This is the Netherlands, a picturesque nation filled with windmills, tulip fields and uhh
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 healthcare, 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
relatively high tax rates, and the protections for employees are very strong almost to the
point that people joke it is impossible to be fired in the Netherlands.
So this kind of looks like a liberal paradise right? Well, it would 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 were to pose this question to google, it’s what you would
walk away thinking. But this 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
will do that at all.
So to really understand this we are going to as always look at a few key issues.
How did the Netherlands of all places 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 work to benifit everyone?
And of course, while we are here we will call this a country video and put the Netherlands
on the economics explained leaderboard.
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 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 fence sitty answer we could possibly give based on existing research
and it is still the most disliked video on the channel by a fair margin. So 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 decisions makers
will be looking at.
The equality of countries is measured with something called a gini-co efficient now people
might have heard this term before or seen graphs like these ones, but still do not truely
understand what it actually shows.
So to keep it simple lets imagine an economy with 3 people and 3 dollars to be gained in
income each year.
A perfectly even system would have each of those participants earn 1 dollar each. If
we then looked at the cumulative total for each person it would form a perfect y=x line.
The income of 1 person is 1 dollar the second person plus the first person is 2 dollars
and the income of the 3 people plus the second person plus the first person is 3 dollars.
Mind-blowing stuff I know.
This perfect world of equality would have a gini co-efficient of 0 meaning that everybody
earns exactly the same amount. Cool but now lets look at the opposite where all of the
3 dollars goes to just one of the three people, well this hypothetical economy would have
a gini coefficient of 1 meaning the system could not get more unequal because one person
controls all the wealth.
Now in reality, real economies have more people and 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 0 to 1.
Cool so thats the gini co-efficient for most people watching I am sure there were no major
surprises there, but this figure can be used to measure 2 things, income inequality and
wealth inequality.
Naturally income inequality tends to get alot of the attention, people riling over how a
CEO earned 300 times more than the 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 than 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 there 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 national social policies are quiet strong and are funded by taxes that
are quiet hight, that is why if we look at the world banks records on income inequality
all of these nations rank quiet low.
Yet despite the obvious connection between income and wealth, all of these nations have
very high wealth inequality, of course none quite to the extend of 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 to the side that normally gets the
least attention, the poorest households.
Unlike income where the least you can earn after taxes in a given year is zero dollars
your net worth can be negative. For example someone with huge student loans debts, that
doesn’t own a house or a car and has minimal savings might have a negative net worth.
Now in the netherlands this isn’t so much of an issue, schooling is heavily subsidized
but that doesnt mean that people don’t take on other types of debt. Infact 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
in at least 20% and at a bare minimum 5% so that you have skin in the game and will be
more likely to pay back your 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 as an asset its worth more than the liability
of the home loan so as long as you don’t have other debts or the value of the property
has depreciated, you should be in the green.
This is not the case in the Netherlands, where borrows can, and are in fact encouraged to
borrow up to and 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 doesnt 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 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 euro’s in a year but you
are paying 40,000 euro’s in interest to the bank on your homeloan you would only pay
tax as if you are earning $60,000 euro’s.
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 a real estate portfolio.
The other thing it does is encourage people to take on debt, up until recently people
were able to borrow up to 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 on top of it and suddenly find themselves with
a net worth of negative $30,000 dollars.
This means that a good chunk of the population is underwater on their homes and that’s
perfectly fine.
This is one of the failings of the gini co-efficient as a simple metric. Dutch people, even the
dutch people who might have negative net worths 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 overlord watching
over them.
But of course this simply isn’t the case.
Credit and acces to it for responsible purposes can 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 beyond the control of regular government intervention.
For an extreme example, donald trump once joked that a homeless man on the street was
900 million dollars richer than he was because at that time he was in crippling debt. Despite
this his lifestyle was obviously far more comfortable than the homeless mans and no
rational economist would call him the porest man in america, although I am sure the comments
section will and I already regret using this example.
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 is 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 stretch 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 idea’s like stock markets, limited liability companies, and speculative assets
as far back as the 1600’s.
Beyond this the Netherlands has not really experienced much in the way of shakeup of
this system in the past 400 years. That’s not to say that there hasn’t been wars and
coups and all that good stuff, this is modern history in Europe we are talking about...
common.
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 been guillotined somewhere
in the family tree.
That’s why the money in the Netherlands is ooooollllddd 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 Carvalho-Heineken,
we can learn a lot about the nature of wealth in the country.
This lady is 66 years old and is surprise surprise in the beer business. Although she
didn’t found the company, neither did her father, or his father, and infact even her
great grandfather didn’t actually found the heineken brand we know and love today,
he simply convinced his wealthy parents to buy a brewery with the family fortune that
he just slapped his name on.
That family fortune dated back to the dutch east india company.
What this means is income taxes will do absolutely nothing to control this wealth… Income?
Hah, this family hasn’t earnt 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 families assets as protected
and low key as possible. The other children will all still live a very comfortable lifestyle
but the fortune does not get split up equality like it did with the Waltons lets say.
This 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 ten 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 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 $10,240,000, those are some
serious tendies, but our more conservative investor with a 100 year outlook would be
walking away with $137,806,123.40, which even accounting for inflation is significantly
better than the first portfolio who had unrealistic return expectations anyway.
Time in the market beats timing the market, and when people have had 400 years in the
market well that is going to create some serious wealth concentration.
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 quiet
have this dynastic inheritance scheme and thing like the giving pledge amongst big ticket
billionaires will certainly make a difference.
But as we have seen with the Netherlands it’s not the top ten on the Forbes list that is
going to change these figures, it’s the hundreds of other families that intentionally
slip below the radar.
Now is this a problem?
Well 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 gini co-efficient
metrics, infact 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 the comfort, safety and wellbeing of average people is not sacrificed in the name
of profits for a few.
I think I somehow managed to make everybody on both the left and the right angry with
that sentence. Please like the video, I feel like I am going to need it to balance out
the dislikes….
Ranking
Ok the fun stuff, time to put the Netherlands on our economics explained national leaderboard,
but before that, I am 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
released this year so don’t go recommending your home state for a video until that one
reaches at least 200,000 views, I gotta follow market demand here.
Ok self pity aside,
The Netherlands has a large advanced economy with a GDP of $914 billion usd it gets a 7/10
falling just short of the trillion dollar club.
GDP per capita is very impressive at just under $60,000 per person as of 2019. Whats
more is that income is actually spread very evenly, it’s within the top 15 countries
in the world for income equally which makes the wealth inequality all the more interesting.
It gets an 8/10.
In the weekend category
Stability and confidence, well that’s a no-brainer, 10/10. 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 ensuing eurozone crisis, I can’t imagine the fallout of the coronavirus doing
them any favours so it gets a 2/10 because at least it hasn’t gone backward.
Finally industry, well the nation is quite impressive here, it has always been on the
cutting edge of capitalism and even today it is a centre of advanced financial services
that are used all over the world, it gets a 9/10.
All together it gets an average score of 7.2 out of 10, only really been brought down by
it’s growth score, none less very impressive and it claims a solid spot on the economics
explained leaderboard.