Politics

Misleading Inequality Report Is Nothing to Fear

No, the richest 1 percent will not soon have as much wealth as the rest of us.

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There's a good chance you saw the "wealthiest 1 percent will soon own more than the rest of the world population combined" story floating around the Internet the past few days. Fortunately, there are a multitude of reasons to be both highly skeptical and unconcerned about the article's claims.

Oxfam, the U.K.-based organization that published this research, is largely regurgitating a similar eyebrow-raising claim it made last year: that the world's 85 wealthiest people have the same wealth as the bottom 3.5 billion people combined, an assertion that's been solidly refuted by financial reporter Felix Salmon among many others.

There are three issues with Oxfam's methodology: 

  1. Oxfam accounts for people's debts, meaning that the poorest two billion people—57.1 percent of that bottom half—have negative net worths. Many of these world's "poorest" are people from the most wealthy portions of the world who are simply underwater on mortgages, student loans, or credit card debt. When you add these two billion (often very large) negative numbers to the remaining 1.5 billion positive-wealth people in the bottom half, you get a relatively small figure—$1.7 trillion.
  2. Oxfam takes this $1.7 trillion figure and simply counts down the list of Forbes' wealthiest people until they hit that total, but the organization attributes wealth entirely to individuals, when the multibillionaires of the world presumably have many family dependents. They're not, in other words, spending all their money on just themselves.
  3. Oxfam has then taken recent trends of rising wealth for the top 1 percent and extrapolated those recent high growth rates into the future, which is a large assumption given the likelihood of the U.S. Fed's quantitative easing (Q.E.) soon unwinding.

Is inequality an issue? Sure. A dollar in the hands of a poor person has greater utility than a dollar in the hands of a very wealthy one, so wealth inequality means we have something less than the maximum possible amount of worldwide utility/happiness.

But studies like Oxfam's that solely focus on the division of the pie always entirely ignore how much the pie has grown over the last few decades—leading to bigger slices for just about everyone and creating a rising tide that floats the vast majority of boats.

Here is the share of the world's population in poverty as defined by the World Bank:

via Sean Mulholland

 

The rate more than halved from 1990 (43 percent) to 2010 (21 percent), and, The Economist notes, "Almost all of the fall in the poverty rate should be attributed to economic growth." Some well-known economists, such as Columbia University's Jeffery Sachs, believe we can even end extreme poverty by 2025.

Inequality analyses like Oxfam's also ignore the fact that the top 1 percent isn't some static, unchanging body, but a relatively dynamic one, with many individuals moving in and out. Here, for example, is a chart I made with data taken from the U.S. Treasury Department by the Stonehill College economist Sean Mulholland showing how Americans in different wealth quintiles shifted from 1996 to 2005:

U.S. Income Shifts

As far as the ever-demonized "1 percent," Mulholland says, only 40.4 percent of Americans in that highest percentile in 1996 were still in the top 1 percent in 2005. Additionally, children of families at all income levels are expected to exceed their parents' family income:

Generational Growth

Most income inequality reports focus only on the most negative interpretation of the data, creating a narrative that the world's economic situation is spiraling toward a dystopian hell. People then use that misperception to justify wide-reaching government redistribution policies. Stepping back to look at the more meaningful figures, though, makes it clear that those fears are largely misplaced.