Wednesday, 20 January 2016

For richer or poorer: Oxfam's wealth inequality report withstands scrutiny

Oisin Gilmore: A few days ago, Oxfam released a report stating that “the richest 1% have now accumulated more wealth than the rest of the world put together” and that “just 62 individuals had the same wealth as 3.6 billion people” (p.2). This has been reported widely and was front page news in the Irish Times. These stats come follow on from previous reports which Oxfam produced last year and the year before that.

What Oxfam does in this report is pretty simple but pretty effective. Most of the report simply reproduces the data produced and presented in the annual Credit Suisse “Global Wealth Databook”. So for example the statement “the richest 1% have now accumulated more wealth than the rest of the world put together” comes from Table 3-4 of the Credit Suisse report. However, they develop on the Credit Suisse report by performing the simple exercise of taking the Forbes Rich List and seeing how many of the world’s richest people you need to add up until their combined wealth is equal the combined wealth of the bottom 50%. In 2013 it was 85, in 2014 it was 80 and they have now shown for 2015 it is only 62.
When the report last came out last year it got a bit of blowback with harsh criticism from the Felix Salmon, The Economist and somewhat more judicious criticism from Ezra Klein at Vox. And we can expect some blowback again this year. Indeed Felix Salmon already posted a link to his earlier articles.

And in fairness articles such as that by Salmon are a useful corrective to mistaken interpretations of the Oxfam report. The core point he's making has some validity.
He writes: "Wealth, and net worth, are useful metrics when you’re talking about the rich. But they tend to conceal more than they reveal when you’re talking about the poor."

This is in some ways fair. The basic issue here is that wealth isn’t a great measure of how rich or poor most of us are. When most of us think about how rich we are we think about our income not our wealth. For example for many of my friends in their 20s, this means they think about their wages not the few belongings they carry with them when they move flat. But beyond that, for most workers, even well paid workers, when they think about how well off they are they also think about their wages, not their houses or savings.

There are two main ways of considering how rich or poor someone is, by looking at their income or by looking at their wealth. For most of us, what matters is our income. But just looking at income conceals that the rich earn their income from the property they own, not from the labour they sell. So if we just looked at people's income we would miss-out how unequal society is. If we want to assess how rich the rich are, we need to look at what property they own i.e. their wealth.
But if we compare the wealth of the rich with the poor, we can end up with weird statistics because the poor don't own anything of value. The vast majority of society own nothing of value apart from a house and savings (often in the form of a pension plan). And huge sections of humanity don't own a house or have much savings: pretty much everyone in poor countries and pretty much everyone under 30 in rich countries. So, for example, if you look at wealth inequalities between a middle-class 20 year old and their parents, you'd produce weird stats. Say a 20 year old owns clothes, records and books worth €1,000, their parents might own a house worth €220,000, savings (including pension) of €40,000, and other assets like a car and furniture worth €10,000. So if you looked at the distribution of wealth within that family the parent own 99.6% of it, the 20 year old owns 0.4%.
Similarly, a huge part of the Oxfam story of 1% owning more than the bottom 99% is simply because most people own nothing. The Credit Suisse report explains, people earning $10,000 a year or less account for “71% of the global population, but account for only 3% of global wealth” (p.99). And as can be derived from, Table 3-4 the bottom 50% own 0.6% of the world’s wealth and the bottom 90% own 12.4% of the world’s wealth.

It’s worth remembering here that, this is world population we’re talking about. So you need assets of only $68,800 to be in the top 10%. For comparison, Ireland has a median wealth of $64,444 per adult. So a bit over half of Ireland is in the top 10% globally and a bit under half in the bottom 90%.

The point of all this is to explain that the words of caution from the Economist, Klein and Salmon have some merit. The Oxfam report could easily be misinterpreted to imply a much higher degree of inequality. So while 62 people might have the same wealth as the poorest 50% of the world, they certainly do not have the same income. But, there’s always a “but”, there are also problems with the claims of Salmon, the Economist and Klein…

Firstly, Salmon also makes some slightly ridiculous points about how people whose debts are greater than their assets have negative wealth. As Oxfam pointed out in a response, this is a bit ridiculous because it doesn’t really matter for this discussion. The outcomes don’t change when you exclude those with negative wealth.
And both he, the Economist warn us against Oxfams’s prediction last year that the richest 1% will accumulate more wealth than the rest of the world by 2016. Salmon calls the prediction “a little crazy”. Although, as Oxfam point out, this happened in 2015, “a year earlier than Oxfam’s much publicized prediction” (p.2).

However, the biggest “but” is in relation to Salmon’s main point.
As explained above, what is driving the massive global inequality in wealth is the lack of assets held by most of the worlds population. Because of this Felix Salmon states that Oxfam report is “misleading”, “extremely flawed” and "crap".
But really the report is only misleading if you don't understand what the concept of wealth means. (Granted, a lot of people don't.) And it's only "crap" because, according to him, although measurements of wealth are useful metrics when you’re talking about the rich, they “tend to conceal more than they reveal when you’re talking about the poor”. The reason for this is because the lack of assets held by most people in the world skew the global figures. Or in other words: the poor are too poor to be considered in an evaluation of how much wealth the poor have!

To be honest, I think that’s a pretty silly objection to a serious report on what is a pretty serious situation: the best figures we have show that the richest 1% have more wealth than the rest of the world put together and that 62 individuals have the same wealth as 3.6 billion people.

So sure, the figures are “crap” because reality is “crap”. The Oxfam report, however, is just fine.

Oisín Gilmore is a PhD candidate in economics at the University of Groningen

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