In recent months the global elite, including the Catholic head of the Bank of England Mark Carney, have joined Pope Francis in expressing concern about inequality. The issue will be discussed at Davos again this week, though it is doubtful that any useful action will ensue.
Within this debate on inequality, statistical gymnastics are becoming more sophisticated and thus obscuring important issues such as how to
improve the position of the world’s poorest people.
For example earlier this week, Oxfam published a report arguing that inequality is rising. “The combined wealth of the richest 1 per cent will overtake that of the other 99 per cent of people next year unless the current trend is checked.” What did not make the front page was the fact that the share of wealth held by the richest 1 per cent is lower than it was 15 years ago and that Oxfam’s numbers for next year are an extrapolation of trends in asset prices caused largely by quantitative easing and unlikely to be repeated.
Indeed, Oxfam’s figures are as meaningless as its extrapolations are misleading. The inequality figures are based on what is known as “net wealth” – total wealth minus debts. On this measure, for example, a US Harvard MBA graduate just joining a hedge fund is likely to have negative net wealth. Thus, on the basis of Oxfam’s figures, the world's least wealthy 10 per cent contains almost no Chinese; North America, on the other hand, with all those potentially rich young people borrowing to buy houses and study for MBAs, has 8 per cent of the world’s very poorest people; and a subsistence farmer in Africa earning a dollar a day would find himself amongst the world’s richest 70 per cent and quite possibly further up Oxfam’s net wealth distribution than most British graduates.
Meaningless figures deflect attention from serious issues. There is much good news when it comes to poverty reduction, and all Catholics should want the poor to become better off (spiritually and materially). The proportion of very poor people in the world has fallen more rapidly than at any other time in history. Pope Francis’ claim that: “While the income of a minority is increasing exponentially, that of the majority is crumbling” is, fortunately, demonstrably and objectively untrue. These improvements in the position of the poor happen when there is peace within countries, good governance, the protection of property, openness to trade and good conditions for business to establish. There is much to be done and much to be debated about how to improve matters. Oxfam’s presentation of statistics does not help clarify these debates.
What really matters is how people become rich – are people enriching themselves through enterprise whilst helping to make others better off too, or are they enriching themselves at the expense of others through corruption and cronyism? It should be noted too that, in a free and justly ordered society, all will benefit even if outcomes are more unequal. This is not “trickle-down” economics but the outcome of enterprise. In Mao’s China, tens of millions were starving in a shared equality of misery. Today, hundreds of millions of Chinese are more prosperous than in the 1970s.
In fact, we are beginning to look more and more like “one world” – the slogan of Oxfam and other campaign groups when I was at university. If
you look at the distribution of world incomes in 1970, it very clearly showed two worlds. The vast majority of people in poor countries earned much, much less than anybody in rich countries. If you look at the same graph today, the poor countries are catching up (rapidly). Oxfam admit this. They now argue “it is inequality within countries that matters most to people”. This change of focus is a regrettable one for Catholics who think of solidarity in worldwide terms.
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs
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It is a very unequal world, but Oxfam distorting the data to make it look more unequal than it is is not helpful - so it is not nitpicking. There is no point quoting another study which provided the data for the Oxfam study as independent evidence that the world is as unequal as Oxfam say. I don't "poo-pooh the spirit level" I criticise it (why do you have to use such pejorative and ungenerous terms by the way?). There is plenty of peer reviwed work in this area that comes to different results. But let me give one example of the way in which the spirit level has the problems I cite (there are many others). It is widely mentioned that the spririt level shows that more equal societies have greater levels of trust. Remove the outliers and the relationship disappears. More interestingly, other measures of social cohesion such as charitable giving and voluntary activity decrease as societies become more equal. This is true even if you exclude the US (the outlier in this case) and church-related voluntary activity.
There is no point using an exceptional case such as ebola (and by the way, drug companies do not tend to develop drugs for infectious diseases for the rich either because the short times they are used for prevent them from being profitable, hence the antibiotics problem) to justify a very general and wide-ranging point. Re gini, it rose rapidly, 1977-1986 and is now lower than in 1986 and the poor are much better off than when we had 98% tax rates.
Phillip,
I said nitpick because Oxfam is correct. It's a very unequal world. Credit Suisse's 2014 Global Wealth Report showed 0.7% of the world's people with more than $1m assets controlled 44% of global wealth & recent research by Saez, Univ. of California, Berkeley & Zucman, LSE, shows the USA's top 0.1%, 160,000 families, with $73m each on average - hold more than 20% of all US wealth, the same as the bottom 90%.
You put up your data but reject the peer reviewed Spirit Level, a book you haven't read, which shows that equality, which you pooh-pooh, is important because more equal societies enjoy, e.g. better physical & mental health, lower homicide rates, fewer drug problems & higher maths & literacy scores.
You say focus on the poor, but rich & poor are linked. E.g. "the relevant research (to find a vaccine) didn't happen because Ebola was seen...to be a disease only of the poor...therefore the giant pharmaceutical manufacturers couldn't see how to make big money out of an Ebola medicine...Today...Ebola is a global threat...hence....a mad rush to find a treatment", said Robert Peston, who went on:
"....when decisions about who gets what or how investment funds are allocated are left to markets, the outcome may seem to benefit only the rich but the consequence may end up hurting rich & poor alike."
Re gini, today's 0.34 is far worse than 0.24 in 1977 & re top 10%, 2010's 31% share of income is far more than 21% in 1979 & the bottom 10% fell from about 4% to 1%
David - i am not nitpicking about the Oxfam report, these are very serious issues about the use of the data. The figures also miss out entitlements to state pension benefits (the expansion of which is a major reason why less well off do not have assets). If you have saved for a pension of £7,500 a year, you would be near the top 1% in the world. If you have borrowings of (say) £500 and an entitlement to a state pension of £7,500, Oxfam put you in the bottom 20%. It is completely meaningless. When it comes to chronyism etc, nobody is a bigger critic than me (I think i coined the phrase "welfare state for bankers") and the IEA has been publishing on the subject of "rent seeking" for 35 years.
It is not just China but the whole of South and East Asia that has contributed to the fall in poverty and the reasons for their success (and Africa's relative failure) are clear. The extent to which inequality has increased (as I show below) depends on how you define it. If you look at the extremes it has, if you look instead at the top (say) 10 per cent the picture is very mixed.
I am not sure what you mean about the "Peer Reviewed" Spirit Level (it is a book). There are many peer reviewed articles that come to different conclusions. The sort of univariate regressions that they use, highly dependent on a few outliers with little explanatory power must be questioned. Anyway, we agree on chronyism but I think the main focus of our thoughts should be the poor and not the rich.
Sorry ran out of Characters _ LAST PARA SHOULD HAVE READ:
Where is the evidence for enterprise in our present British Society? The banks continue to lend to hedge funds and the likes whose utility to society is nil, being conveyors of wealth to the already too wealthy. And where in the world is the idealised free and justly ordered society where all benefit from the enterprising? Certainly not here with the rich getting a top tax rate reduction while those at the other end are split from their communities because they have “too much” bedroom space. I suggest the end of the sentence, “even if outcomes are more unequal” is the most realistic part even if we are not now supposed to say “trickle down”. How about “crumbs from the rich man’s table instead.
Meanwhile one comment on Philip's response. I am well aware that if you take 1923 as your starting point then the share of the rich ( in rich countries) falls - This is because the neo-kiberal economists & followerd did not get a total grip until around 1975. At that point all indicators of inequality turned up and have continued to rise since and if the coalition get back will inequality will continue to grow.
may be I can explain the sportsman/woman comment in more detail. Hutton could market his talents to spectators at Headingly and domestic punters who listened to radio and television in the UK. Pieterson can market his talents to a huge audience around the whole world (made up largely of people who were too poor to own televisions 20 years ago). The same is true for some people operating in global industries. Unlike with sports stars, these advantages to mega rich people in industry may get competed away (but I don't know). But, like with Pieterson, they don't make anybody else poorer - indeed, Bill Gates and co bring their wares to all sorts of people rich and poor who benefit. Even if you wanted to do something about this (at a policy level) I am not sure you could. However, people with wealth (and that includes all of us who are comfortably off) should be acutely aware of the responsibilities Christ put upon us. It can be argued that bankers made their money whilst betting with the money of taxpayers and that some make their money whilst in league with corrupt political regimes (I won't name names here - there is no need to be specific) and we are both against this of course. On that count I think we can probably agree.
Mike, we may have had a long debate before! I appreciate your comment and, as you hint, I am neither a fan of artificial mechanisms that raise asset prices (though not entirely against QE) and I am definitely against bank bailouts. I am also especially interested in the plight of the poorest in poor countries. The picture in the UK is rather mixed. Using Oxfam's definition of net wealth in 1970, the poorest half of the British population had a 0 per cent share of the country’s net wealth (I am sceptical of this use of net wealth as is clear). By 2010, this had risen to 14 per cent. The share of net wealth held by the richest 1 per cent fell between 1923 and 2003 from 61 to 21 per cent (I don't know the 2010 figure). In 2002, the standard of living of the poorest quintile was higher than the standard of living in 1977 of the second richest quintile (so the poor are advancing, certainly). Today inequality (measured by the gini coefficient - in other words looking at the whole distribution) is at its lowest level since 1986. The top 10 per cent are not doing any better today relative to the bottom ten per cent than in 1986 either (indeed, they are doing a lot worse than in 1991). What is happening is that the top one per cent (i.e. the top of that top ten per cent) are doing much better relative to the other nine per cent in that ten per cent. My own feeling is that is strongly connected with globalisation (think sports stars - Hutton compared with Pieterson).
Booth nit-picks Oxfam's report offering instead complacency & obfuscation.
He asserts wrongly: "..in a free & justly ordered society, all will benefit even if outcomes are more unequal". Peer reviewed, The Spirit Level shows that if outcomes are more unequal all will not benefit, whereas, e.g. creativity & social mobility flourish in more equal societies.
He says: "The proportion of very poor people in the world has fallen more rapidly than at any other time in history", but must know that since 1980, China alone accounted for most of the world’s decline in extreme poverty whereas Sub-Saharan Africa's poverty headcount continues to rise.
Justifying inequality he says: "the share of wealth held by the richest 1% is lower than it was 15 years ago" but fails to point out that in 34 of the member countries of the OECD, the rich-poor gap was found to be at its highest level in 30 years.
The answer to his question: "...are they (the rich) enriching themselves at the expense of others through corruption & cronyism" is largely yes. Many firms associated with the world's richest invest huge sums lobbying & funding election campaigns for on-going profit & avoid or evade paying tax.
He says: "all Catholics should want the poor to become better off (spiritually & materially)" but worldwide most Catholics are materially poor, it is likely we who are spiritually poor & what we should do, as St Ambrose insisted, is give the poor back what is theirs.
There is much to argue with in Philip Booth’s denigration of Oxfam’s Report on inequality. First, he claims that the share of wealth held by the richest 1 per cent is lower than it was 15 years ago.
In fact, all trends since the Thatcher/Reagan mid-seventies have been to make the rich richer in every respect at the expense of the poor. Even the supposed solution to the bank debts, “quantitative easing” only served to increase the wealth of the already rich without improving the position of the less well off. (I am aware that Philip Booth’s economic theory doesn’t make him a fan of quantitative easing.)
He continues, “What really matters is how people become rich – are people enriching themselves through enterprise whilst helping to make others better off too, or are they enriching themselves at the expense of others through corruption and cronyism? It should be noted too that, in a free and justly ordered society, all will benefit even if outcomes are more unequal. This is not “trickle-down” economics but the outcome of enterprise.”
Where is the evidence for enterprise in our present British Society? The banks continue to lend to hedge funds and the likes whose utility to society is nil, being conveyors of wealth to the already too wealthy. And where in the world is the idealised free and justly ordered society where all benefit from the enterprising? Certainly not here with the rich getting a top tax rate reduction while those at the other end are split from their commun
An interesting and thought provoking article. Perhaps it really illustrates that truth is the first casualty of soundbite journalism.
Most people compare themselves to their own neighbors & relatives & then to their countrymen & women.
Across the oceans or beyond the continents -- out of sight, out of mind...