The government even subsidises their savings, by offering bonds yielding 4% interest—more than five times its own borrowing cost—exclusively to the over-65s…

Over the past five years, the average British household has seen its income fall by about £500 as a result of coalition tax increases and spending cuts. The average two-pensioner household has taken a hit of just £23…

Buoyed by generous pensions and decades of soaring house prices, the wealthiest fifth of pensioner households enjoy average incomes well over twice the British average…Contrast their treatment with that of younger Britons, whose taxes are paying for their pampered elders. Unlike state pensions, working-age handouts have been squeezed.

At 14%, youth unemployment is high. And for those without property to inherit, exorbitant rents and house prices—the result of decades of failed planning—have dashed the dream of home-ownership to which Britons aspire.

Of course there is a solution at hand to address the inter-generational divide, tax the land:

What has skyrocketed over the past several decades is the value of land and housing…

Joseph Stiglitz, the Nobel-winning economist at Columbia University,… urges that policy makers distinguish between wealth, which includes land, and productive capital, which doesn’t. The distinction is important because an increase in the value of land and housing — unlike an increase in other forms of capital, such as computers and equipment — doesn’t necessarily increase our capacity to produce goods and services. It doesn’t imply that we have any more land to use.

Stiglitz also argues for imposing a land value tax, to directly address this source of increasing wealth inequality. Economists have long favored such a tax, because it does little or nothing to distort incentives. Since land is roughly fixed in supply, there’s little one can do to escape a land tax. Indeed, from the perspective of economic efficiency, a land value tax scores higher than even a value-added tax, which is typically seen as the most efficient form of taxation…

Spot on. Efficiency issues aside, it is ridiculous to expect younger generations, many of whom are renters, to support their relatively wealthy home owning parents and grandparents as they live in tax-exempt homes the young can only dream of.

unconventionaleconomist@hotmail.com

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https://prosper.org.au/2015/03/04/the-great-grey-gouge-of-the-west/