The Danny Dorling technique

I’m beginning to recognise this. Stick loads of numbers together and ask the audience to shout “Wow! That’s Terrible!” without actually tying the various figures together into a coherent whole.

It’s the sort of thing that works well at The Guardian as none of the people there understand numbers anyway.

In its latest report on global wealth, Credit Suisse describes the UK as a country that enjoyed stable income-to-wealth ratios for the first 70 years of the last century and an evening out of the distribution of money across the population for most of that period. The average household came to have assets worth between four and five times their income, and more households were nearer that average than ever before.

That stability ended during the 1980s. Apparent wealth grew rapidly and became more concentrated among a few households. The housing market and equity in shares boomed for most years until 2007. By that point, the average household had nine times as much wealth as average income, double the ratio reported some 25 years earlier, but there were far fewer average households. The country appeared richer, but it was in riches increasingly held by the few.

According to the report, the UK’s 2007 wealth-to-income ratio was “the highest level recorded for any country apart from Japan at the peak of its asset price bubble in the late 1980s”. Credit Suisse doesn’t spell out the implications but house prices in Japan in the late 1980s reached record levels, and subsequently halved in value in the great property crash around 1990.

In the UK, there was a similar, if smaller, collapse in wealth after 2007. Property and financial assets fell by 12%, or by 36% when measured in US dollars (because the pound itself fell in value). Measured in dollars, these assets have still not recovered to 2007 levels. Household debt in 2013 stood at 150% of national income. By 2014, that debt had rocketed to 170%, largely as some people borrowed more to try to buy a home.

I do like that “fewer average households” bit.

But let’s try to piece these numbers together a bit. Without referring to anything else, just using what he’s given us.

Household income, in aggregate, is going to be pretty similar to GDP. Not exactly, but all of GDP is income to someone and at least one measure of GDP does assign all of GDP to household incomes. Probably not this one though. However, the allocation to depreciation, or other capital incomes etc, isn’t going to change all that much (maybe a few percentage points) over this time scale.

Let’s just, for giggles, assume that household income does equal GDP, we’ll not be far off for our uses. So, Danny tells us that the average household had four to five times, in assets, their income. Thus the ratio of GDP to household assets was, roughly, 4.5:1.

Yes?

And then in 2007 households had 9 times their annual income in assets. So our GDP to household asset ratio is 9:1 (this is why whether household income really is GDP isn’t all that important, because we’re still comparing like with like). It then falls by 12%, leaving us with say 8:1.

And now household debt has risen to 170% of GDP.

Now normally household assets are recorded as net: that is, after we take off that debt load and look at the net asset position. So, Danny’s telling us that the asset backing that is behind household debt has risen: and this is something that is terrible, right? And even if they’re using the gross figure, when we take off that debt load of 1.7 times GDP we still have household assets being a higher portion of GDP than it was in those halcyon days of the 1970s.

And Danny leaves us with the impression that this is all a terrible problem but without actually putting all the numbers together to explain why.

My impression of this is, and yes I have read his latest book in full which is packed with this sort of stuff, is that Danny himself doesn’t understand why. He is, after all, a geographer, not an economist.

By the way, absolutely my favourite line in his book is that no one can afford to be ill in America because it costs $110,000 a year to be so. Seems he’s not heard about this insurance lark as yet.

And isn’t this great?

It says real estate prices will rise, corporations will make greater profits and new financial instruments will be issued to raise wealth.

How does issuing a new financial instrument raise wealth? Move it around a bit, maybe, but create it? Srsly?

But markets are not self-correcting mechanisms.

And what in buggery do you think 2008 was?

Most importantly, there comes a point when more and more people understand that wealth cannot increase by 40% in five years without repercussions. We are not all suddenly working so hard that we will produce 40% more of everything we have in that short time.

No shit Sherlock. But you have noticed the difference between a flow and a stock have you? Wealth being a stock, our production being a flow? And if our production rises by 10% over 5 years (not unlikely at all) then by how much does that raise the value of the stock, that wealth? Think about a share for a moment: double the company profits, double them in a manner which everyone believes is sustainable but had no clue about before the announcement, and do the shares rise by less than 2x, 2x or more than 2x?

You know, it would probably do the British left quite a lot of good to pay a great deal less attention to Professor Dorling on the subjects of finance and economics. He’s just not very good at either of them.

14 comments on “The Danny Dorling technique

  1. In the unlikely event of a Ukip government I should think Prof Dorling will get a full clip behind the ear. Followed by the staff of the Graun. Bored of him now.

  2. Funny how in the Graun you have to be a certified, credentialed climate scientist to be allowed to speak about it (and then only in favour), but any old clown is allowed to be an expert on economics.

  3. This is about propaganda not economics.

    However much production has increased UK household debt has risen greatly. But unless all that debt was incurred by poor people trying to feed and keep a roof over their families heads, all that proves is that many people are living beyond their means. Some people seem happy to do that in a land that promises them a safety net.

    Also the family itself has changed–there are far more single/divorced etc about now. And also the state has spent decades debasing the value of the currency and adding to real inequality by ever-greater meddling in the economy and personal life. All of which adds costs to said life. None of which gets much mention in the Guardian.

  4. ‘You know, it would probably do the British left quite a lot of good to pay a great deal less attention to Professor Dorling on the subjects of finance and economics.’

    But they won’t. Because for them it’s not about facts, it’s about faith. They just know money’s evil and that 99% of the population live on tinned beans from food banks. Giving them facts just confuses them and their minds have to retreat even further from reality.

  5. Shirley the asset increase is driven by the Guardian’s two favourite commie ploys:- a couple of Norman Conquests worth of immigration in 15 years combined with a Stalinist land use regime?

  6. Professor Dorling also states simple untruths. The data (as published by HMRC when Gordon Brown was Chancellor so unlikely to be designed as Tory propaganda) shows wealth inequality *declined* while Mrs Thatcher was PM – it increased under Blair and Brown.
    Secondly private sector debt rose by £1 trillion, more than doubling under New Labour, with hundreds of £millions of consumer debt converted into second mortgages. Most of the increase in debt was *not* due to people struggling to buy a home – since every buyer has a seller the increasse in debt due to people trying to buy a home could only be equal to the aggregate cost of new-builds minus aggregate mortgage repayments – pretty small during a period when the rate of new building had slumped but nearly half of all households were repaying mortgages – plus transaction expenses involved in house purchase.

  7. John77

    More than one measure of income inequality.

    They don’t always agree with each other either.

    Would be good if all sides in such a debate at least acknowledged which measure they were using.

    Would be even better if they considered all measures, not just their pet one which happened to agree with them, but a chap can dream…

  8. Some 85% of debt in this country is against property. So no, people aren’t maxing out the credit cards to buy food at Lidl or to pay the gas bill.

    What we’ve seen globally since 1980 is 34 years of falling interest rates, falling bond yields, as inflation has come under control. As interest rates fall, asset values increase. That’s econ 101.

    The fall in interest rates is caused directly by demographics: baby boomers saving for old age, and living a long time too.
    In the UK we also saw the abolition of domestic rates (replaced by usually lower council tax). All told it’s no surprise that property values have risen a lot: and since property backs most loans, debt is up.

    But that’s all a bit much to explain to Guardian readers. Far easier to scream “Debt Bad!”.

  9. John77

    “Secondly private sector debt rose by £1 trillion, more than doubling under New Labour, with hundreds of £millions of consumer debt converted into second mortgages. Most of the increase in debt was *not* due to people struggling to buy a home – since every buyer has a seller the increasse in debt due to people trying to buy a home could only be equal to the aggregate cost of new-builds minus aggregate mortgage repayments -”

    Good stuff my friend – I like this.

  10. @ MBE
    I specifically referred to wealth inequality.
    Income inequality did increase after 1979, partly a catch-up for salaried workers whose real incomes had plummeted between 1974 and 1979 (and didn’t get paid for overtime), partly a lot of entrepreneurs being allowed to compete. However wealth inequality declined so a switch from negative to positive real returns on capital did *not* result in most of the increase in wealth going to those already rich – instead a combination of strong growth in incomes with divergence meaning faster growth at the top led to most of the increase in wealth (=income – expenditure) going to those with little or no wealth in 1979. The rise in real incomes for those below median income in the Thatcher years meant that they were able to both spend more and save more, increasing their wealth relatively to the top 1% or 5% or 10%.
    Kinda refutes Picketty (but his assumption that the rich don’t spend any of their income was so blatantly wrong that no-one would have stood for it for one second if it hadn’t suited their political agenda).

  11. @ Andrew M
    There is a difference between debt being secured on property and being raised solely in order to buy property. The BoE (used to) publish a series showing “Mortgage Equity Witjhdrawal” meaning the amount of money borrowed using property as a security that was used for other purposes.
    Secondly the replacement of rates with council tax is insignificant as a cause for the rise in house prices. There are two principal causes for the rise in house prices: firstly shortage (especially in the south-east) which causes rationing by price so that prices keep rising until enough people are priced out of the market and the remainder are equal to the number of houses/flats available; secondly inflation hedge when people view their house as the only safe investment when a Labour government is destroying the value of savings. House prices doubled between 1997 and 2010, far more than doubled in 11 years 1997 to 2008 – that means they rose more in 11 years of New Labour than the preceding 11 centuries.
    Reasons? Immigration of workers to take jobs that unemployed Britons could not afford to accept because Brown ensured that they would be worse off in work than out of it is one but probably less than half of it. Second is Blair’s determination that half the 18+ kids would go to university and so need somewhere to live away from home, which is smaller than the impact of immigration but the same order of magnitude, third is the increase in wealth differentials under New Labour and the massive increase in the number of “second homes” which are empty most of the time.
    The artificially created housing shortage is the principal reason for the rise in price but the negative after-tax return on investment in other assets under any type of Labour government adds to pressure to put all your money into a house which is expected to retain its value (and if you buy it with a mortgage you gain from the devaluation of your debt).

  12. “There are two principal causes for the rise in house prices: …”
    Sorry John, but no.
    There is a single reason for the rise in house prices. Credit creation. No price can rise above the money available to pay for it.

  13. @ B(N)IS
    Credit creation may facilitate borrowing to buy a house or borrowing to buy a car or borrowing to build a factory but it will not cause house prices to rise above production cost if there is a surplus of supply over demand.
    House prices more than doubled in ten years from 1997 and fell 15% in the next six years from 2007. There was credit creation before 1997 and after 2007. The recent rise in prices in London is fuelled by cash buyers at the luxury end of the market.
    So while I do not dispute that your simplistic argument has some validity, it doesn’t fit all the facts.

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