Stats about rising inequality are a bit rich: it’s debt simple
Is it possible for the poor to get richer without the rich getting richer? Now there is a question worth answering
Every year like clockwork, just before the Davos meeting of the global elite, British charity group Oxfam publishes an astounding statistic that is designed to shock the world and instantly goes viral.
This year it was that 2,200 billionaires worldwide saw their wealth grow by 12% in 2018 even as the poorest half of the population saw their wealth fall by 11%. In 2018, it was that the 26 richest people on earth had the same net worth as the poorest half of the world’s population, about 3.8 billion people.
These statistics send me screaming up the wall because not only are they grotesquely wrong and ridiculously formulated, but they also trivialise a much more important debate about inequality and how to fix it.
Let’s start with why they are wrong. Oxfam’s basic philosophy is rooted in the old Marxist notion that capitalist society is caught in a structural contradiction that results in the rich getting richer as the poor get poorer. This inevitably results in a socialist revolution, after which we will all live in social heaven. In fact, the entire gamut of accumulated historical knowledge of the past century is that while capitalism does make the rich richer, it also enriches the poor and the entire middle class too.
Even Bono, a member of the rock band U2, now recognises this fact. He actually came up with a great quote at this year’s World Economic Forum meeting: “Capitalism isn’t immoral, it’s amoral … capitalism has taken more people out of poverty than any other ‘ism’ but it is a wild beast, and if not tamed it can chew up a lot of people along the way.”
Starting from the wrong premise, Oxfam inevitably grabs the bull by the udder. The big problem (and this has been pointed out countless times by countless writers) concerns the status of debt. Calculating wealth is much harder than calculating income because debt has a vacillating quality. If you, as a person or a company, are able to comfortably manage your debt then it’s an asset, and an enormously powerful one at that. If you are unable to maintain your debt, it is a liability. It depends, but in general the capacity to raise debt is one of the miracles of modern finance – and potentially one of its greatest vulnerabilities.
To calculate the global wealth distribution, Oxfam uses not its own research but the Credit Suisse Global Wealth Report. This is a very catchy title, but in truth it is an extraordinarily lightweight attempt to research the topic because it’s based on regressions off GDP numbers, equity market capitalisation growth and inflation. There is no actual research here by people holding clipboards; these are just extrapolations.
If you look at the results there is one obvious weirdness: there are a lot of people in the lowest percentile from North America and Europe, but almost no one in the second-lowest percentile from these regions. How can that be? The reason has to do with debt, because if you extrapolate from GDP data it turns out that a young doctor with university debt hanging over her head ends up being poorer than most poor African subsistence farmers because she has negative wealth, as opposed to the African farmer who merely has nothing.
To extend the metaphor, imagine someone in the middle class in, say, Indonesia, who has just managed to get a home loan for the first time and buy a house. For the vast majority of the middle class, the one way you can fairly easily leverage yourself is with a home loan, and it’s worth the risk. The level of leverage is enormous, so for some time before property prices rise you will have negative equity. In Oxfam’s terms, you will be poorer than people who are actually starving.
This has been put to Oxfam, which tends to react with barely disguised irritation, but it does make two substantive points. Although there are a huge number of North Americans and Europeans in the bottom decile, they only constitute 25% of the total. In addition, if you just ignored the bottom decile the resulting wealth disparity remains more or less the same.
But both these reactions miss the point. Some of the richest people on earth are also in debt on a net basis or are just poorer than they might otherwise seem. That might not put them in the bottom decile, but it does diminish their apparent wealth. But to say these people are poor is not only false but a grotesque misreading of how wealth happens.
If you look at the lifespan of average middle-class people in the developed or developing worlds, they invest in property early and only later begin investing in the stock market or similar, mainly via a retirement fund. If they are successful, the balance shifts toward the stock market. If you average all this out, it tends to enormously inflate the relative wealth of people who own stocks and undervalue that of people whose main wealth vests in their property. And that would be basically everybody from decile three to eight.
That is of course not to say we do not face an inequality problem. Obviously, we do. The question is how you fix it. In its rage and fury about the iniquity of the situation, Oxfam is blank on this question.
The one obvious solution is to increase taxes on the rich. The problem with that solution is that we have been there before. The maximum marginal rate in the 1960s and 70s on the very rich was 80% and more. Rather than helping the poor get richer, that solution tended to help the civil service get richer, and total tax income was lower than it is now.
Which prompts the real question here: is it possible for the poor to get richer without the rich getting richer? Now there is a question worth answering, but sadly I doubt it will result in a viral tweet.