Heir-raising: the boom in inheritance

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The Economist. Hello and welcome to the Intelligence from the Economist. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. It's time for our annual Democracy Index, a ranking of which countries best protect democratic rights and institutions. On the whole, the news isn't great, but we look at one pattern in the data that counterintuitively suggests a route to democratic health. And you may have heard that ice cold showers or dunks in freezing water are supposed to be good for you. Personally, you couldn't pay me enough. But in the interests of science, our correspondent gives it a go. First up, though.

In some ways Jane Austen's Pride and Prejudice depicts a bygone time when the surest route to riches was not by working hard, but by marrying heirs to great fortunes.

That is Mr. Darcy.

He looks miserable, poor soul.

Miserable he may be, but poor he most certainly is not.

But nowadays, as people in their 30s and 40s are well aware, it turns out that inheritance is back.

Callum Williams is a senior economics writer for the Economist.

It's very difficult to track inheritance flows because government surveys are not really designed to track big one off payments. But we've gathered academic estimates on the value of what is passed on from one person to another in the form of cash, stocks, houses, artwork, wine, all that kind of stuff. And what we found out was pretty striking. In about 1900, when our data begins, inheritances were worth more than 20% of GDP in some countries then, inheritances fell during the 20th century, but more recently they've come back in a very strong way. We're expecting this year people across the rich world, across industrialized economies to inherit on the order of $6 trillion.

Goodness, a bit more than Jane Austen's day. What does that mean in today's world, in today's numbers?

Well, of course, people have been inheriting the family business and fortunes as long as society has existed. But we've now reached a stage where the share of overall wealth in the global economy that is inherited is rising. So for example, if you look at billionaires, by one estimate in 2023 there were 53 people who became billionaires through inheritance. And that's only a bit less than the 83 people who became billionaires on their own terms. And then if you look at particular countries. So as a share of national output, French inheritances have roughly doubled since the 1960s. In Germany, they've roughly tripled since the 1970s. And in somewhere at the UK, inheritances are now twice as important relative to earnings for people born in the 1980s versus people born in the 1960s. And really there's very few countries that buck these trends. One is Ireland. Really, this is the only country where we don't see a very obvious shift towards what we're calling inheritocracy.

And what's behind the fluctuation here, the drop over the 20th century and now.

The sharp rise, the three big things that we've identified. One is that there's actually just more wealth about. So what happened across the rich world was after the first, the second World War, the value of wealth just collapsed relative to national income. So in Europe there were lots of buildings that had been destroyed. And then in the post war period, you had often high inflation, which eroded the value of cash and government bonds. Governments were also pretty keen on things like wealth, taxes and nationalization. And then you just had a lot of families, most famously the Vanderbilts, who just squandered all of their wealth. That's kind of changed in recent decades. Wealth has come roaring back. Housing is much more valuable, in part because planning laws have become much more restrictive. Wealth taxes have fallen out of favor and stock markets have been performing fantastically well. So now basically that means there's just more wealth around that people can pass on to their children.

Wealth that for the moment is concentrated in the hands of the accounts of baby boomers, I guess.

Exactly. So this is the second thing. There's a big demographic component to this. The baby boomers have managed to hoover up a lot of this wealth that's come into the economy. And so, for example, if you look at the U.S. baby boomers are on the order of 20% of the population, but they own roughly half of the wealth. And not to become sort of morbid about it, but these are the people that are now starting to die.

And slower economic growth, you said.

Yeah, so that's the third factor. Now without getting kind of technical, there's a bunch of economic research which quite convincingly demonstrates that when an economy slows down, wealth accumulates more rapidly. Basically, people add to their savings at a reasonably steady rate, but GDP grows less quickly. And of course, what you've had in the rich world over recent years is that a combination of weak population growth and, and weak productivity growth means that GDP growth has slowed down quite sharply. So this is one big reason also why wealth has grown and why inheritances are growing. I mean, it's interesting if you look at the countries that have actually grown reasonably rapidly in recent years. So if thinking about countries like the US and also Ireland, again, they do appear less afflicted by inheritocracy. Whereas you look at the really slow growing countries, Italy being a classic example, and their inheritances have really grown in recent years. The reverse effect is also true, where the inheritance boom could reinforce the trend towards slower economic growth. And the reason why that is is because a bit like in Jane Austen's time, it may well be better to focus your energies on finding a really rich person to marry rather than focusing your energies on starting a business or working really hard.

So in a sense, if you're a, I don't know, a financial advisor, the advice might be just go ahead and marry for money, even if it does, you know, depress growth in the long run.

Yeah, absolutely, that's pretty clear. I mean, you can do some very simple calculations. And even if you're earning very well in somewhere like London or New York or Paris, if you don't have someone to help you out, then affording a house is very, very difficult. And that's becoming more and more of a problem every year. So we have now reached the stage where the top 1% of inheritors in somewhere like France now earn more, have higher incomes than the top 1% of workers. So in a sense, if you are truly interested in maximizing your lifetime income, it really does make sense to kind of follow the Jane Austen route rather than follow the route of working really hard and trying to earn as much money as you possibly can.

And so you've laid out pretty clearly what the economic factors are here. But if this continues to be just a plain good calculation, there's going to be some serious social factors to follow.

Absolutely. And you can already see that in the popular culture, inheritance gets talked about a lot more than it used to. Take for example, something like Succession, the TV show.

I always wanted one of you kids to take over.

People would do well to remember there's Going to be a new sheriff in town.

Well, he asked me to run the company.

I'm kidding. Am I?

Obviously, it's in some sense very exaggerated and very few people face the problems that the children of Logan Roy face. But it is about squabbling siblings who are jockeying to inherit their father's enormous empire. Another example, equally popular would be the movie Crazy Rich Asians from a few years ago.

So your family is rich?

We're comfortable.

That is exactly what a super rich person would say.

Again, very exaggerated, but touches on this notion that family wealth and dynasties create all kinds of interesting problems. And more anecdotally, it does seem to me that the marriage market is already being impacted. I live in San Francisco and it is quite common for people to allude to the fact that they are looking for a husband or wife who comes from a lot of money. And in fact, the economic evidence on this is quite convincing that inheritance is becoming increasingly important over time in explaining why people get together. So, yeah, there are big, big social.

Changes underway, changes that have their roots in some particular economic conditions now in the past. Do you think this will continue?

The evidence would suggest that the inheritance boom is likely to continue for a while. Baby boomer deaths are going to continue to rise. They'll probably peak around 2035 or 2036. So that's one thing. Economic growth is generally speaking, quite weak. So that reinforces that trend towards wealth becoming more important. Governments are still loosening inheritance taxes, so that means that there's just more money that people get to keep when someone leaves them a request. And so you now have this slightly alarming situation where you could get the emergence of an inheritor class that's even more enduring than it was in Jane Austen's day.

Callum, thanks very much for your time.

Thank you, Jason.

You could say that last year was one of the biggest ever for democracy. More than half of the world's population voted in national elections.

Indeed, Labour has won the 2024 election. This was not the landslide victory predicted.

For Narendra Modi's BJP party.

In a shock result for all, the left, far left coalition has unexpectedly become.

The biggest party in the French Parliament. But just holding a vote does not a democracy make. In order to work out which countries can be considered democracies and how democratic they actually are, our sister company, the Economist Intelligence Unit compiles an annual democracy index. 165 countries and two territories surveyed and scored based on 60 indicators across five electoral process and pluralism, functioning of government, political participation, political culture, and civil liberties. So did a bumper election last year help make the world a more democratic place?

The main takeaway from the 2024 Democracy Index is that this long running democracy recession is continuing. But at the same time, what we're seeing is a growing popular demand for more representative government and political parties.

Joan Hoey is editorial director of the Democracy Index.

The index score declined once again from 5.52 in 2023 to 5.17. That's on a 010 scale. And 130 countries of the total 167 covered by the index either registered a decline in their score or made no improvement.

So what's going on here? To your mind, why the continuing slide?

So the overall regression in the index is being driven by developments among the authoritarian regimes where the overall negative change in score for those regimes eclipsed a more modest decline in the average score among democracies. So this is in line with a very long running trend over the past decade and more where we're seeing a shift towards the authoritarian camp. So today, for example, we have 60 authoritarian regimes. That's up by eight over the past decade. And we have a decline in the number of democracies since 2014, a decline of 5. That's the shift taking place. Authoritarian regimes are growing in number and they're also becoming more entrenched. So their actual scores are declining as they tend to restrict freedom even more as time goes on.

And in light of the fact that we had so many elections last year, did that I guess not serve to bump up the overall score of how democracy is doing?

Disappointingly, no. This vote quake, as we called it, did not result in an improvement in the overall score for one category of our index, which is electoral process and pluralism. So many elections that took place were not free or fair and other prerequisites of democracy, such as freedom of speech and association and so on, were absent. So the score for that category of the index, electoral process and pluralism, declined in every single region except for North America and Western Europe.

So all in all, it appears to be a pretty grim picture this year.

Well, I think there are positive things amidst the overall gloom, maybe, and there's quite a lot of gloom around at the moment. First, what we saw in this election wave is a big anti incumbent trend, some people would argue. Well, surely that shows that democracy is working very well. Not really a problem here. I think what it tells us is that electoral systems are working as they should be in many places. But the sheer scale of this anti incumbent backlash tells US that the problem maybe goes beyond democratic political systems or elections, the electoral process. And the focus of this year's report really is what has been going wrong with representative democracy. So it's analyzing this groundswell of popular dissatisfaction which is driving support for political insurgents and populists in many places all around the world. I think that's a positive thing because political insurgents are opening up the political space, providing more political competition, being responsive to voters concerns, and actually putting pressure on the political mainstream to do better. And it's encouraging political participation, which is the one category of the index where there has been improvement over the lifetime of the index. So that's all positive.

And given that you are somebody who has watched these trends and watched this index over time, what's your sort of prediction for 2025? Things to look out for, things that you think are certain to happen?

I think all eyes are on what happens in the US under the new Trump administration. The US is classified as a flawed democracy, has been since 2016, mainly reflecting gridlock and problems of declining public trust in institutions and so on. There is a clear demand for change from voters, so whether he can deliver improvements now that the Republicans control both the House and the Senate will start to become clearer after a few months. I think there's some other key elections this year pointing to the possibility of positive change. We had the election in Germany at the weekend. Maybe there will be something that is energetically different. Same goes for Canada, where the unpopular government of Justin Trudeau is on the way out and we can expect elections in the spring. We have many elections again in Central and West Africa, some of which are likely to be stage managed by incumbents. But there is again a chance, as we saw in Senegal last year, for big changes. And of course in the Middle east and North Africa there's a chance for a democratic transition. In Syria also, there is a very big risk of internal conflict and violence. So a mixture of good news and bad news potentially. But I'm open to the possibility of positive results this year.

Joan, thanks for your time. It's always a pleasure to keep an eye on how democracy is doing.

Well, thank you very much. Thanks for having me.

To have a look at what your country scores on the democracy index, you can follow the link in the show notes.

Okay, well, here we go. I'm switching the shower water from full hot to full cold and let's see how it goes.

Benjamin Sutherland has been doing some gonzo journalism for the Economist's column well Informed, which examines the science behind the headlines on Health.

All right, now that's real cold. Okay, I've switched off the water. That was maybe a few seconds shy of 30 seconds.

That.

Okay, so there's a big social media friendly trend of taking ice baths and cold showers. And I thought I'd give it a try myself. And I have to say, it is quite a bracing experience.

One of the biggest advocates of cold therapy is an extreme athlete named Wim Hof, who goes by the Iceman. I was able to regulate my mood in psychiatry, in brain scans and to in blood samples, we could show how to bring down inflammation. And then the Wim Hof method was born. His method of combining cold soaks with breathing exercises and meditation is supposed to come with all kinds of health benefits.

The Wim Hof method makes some pretty big claims. The website says it reduces inflammation, strengthens the immune system, balances hormone levels, improves sleep, lifts mood, perhaps most dramatically. They also say that cold immersion remedies cardiovascular diseases by exercising the heart and blood vessels.

It sounds basically like really, really big promises. What data are there to support any or all of those claims?

Well, we do know that cold speeds up metabolism. It also reduces swelling. That's why people put cold packs on injuries. There was a very interesting 2014 study in which 12 practitioners of the Wim Hof method were deliberately infected with a bacterium and they actually experienced fewer flu like symptom than did the control group. There was also an interesting 2018 study in which Wim Hof himself was subjected to mild hypothermia. They gave him a brain scan and it revealed that the parts of his brain responsible for feeling good and suppressing pain had been activated. The biggest study that was done was in 2015. It was a Dutch study done in the winter. They had more than 3,000 volunteers divided into two groups. Some of them were asked to take normal showers. The intervention group were told to finish their shower with a blast of cold water, either 30, 60 or 90 seconds. And interestingly, after a month, the intervention group had missed 29% fewer days of work. But the study also raised some interesting questions. Number one, it didn't matter how long the cold blasts actually were, if they were the short or the long blast. And actually, both the intervention and control groups reported the same number of days of sickness. So there may have been some sort of a placebo effect. And it's worth noting also that the study researchers did not measure any physiological changes.

I have to say I'm not convinced yet.

Okay, so more recently in Switzerland at the University of Bern, there was a study that decided to test whether or not soaking in cold water could improve what they called body sturdiness. And the hypothesis was that this could jack up antioxidants levels and release enough stress hormones to strengthen and build up the immune system. They did a battery of physiological tests on the 22 young men in the study, but they couldn't find any positive effects after 15 days. And keep in mind, the Wim Hof method claims that it works after just 10 days of practice. But there is an area where the research has been established and that is that both cold showers and cold soaks really do raise the level of neurotransmitters that are linked to pleasure. So that includes dopamine and endorphins. And that's been pretty solidly established.

What's your take on this? I know that in true gonzo journalism fashion, you gave this a go yourself. What do you reckon? Did it make you feel more inspired?

Yeah, you know, I did. I started two days ago. I was actually kind of intrigued by a New York Times bestseller called what Doesn't Kill Us? And it basically makes the argument that using freezing water and subjecting yourself to all sorts of extreme environments can help you recover what they call lost evolutionary strength. I don't know if that's actually held up by the data, but you gotta admit, in today's comfort obsessed age, that's a pretty seductive notion. And I've made a decision to go with cold showers for two full months. And I'm gonna bet that the mantra of power in the cold shower, as the WIM HOF people like to say, is gonna keep on going strong.

We may check back with you if you survive all of that, Ben, but for the moment, thanks very much for your time.

Yeah, thank you. Always a pleasure.

That's all for this episode of the Intelligence. We'll see you back here tomorrow.