Monday, 17 March 2014

What do wealth distributions tell us about economic inequality?

This is a guest post written by Simon Wan.

A lot of reports have been making headlines recently trumpeting the irresistibly catchy claim that “X number of individuals have more wealth than the bottom Y% of the population”. The most recent manifestation of this has been this morning’s Oxfam report claiming that “the five richest families in the UK are wealthier than the bottom 20 per cent of the entire population”. Here I want to lay out a simple critique of using “wealth” distributions to make broader claims about economic inequality. Tim Harford and Tim Worstall elaborate on this very persuasively, so I will do no more than draw the broad strokes.

The heart of the critique is this: wealth is usually measured as “the marketable value of financial assets plus non-financial assets less debts”. It is this last part of the definition that makes a discussion of “wealth” at best misleading and at worst meaningless. For the class of people with zero measured wealth may span a huge spectrum: it will include the genuinely poor and destitute, but it will also include the hedge fund manager who has taken out a £30 million mortgage on a Kensington townhouse, or the new lawyer earning six figures but with a stack of student debt. Conversely, the category of people who have high measured wealth will of course include those who are genuinely wealthy, but will also include pensioners who have accumulated net savings over their lifetime to consume in their retirement.

The studies that make this kind of claim are superficially true. For instance, it is correct to say that six members of the Walton family have more wealth than the bottom 30% of Americans. But, given that close to 1 in 4 Americans have zero or negative net wealth, the point is that so does anyone with a penny in their pocket and zero debt to their name. This is not to say that economic inequality does not exist or that it is not a problem. It’s just that looking at “wealth distributions” of this kind doesn’t tell us anything meaningful about the world.

No comments:

Post a Comment