The phenomenon of easy access to credit and the debt has been a key factor in the stability of the USA’s modern economy. Borrowing plays a huge role- consider the housing market, whose dependence on the lending industry has drastically increased in the past 50 years; between 1949 and the turn of the millennium, the mortgage debt to household income ratio rose from just 20% to 73%.
There are many reasons for this phenomenon of ‘credit addiction’- the principle of these being increasingly easy access to credit, changing consumer decisions and the squeezing of incomes. Let’s analyse these and see which contributes most, if at all, to American wealth inequality.
Credit addiction has without doubt been encouraged by the financial sector in America. The subprime market’s recent catastrophic explosion exemplified how open credit has become in the US. The subprime market emerged from a restricted financial industry- previously, banks had to take great care in selecting who they could lend to, to minimise the likelihood of future unpaid debts. This process was rigorous- any previously outstanding debts, or missed payments would almost rule you out of contention for a mortgage.
The subprime market sought to open a whole new world of profitability- opening the door to credit to these individuals who were previously deemed unsuitable to receive a mortgage. The industry boomed- at its peak in 2005 the subprime industry had granted $625bn of loans, contributing to over a trillion dollars in loans made by subprime lenders between 1994 and 2007.
Their open availability made subprime mortgages incredibly attractive- a complex arrangement between financial institution and bond traders meant banks were in little danger if mortgages were to go unpaid. They could benefit from cheap loans, avoiding the traditional risks associated with defaulting customers.
Unsurprisingly, the result was devastating- the recent subprime crisis had severe implications on homelessness for example. According to the National Coalition for the Homelessness (NCH), there were 342,038 foreclosures of US properties in April 2009 alone- a third higher than the already high foreclosure figure of April 2008.
The authorities have also played a role in this disaster- attempting to kickstart the economy following the dot-com crash of 2000, the Federal Reserve cut long term interest rates from 6.5% to just 1%- former Chairman of the Fed Alan Greenspan admitted that this move “fundamentally engendered” the development of the doomed housing bubble whose explosion caused this economic trouble.
One could argue Western society has developed a culture of debt-accumulation. Availability of finance on any consumer product, from a blender to a Mercedes, has encouraged people to be less financially responsible. You no longer need to take a single heavy hit on your bank account to purchase a car- finance allows the (greater) cost to be spread over a few years. As a result, prices in the short term are lower and thus customers are more likely to be seduced to purchase a car that is beyond their financial boundaries.
Additional interest payments make the situation worse- Jeremy Vohwinkle of GenerationX Finance describes new car purchasing as borrowing money at a high rate of interest to invest it in a stock guaranteed to lose value rapidly. Yet March 2014 saw the average amount borrowed by American car buyers surpass $27,000 for the first time ever.
The wealthy are not so reliant on financing- cash purchases ultimately cost less and often cars do not represent a significant enough hit on a millionaire’s finances that he has to take a loan for it.
The ever-present temptation of taking loans, trading short term gain for a greater long term loss, to cover purchases such as cars and more significantly homes, has driven down the economic prosperity of much of the poor and middle class.
Debt has also been piled on by the US’ social welfare system (or lack of one). Take the medical system- a NerdWallet survey found that Healthcare bills were the primary cause of personal bankruptcy. Healthcare is special in this regard because unlike a house or a car, we usually have no choice as to whether we need it or not. After a car accident, one cannot choose not to go to hospital- they are taken by emergency services, and often they wake up to the bill- which they must pay, as they’ve already been treated.
This unlucky 20 year old got charged $55k for an appendectomy.
Even after insurance contributions, he had $11k left to pay.
One could argue that health insurance solves this problem- but even ignoring its ever-rising price (family health insurance topped $16k for the first time ever last year) over 10 million fully insured Americans aged 19-64 are expected to face bills they will be unable to pay in the near future. Plus, as the picture on the right shows, even health insurance can leave a substantial bill for the individual to pay. This idea of healthcare being financially unattainable is something that, while far from being exclusive to the USA, is pretty much unheard of in similarly developed countries like the UK and much of Europe.
These problems are mostly faced by the poorer of society. Like an overly expensive house or car, it adds to personal debt. However, usually being an involuntary expenditure, it can be even more damaging.
Stefan van der Fluit is a man whose experience in startups and entrepreneurship defies his age. A Dutchman raised in Silicon Valley, Stefan started his first business at just 15- a web design company Nafets Solutions, that he ran alongside his studies. During his 4 years studying Management at The University of Warwick, he continued his entrepreneurial activity with a campus discovery tool, Unibubble.
Having been recognised by the likes of HRH The Duke of York, and now being a TEDx speaker, I caught up with Stefan after his recent talk at The University of Bath, to discuss his latest project- Nuklius- and get his opinion on wider entrepreneurial and business issues.
Your relatively new startup Nuklius is a service aimed towards other budding entrepreneurs. What was your initial vision for Nuklius, and what does it do?
Nuklius is a talent-mapping app connecting people & their skills to projects or startup ideas, within a given network. We help people with ideas find their collaborators and team members; if you haven’t got an idea, we find you projects for you to get involved with which are looking for people with your particular skills.
The initial concept for Nuklius came to me whilst giving a guest talk at Warwick, around my previous startup experiences. The main question asked during the Q&A was where I found my (brilliant) cofounder and close friend, Alex Dobinson. Lots of people there had the issue of having ideas, however none of them had the necessary skill set to act on them. This is when it occurred to me that a big reason why people don’t get involved with startups isn’t because they aren’t motivated, or haven’t got good ideas of their own, etc. Its the very simple fact that, alone, they haven’t got all the skills needed. And this is a very normal problem: no one has all of the skills needed to create a successful startup. If you look at all the fantastic companies now, they all have one thing in common and that is that they were founded by teams.
I fundamentally believe that startups drive true social and economic innovation, so to me, the more people we could help act on their ideas, the better. This was the initial vision for Nuklius - now it has evolved into something a bit larger; we want to become the platform for the future of work, where we see the future to be moving from “I’ve had x amount of jobs” to “I’ve been involved with x amount of projects”. Now knowing what you are an expert in, how can we find you projects for you to work on, whether they are in your organisation you work for or external to it, which match your personal interests and passion. This helps employees create a more motivating and stimulating career for themselves, essentially empowering them to steer their own careers, internally. For the organisation, their benefits include increased talent retention, quicker access to talent which speeds up their innovation processes, cross-departmental collaboration which is key when it comes to innovating, etc.
50% of our time on this planet is spent working. We believe you should enjoy every minute of it and have a say in what it is. Having been an active entrepreneur from such a young age, you must have learnt a lot of lessons about entrepreneurship- which one lesson would you say is the most important, and how did you learn it?
I would say the most important lesson I have learnt is to not be afraid of sharing your idea with others. There seems to be a sense of paranoia amongst many starting entrepreneurs where they believe that their idea is the next big thing, and therefore defacto, is worth millions already. After having been through the ring a couple of times, its safe to say that ideas on their own, are absolutely valueless. It is all about the execution of your ideas.
In order to successfully execute, you need to share your idea, to first of all see if it is something people are looking for - will what you are intending to create resonate with those you are creating it for. This is impossible to do, if you are not willing to open up about your idea.
Other reasons why this is so important:
how will you find a cofounder if you can’t tell them what they will be working on with you
how will you create key partnerships / relationships if you can’t tell them who and what they are partnering with
how will you undergo the crucial customer development process if you can’t talk about what it is you want to create
and the list goes on…
To address the paranoia of “stealing ideas” I wanted to share this anecdote. A professor of mine at Cambridge, Simon Stockley has been in the startup sector for 15+ years, and not once has he seen an idea be stolen. Why? Because there are two types of people in this world. One, those who are too lazy to act, and the second; those who are not lazy and therefore are already working on their own things (and don’t have the time, even if they wanted to, to copy yours).
Ideas are unique to the person they came from; you cannot copy this. I may give you an idea where you can probably make out steps 1,2 and 3 but I, because its my idea see step 1-100. So if you have an idea, the best thing you can do is act on it, get it out there and see if its worth pursuing.
One small addition to this: just because it is your idea, do not expect this to be a valid reason to retain 80+% equity within your startup. Your cofounders are key to the success of your business, so they should feel adequately motivated and have the representative ownership position to validate their risk, etc. Technical cofounders are not ‘resources’ as many business people see them as, they are incredibly talented, creative and hardworking individuals who add just as much value as the sales/marketing/business development cofounder. I guarantee you, that if you consider technical talent to be a resource to “go build this for me” - you won’t get very far. How do you think your childhood in Silicon Valley has influenced your mindset and outlook on business?
Great question and to be honest I think it doesn’t really have to do with where I grew up, rather who raised me (Also I was quite young during my time in the Valley). My parents have always encouraged us as children to not be bound by what we perceive our ‘limitations’ to be, or what others “tell” you are your limitations. This really helped when I decided to found my first company at 15, rather than being told that its daft, or impossible, etc. they simply said, sounds good - go do it.
Since both of my parents have spent their careers in the technology space, all of our dinner conversations were always evolving the latest and greatest within the industry, from this I developed a deep love and respect for technology as I saw first hand how it was created, who was behind its creation, etc.
I must admit, it is a bit surreal growing up in an area where you have so many ‘idols’ in one place. When I was a kid we used to trick or treat in Steve Jobs’ neighbourhood (his wife was the one to open the door and pass the candy), my sister was best friends with one of the daughters of an ORACLE cofounder, so we would regularly spend time with his family, etc. Which companies or individuals inspire you as an entrepreneur, and why?
I have a lot of respect for anyone who takes a concept from nothing and grows it out to something for others to benefit from. Having been involved with this process for a couple of years now, you never can truly realise and respect how tough and challenging this journey is, until you yourself try it as well.
I am very much inspired by companies whom are design driven; design not purely in its aesthetic meaning but also how a product or service gets created, around and for the individual they are targeted for. Good design, with all these elements combined is incredibly difficult and hard to pull off. Apple, Square and IDEO are companies that I take a lot of learnings from as well as their respective founders, Jobs, Dorsey and Kelly and Jony Ive (not an Apple founder, but a lot of their current success lies with his genius).
One entrepreneur I deeply respect and admire is John Mackey, the founder of Whole Foods. Reason being is his deep respect and understanding for the social responsibilities of business (he also coined the phrase conscious capitalism) as this is something which resonates deeply with myself. I think that for a long time, since WW2 the majority of organisations have been focused around maximising profits and seeing this as the primary metric of a successful business (Friedman Doctrine) whereas I think its quite clear that in order to be a successful business you also need to consider social contributions and your responsibilities to the communities in which you operate, your supply chain, employees, etc. Not only is it the right thing to do from a moral perspective; its actually proven to make good business sense too. One of your most popular talks has been the one you gave on the topic of ‘Conscious Entrepreneurs’. Could you summarise what a ‘Conscious Entrepreneur’ is, and why the world needs them?
Great question- and I'm glad you enjoyed the talk! To me, a conscious entrepreneur is someone who has a certain perspective of what a business and its purpose is. Rather than seeing it as a profit machine a conscious entrepreneur sees a problem they are passionate about and seeks to address it through setting up a business/venture. The conscious entrepreneur's vehicle of driving change is through a company, as you can have significantly more impact as an organisation than you ever could on your own.
Conscious Entrepreneurs set off to create value, not only for themselves but for everyone involved in their business operation; from their suppliers, to the end user. They see a business with a more holistic perspective and incorporate values and a culture of openness, transparency, do-good, sense of belonging for this working in the organisation, etc.
One key thing to remember is that conscious entrepreneurs are no different than any other business person, meaning they are most definitely in it to make money - however the purpose or meaning of money is perceived as not the end goal, rather a tool to build more value with. According to Fortune Magazine, for every start up that succeeds, there are 9 that fail- what do you think are the most notable differences between a startup that fails and one that succeeds?
There are unfortunately way too many factors involved with the success of a venture (speaking to the right people, timing, the founding team, raising capital, the product, the marketing, etc.) that its not all too easy to pinpoint the main differences - though one thing I have noticed and something you probably hear all the time, is the importance of the founding team.
Having the right people, people who are not only skilled and passionate about what it is they are doing but are also flexible in their ways of working, meaning that they don’t bend at the first sight of setbacks, that they are willing to make changes to their approach if need be, that they are stubborn in the sense that they keep pursuing no matter how many times you are told it won’t work. I’d actually like to stop and focus on this point as this is an important lessons I have recently learnt; there is no universal truth. What I mean by this is that no one in the world can tell you whether you idea is a good or bad one with absolute certainty. Its no one’s place to tell you whether its worth pursuing or not; only you can, the founders. All else is just peoples’ opinion, that’s it (some opinions are backed up by experience, but they stay opinions none the less).
The only way you can find out if something isn’t worth pursuing, is through trial and error. Thats what entrepreneurship is all about. Lots of trial and error. This is why it is so crucial to truly believe in what it is you are doing as otherwise, with all the nay-sayers out there, you will most likely give up. Believe in yourself and what you know, don’t be afraid to call yourself an expert (as honestly, if you work 13-14 hours a day for two years straight in a particular field, you wouldn’t be wrong to do so) and don’t be afraid to kick back and tell people, who might be older and more experienced than you, that they are wrong. It is not uncommon to hear every once in a while that this whole startup movement is just a bubble about to pop (á la dot com bubble). Do you think the future is bright for startups like yours?
Honestly I do not think about these things. Sure there might be a lot of “first world problem” solutions out there which after a period of time people might turn around and think do we really need this in our life…but as long as you are creating something which solves a true problem, you will always be needed.
This is why our team focusses on building something which addresses a true pain point. As an entrepreneur, always try to be a pain killer rather than a vitamin. Stefan's latest startup Nuklius is open for investment for a limited time on Seedrs. Click here to find out more about how you can become a part of his journey.
The power of the Corporate Lobby, according to George Monbiot, is a ‘Great Unmentionable’- rarely discussed in the media or among politicians, it has maintained a firm grip on every level of American policymaking. Not only has it subverted the very system of representative democracy that the West prides itself upon, but it has potentially created conditions conducive to a strong socio-economic imbalance in the States.
Corporate lobbyists have one primary goal- to represent their employers in the political arena, not by competing directly within it but by gaining favour with those already within.
Outgoing Congressional Speaker John Boehner was seen
handing out cheques on the House floor seeking votes
against the cutting of tobacco subsidies.
Of course, this cannot be done by a friendship alone- since 1998 the nation’s largest lobby, the US Chamber of Commerce, has spent over $1.1bn on lobbying activities. The massive payments involved reflect lobbying’s effectiveness; PepsiCo spent $10m in 2009 lobbying to (successfully) prevent 24 states attempting to pass a soda tax. Even more spectacularly, current House of Representatives Speaker John Boehner was caught handing out cheques to fellow politicians written by a lobbying tobacco company- on the very house floor a debate on cutting tobacco subsidies was to be discussed. The tobacco company saw these payments as an investment to prevent their own subsidies being cut- and, unsurprisingly, the House voted against cutting them.
But a more appropriate action of the lobby to the topic of economic inequality is the influence of corporations over minimum wage legislation. A minimum wage naturally affects businesses, leading them to either spend more or reduce staffing. However, in a period of constantly inflating costs of living, arguments are being made that minimum wages set by every state are all insufficient to maintain a decent standard of living. Governments around the world have sought to address this issue- the British government, for example, recently implemented a 'living wage' designed to provide enough for workers to maintain a decent standard of living.
Housing is a key indicator of living standards- yet in Florida, the minimum wage ($7.93) is less than half of what is needed to rent a two-bedroom home at official ‘Fair Market Rent’ calculations. Similar results arise in every state- the National Low Income Housing Coalition calculates that it would take two minimum wages to afford a Fair Market Rent nationwide, even with many one-bedroom properties.
Corporate taxes have sunk in recent decades as profits
have boomed.
Corporations have repeatedly successfully lobbied for tax cuts- a significant reason why corporate taxes have sunk in recent decades while profits have boomed (see graph). For example, Whirlpool Corporation spent just under $2m in the year 2011-13 in lobby fees chasing the renewal of lucrative tax credits (equivalent to tax breaks) for creating environmentally friendly appliances. The passing of this motion, thanks to the lobbying, was worth an estimated $120m in 2012-13- a healthy return on the initial investment, and government revenue lost.
Both movements of corporate lobbies to maintain low minimum wages (such as the success of the National Restaurant Association over employees in 2014) and win tax breaks, subsidies and such from the government have drastically exacerbated the issue of wealth inequality- they have made it easier for those higher up in business to profit more, often at the cost of employees lower down.
“The richest country, is not that which has the most capitalists, monopolists, immense grabbings, vast fortunes, with its sad soil of extreme, degrading, damning poverty, but the land… where wealth does not show such contrasts high and low, where all men have enough- a modest living…”
The famous words of 19th-century American poet Walt Whitman ring true perhaps more than ever in the United States of today. The previous few decades have seen economic inequality in the USA escalating with little end in sight- and recent economic crashes have not exactly helped the situation either.
Economic inequality has been a theme reoccurring throughout the world, throughout history- from the time of Ancient Greece, where Plato described any city to be split into “the city of the poor, the other of the rich… at war with each other.”, to today where inequality is often a side effect of economic development (India, China are notable contemporary examples).
But the USA has experienced a more unorthodox growth in inequality. Like China and India, in recent decades the US economy has been growing- yet an almost unique mixture of politics and economic culture has made the USA, according to the Credit Suisse Global Wealth Databook, the most unequal of the top 20 developed global economies, scoring a GINI coefficient of 85.1% (the higher the coefficient, the more the inequality). In comparison, the UK scored a relatively modest 67.7%, the aforementioned India 81.1% and China 69.5%.
The GINI coefficient is the most common mathematical measure of wealth inequality, measuring income distribution. Considering a score of 0% means perfect equality (everyone has the same income) and 100% means total inequality (one person holds all income, everyone else has nothing), 85.1% shows how far the USA’s inequality has grown.
The last time the USA saw inequality at the levels of today was in the years leading to the Great Depression- so what is it that is driving today’s inequality?
Over the next few weeks at poponomics we'll be discussing all things America, from the idea of the 1%, to education, to politics, to the very nature of capitalism itself, as we closely analyse this massively important question.
Stay tuned- the American Inequality series starts on Wednesday, as we turn our attention to the impact Corporations have had on American society.
Entrepreneur Strategist and Founder of website entrepreneurialambitions.comYura Bryant gives an insight into a sociological phenomenon that often escapes our minds.
Groupthink... What is groupthink? Groupthink is
defined as the practice of thinking or making decisions as a group in a way
that discourages creativity or individual responsibility. You could say groupthink is the key process which influences behaviour in mainstream
society. It seems quite irrational to say when people are individuals, individuals
who have the free will to produce their own thoughts. In actuality though, how
free are we to form our own thoughts, when we are moulded from birth to listen
to those who hold an authoritarian position over our development?
Think about that completely for a moment. Your
development over time occurred under the process of being domesticated by the
thoughts and beliefs of others. The world around you became to reflect the
perception of those who held influence over you. From family, to school, to
friends; your lenses to view the world were tainted by other viewpoints that
formed "your" opinion. As this continues over time, you seek to have
your opinion of the world validated by others because you need the
acknowledgement of group approval.
Take, for instance, the power of social media.
Social media platforms are widely used today as a means of communication and
for gathering information. One of the most powerful aspects of social media is
how a piece of information can be shared with millions of people in a matter of
a few hours. But let's backtrack. What is the popular subject in mainstream society,
it gets this special treatment, it is put on this pedestal of being ‘trending’
or being the ‘latest news’. What is not so popular gets the silent treatment. A
study by Pew Research Centre found that, people
refuse to talk about a controversial topic, unless a majority of the their
peers agree with their views. That
means people are unwilling to engage in open opinion, for fear that they will
be persecuted for their thoughts.
If we were to analyse it for what it really is;
groupthink is the movement to suppress original thought which can harm the
status quo in place. There is a need to stifle opposing thoughts because
allowing them to flow freely can lead to dissent and chaos. Going off that
conclusion; is it safe to say that the very fragile fabric that holds the
United States together is dependent on the power of groupthink? That answer
seems to already be illustrated for you by examining everyday society. If a
nation was truly operated under freewill; hundreds of small fractions in
society would be at constant war with one another to control and rule
supremely. But wait... Does this not already occur within the world we live
within?
Yes, it does. That is why the power of
groupthink resides in the ability to gain control of the majority so that the
minority can be labeled as unruly and troubled. Now is this causing you to
question your perception of your reality? Your society around you controls your
views and opinions, but when given the ability to think and process without
distractions, new realisations slowly take form. This presents major problems
if this behaviour becomes widespread. Thus you are consistently bombarded with
distractions which blocks your ability to think freely without bias.
The majority of society is controlled by some
form of groupthink. We all circle around specific ideas, evolving movements and
issues that resonate with our manufactured beliefs. But do the majority of
people know how to subdue groupthink perception in favour of rational analysis?
Groupthink is a danger in modern society, because it develops people who lack
the ability to apply common sense in their daily interactions. Groupthink is a
double edged sword. It has the ability to suppress opposing forces but it also
has the ability to lead its sheep to the slaughter. Be careful of what you
allow yourself to believe as truth because it becomes a dictating force in your
life. Opinions expressed in this article are those of the author.
Applying for economics at university? From someone who has just finished the process of university applications, here are the 5 things you need to do to give you an edge when applying for economics.
1. KNOW THE COURSE.
It's most essential to know exactly what it is that you are applying for. Economics at university is quite a different beast to most A-Level Econ courses, and this is something many applicants fail to recognise. Maths is incredibly important, that's why it's a compulsory A-Level for most Econ courses, but you have to make sure you're comfortable with doing a lot of it: many people (including myself) underestimate the dominance of maths-based work in an Economics degree.
Make sure you read up the syllabi (yes, that really is the plural of syllabus) of whichever universities you are applying for. Look at the units offered, and make sure that there are sufficiently interesting units at whichever universities you want to apply to. Not only does lacking interest in the course reduce your chances of getting admissions to give you a place, but even if you do get in, you don't want to suffer 3 years studying topics you lack interest in.
2. READ.
You probably know the importance of reading outside of the literature prescribed by your school/college, to note in your Personal Statement and discuss in any interviews. But remember, as admissions officers work through piles of cookie-cutter Personal Statements, you want to leave a lasting impression on them.
Saying you've read Freakonomics will not do this.
For sure, it's an excellent book that I would recommend to anyone, but the fact is that it's so popular that it shows off little about your interest in economics.
So find your own, lesser-known books to discuss. These don't have to as formal as academic papers, but there are plenty of economists who write superb literature. If you have a particular interest in a certain area of economics, browse around on Amazon to see what's out there. Putting a more obscure book (that is still from a credible source) will be likely to impress an admissions officer more, as it will highlight you using more of your own intuition.
3. ANALYSE, DON'T JUST STATE.
It's very easy to just regurgitate the outline of any books you've read in your PS, but, again, this would not be a particularly spectacular display of your passion for economics.
You need to ensure that your repetitions of the author's messages are brief, and your own, original analysis and commentary is longer. In this process, universities care more about what you, as a potential student, think than any author.
A way in which you can ensure you are analysing as well as stating is by using a method often ignored when it comes to the PS by many people: the PEE method. That is:
Point Explain
Evaluate
There's a reason why the last 'E' appears the biggest- because that's how much attention you must give it compared to the others.
4. APPLY EARLY.
Applying early is a great idea for everyone- not just if you're applying to Oxford or Cambridge. Remember, the sooner your application has been sent off, the sooner your time will be freed up to pursue things like a social life, or sports- or, most importantly, the exams that are coming up in the summer!
Also, applying early can give you advantages in the application process. Some (not all) universities deal with applications as they arrive. This gives a slight advantage to candidates who apply earlier, as there are fewer applications to process in October, for example, as opposed to January, when the official deadline for everyone is. This can mean more attention is paid to your application, and also that there may be more available spaces and thus more chance of success for you earlier on in the process.
However, this doesn't mean you should rush your application- do make sure that it is of the highest quality you can make it before finally sending it off.
(Bonus Tip)
Applying to university is a stressful process for most people. But remember, it's one of the most important decisions of your life, one that (hopefully) will allow you to pursue exactly the kind of studies that you want to, rather than being prescribed subjects you may have lacked any interest in. University will also be a gateway to new friends, new surroundings, and new experiences that will influence greatly the person you will become.
So, my final piece of advice would be to work hard to achieve your future goals. Recognise how important and exciting the next future is for you, and ENJOY CREATING IT.
