Author on British Inheritance Misses Two Important Points
By David Henderson
In a recent article titled “Is property inheritance widening the wealth gap?” author James Gordon points out that people in Britain who own houses will often leave them to their adult children and, thus, adult children of Brits with no houses will see a large gap between their wealth and those of their housing-endowed peers.
To his credit, Gordon provides balance by citing American economist and occasional EconLog blogger Steve Horwitz:
“I don’t see inheritance being the game-changer that everyone thinks it is,” he [Horwitz] says. “With baby boomers living much longer, even if their sons and daughters are set for a bumper sum of money, many won’t receive it until they are in their mid-60s and by then they will be financially secure and won’t necessarily need it.
But Gordon misses two points.
First, he never asks why housing wealth in London and in other urban parts of England has grown so much. One can casually say that it’s because demand has grown so much, which is true. But if the supply of housing were relatively elastic, a growth in demand would not cause the large increases in housing prices that we’ve seen in London, coastal California, and coastal northeastern United States. Of course, I’m most familiar with the U.S. case, but the same kinds of restrictions on new housing that we see in the United States exist in London also.
Now it’s not quite fair for me to say Gordon misses this point because his article was, after all, written in a context where these restrictions exist and the probability that they will be substantially loosened is well below 0.5 and probably well below 0.3. It’s just that if he’s writing the article in the context of “what is to be done?”, certainly going to the root of the problem is important. If he isn’t concerned about the wider context, then my criticism is moot. Except that I think that someone who cares about this issue should care about the wider context.
Second, Gordon quotes, without questioning, an unlikely example to make the point about how those who get only wages, and no inherited wealth, will fall behind. Referring to George Bangham, a research and policy analyst with the Resolution Foundation, Gordon writes:
Mr Bangham notes that a person earning the minimum wage all their working life would earn around £750,000 over a 50-year period. But, he says, from next April “it will be possible to inherit more than a million pounds of property from your parents, free from inheritance tax”.
Almost no one who earns the minimum wage does so over his whole working life. The hourly minimum wage in Britain for those age 25 and over is 8.21 pounds ($10.08 in U.S. dollars.) Simply being in the labor force for a steady 5 years (and usually fewer than 5 years) typically puts you at a wage substantially above the minimum.