Sen. Bernie Sanders, I-Vt., tells us that wealth inequality is at grotesque and immoral levels. Sen. Elizabeth Warren, D-Mass., has a plan to tax everyone lots and lots to solve this. The slight problem is that the Federal Reserve tells us that wealth inequality isn’t at those high levels. In fact, it’s nothing very much out of the ordinary. Actually, we’re only a little above the inequality levels of the 1950s, you know, when America was still great and didn’t need to be made so again?
Promising to solve a problem that doesn’t exist isn’t a great election strategy. Except that’s not how politics works, of course. Reality is rarely the point at issue, it’s the electorate’s perception which determines matters. We’ve all been told often and long enough that this wealth inequality is back up at levels not seen since the Robber Barons. Thus policies are being crafted and campaigns are being run on something we believe that is not so.
The terror starts with a paper by Emmanuel Saez and Gabriel Zucman who tell us of these horrors of concentrated wealth. That’s where the senators are getting their information, as is every other recitation of the disasters ensuing from the wealth of the plutocrats. It’s this bubble that the Federal Reserve researchers burst.
The extreme concentration of the past couple of decades simply isn’t there. What we do see is the top 1% getting better off in booms and worse off, relatively, in slumps. This makes sense. This is what we expect to see in the business cycle anyway. You know, stock market crashes wipe out the wealth of the rich, booms and ever-higher S&P 500 numbers rebuild it. There is indeed a rise in wealth concentration, an increase in wealth inequality. It’s just that it’s not at emergency levels and thus doesn’t require emergency action.
All of which is nice, not that it’s going to change any of the political rhetoric, of course. It’s all also still wrong. For a reason I’ve mentioned before, our wealth measures fall foul of Worstall’s Fallacy. We must measure a problem after the effects of what we already do to try to solve that problem, not before the effects of our actions. Which is something rarely done at all.
See page 526 of the Saez and Zucman paper for why. The government already does a lot of things to make wealth more equally distributed. Researchers rarely account for any of them when we measure wealth inequality.
Just as an example, let’s measure pension inequality. Some of us have really great savings in our pension IRAs. Others of us don’t. We were ill, didn’t earn enough to save, had bad luck, got wiped out in a stock market crash. That’s wealth inequality. Nearly all of us have some income to arrive in our retirement from Social Security. That’s obviously just as much wealth as any other pension income we’re going to get and should be valued at the same capital value as any other income stream of the same amount. Except that it isn’t. In our calculations of wealth, Social Security is treated as being worth nothing. It comes from government, you see?
Equally, if our lovely defined benefit pension of 50% of salary comes from a funded pension scheme then that’s counted as wealth. If it comes from an unfunded scheme, like must public sector pensions, then it is counted as constituting zero wealth. You could be on $50,000 a year for life with adjustments for inflation, and our standard wealth calculations say that’s worth nothing.
This is, quite obviously, a ridiculous way to measure wealth.
Yet this applies all across all of our calculations. Just about everything the government does to redistribute income and wealth, the entire government redistribution scheme which makes up the welfare state, is not counted.
If all retirees were to get $100,000 a year each from Social Security, would you say they’re wealthier? Richer? Not just higher incomes, but that promise to them, that’s wealth? Well, OK, except all the figures you’re being fed about wealth inequality deny that as wealth. They really are saying that however much money people get from the government, then they’ll still be poor and America will still be just as unequal.
Sure, it’s interesting that the Federal Reserve’s numbers disprove much of what we’re told about wealth inequality. But even that’s not going far enough. The entire system of measurement being used is wrong. We’re simply not counting all the things we already do to make America more equal, a particularly stupid place from which to start when we’re trying to design policy to deal with however much of the problem still remains.
Which brings us back to Bernie Sanders, Elizabeth Warren, and their plans to solve a problem. It’s a problem that just doesn’t exist in the manner they tell us it does.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
