We have another study insisting that wealth inequality will be the death of us all — waifs will starve in gutters as the plutocrats polish their top hats. This study comes from the Institute for Policy Studies and is called "Billionaire Bonanza." The problem here is that they use numbers, and yet never manage to put them into any form of perspective. It might be helpful to, you know, carry on to the point of telling us what this might all mean?
The big finding is that the top three Americans (Jeff Bezos, Bill Gates, Warren Buffett) have more wealth than the bottom 50 percent of Americans combined. Hmm, OK, yes, it’s true in one sense, but not in the ones that are important. This is just the way that wealth distributions work, how they've always worked. Wealth is always more unequally distributed than incomes. Here, for example, is a listing of the Gini (a measure of inequality, 1 means one person has everything, 0 means total equality) for wealth in different countries. That for the US is high, yes, at 0.801. The Gini for Sweden is a little lower, at 0.742, for Switzerland higher at 0.803, and Denmark is higher still at 0.808 despite being thoroughly socially democratic. Note that Denmark’s income inequality is lower than in the US, but wealth inequality is higher – these things can and do move in opposite directions at times.
Why is that possible? You can have negative wealth in a manner that we do not record as having negative income (a failure of our income statistics is that some people really do have negative incomes but we don’t record them as having such – think someone going bankrupt). That newly-minted Harvard graduate with $100,000 in student debt, no assets other than a sheepskin, and an $80,000 salary has negative wealth. A degree is not counted as a financial asset. That’s not all of it, of course, but there are indeed many people out there with no assets to speak of, a reasonable income, and a touch of student or credit card debt – negative wealth.
This makes wealth distributions statistics important to understand. For example, if you have $10, no debts, then you have more wealth than the bottom 30 percent of Americans. This is normal. When we measure who are the poorest, by wealth, across the world we find that near none of the bottom 10 percent are in China, a country with still great poverty, but some 10 percent of that bottom group are in North America (and more in other rich countries). The answer being that, in the U.S. and Canada, poor people can borrow -- in China, they can’t. If your borrowings are greater than your wealth then you have negative wealth, don’t you?
Really, this is normal. Emmanuel Saez and Gabriel Zucman, often co-researchers with Thomas Piketty, tell us so in one of the great academic papers on the subject. The bottom 50 percent of any wealth distribution have very little of total wealth, perhaps 4 percent or so. (The U.S. might be a little different from this, but the final number just isn’t shocking by that comparison.)
There’s another way we can put this as well. Total U.S. household wealth is some $95 trillion. The top 25 Americans have $1 trillion, or perhaps 1 percent. Well, how angry or worried do we want to get about that?
Finally, there’s a large conceptual problem here. When we measure income inequality we do so, generally at least, after all the things we do to reduce income inequality. On the essential basis that we’d be idiots not to (there are some that don’t bother but, they're idiots). What we want to know is how much more redistribution we should be doing -- more taxes, more benefits, more welfare, or not -- instead of the amount of inequality before whatever we already do? And even the U.S. reduces that income Gini by some 12 points or so using those means, European countries perhaps by 15 or 20 points. With the wealth distribution we don’t adjust for what is already done. It’s laid out in the aforementioned Saez and Zucman paper. Government transfers count to reduce income inequality, they don’t count to reduce wealth inequality. Really, a private pension that produces an income for life is wealth by the usual measure, Social Security which provides an income for life is not wealth by that same measure.
What’s happening here is that we’re getting some startling numbers thrown at us without any context. Wealth distributions are always more extreme than those for income, the bottom 50 percent of any wealth distribution always has very little of the pie, those top 25 plutocrats have perhaps 1 percent of American wealth, wealth inequality is a little high but nothing truly out of the ordinary and all these measurements are being done without taking account of what we already do to reduce inequality.
Think about it, why do we have Social Security? So that the old folks have a little wealth, some income, in their golden years. Measuring wealth by deliberately ignoring how we redistribute it isn’t going to give us the right answer, is it?
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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