Wealth inequality: myths, reality
Source: Wikipedia

Wealth inequality: myths, reality

It is perfectly natural for wealth to be unevenly distributed among humans.

This has happened in any society at any time in history, for trivial reasons: people are not all the same; they do not all share the same opportunities; they do not all pursue prosperity with equal tenacity; they are not all equally lucky; and politics may occasionally interfere with wealth distribution among families.

If you look at the statistics showing the distribution of wealth (or income) among families in various countries, you will invariably find a power law that can be used to model a large number of natural phenomena (chart above the title).

As a general rule of thumb, in developed countries, roughly 10% of the families earn 50% of all yearly income nationwide (and pay 50% of the income taxes), and 1% of the families own in the neighborhood of 40% the wealth.

Therefore, resounding announcements of these banal truths demonstrate ignorance of elementary social phenomena. But let's move forward a bit.

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(Source: Quandl, 2014)

Of course there is some variance, country by country, around the above rough averages, and such variance is reflected by countries' Gini coefficients. In the Figure above, green countries have a more evenly distributed (among families) yearly income, than red countries. The higher the Gini index, the higher the "inequality".

However, we should not hope that one nice colored chart may by itself explain the problem of income (or wealth) distribution...

First of all, cross-country data are not as easy to compare as the chart above suggests, due to differences in methodology, data quality and other factors. Then, the Gini of Vietnam and that of China, or that of Orange County (Cal.) and the US as a whole are meaningless to compare. Furthermore, estimating the Gini coefficient before or after taxes can lead to substantially different results. And the same happens depending on whether or not welfare and compensation policies are taken into account: a low income in Denmark -where the State, after collecting taxes, pays for your health, school and baby sitter- or a low income in Afghanistan are two very different problems, even though the two countries appear with the same color on that sexy map.

When it comes to wealth instead of income, things are possibly even more complicated, and "The 1% own the 40%" is not a finding as telling as one may think.

From Britain to Greece, from US to Sweden, many families spend most of their income and have near-zero yearly savings: that's why you are sure to find out that one family with €50,000 in Treasury bills is wealthier than millions of other families. (And, again, don't forget: it makes a hell of a difference having zero savings in the US or in Sweden).

Not only that. If I have no savings and have a mortgage of the same amount as the market value of my house, then my net wealth is equal to zero, even though I have an income (which I use in part to pay for the mortgage) and a house. I certainly am not "poor", yet I will show up as such in wealth statistics. A retired policeman with €25,000 in the bank and a rented house will look wealthier than all the people like me.

Now, the above does not mean that wealth inequality can never be a problem.

It does become a problem when it is acute, above certain limits. Today, the issue is very debated not only because of the ignorance outlined above -the naivety of suddenly finding out that the 1% owns the 40%-, but also because income and consequently wealth inequality is increasing significantly in some geographies (essentially those where it used to be the smallest). E.g., according to some reliable, if debated, sources, in the US 10% of families currently own 73% of the wealth.

This, in turn, may eventually increase the percentage of people who are poor. It is perfectly possible to have inequality without absolute poverty. But if the poor are too many, we aren't just facing an ethical issue. We are confronted with an economical problem that affects even those who aren't much ethically sensitive.

The problem is that if too many citizens are deprived of discretionary spending means, then demand declines. Too many people stop consuming the very goods and services that wealthier citizens are producing, with all their R&D, innovation, robots, algorithms, offshoring, and so on. Production decreases. Factories and offices close. People lose jobs. More poor are created. Fewer consumers are in the economy game... A dangerous perverse loop is initiated.

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(US data. Source: Larry Summers)

According to some, if income inequality squeezes the lower cohorts below certain levels and, at the same time, if automation and AI destroy jobs, then a difficult economical and social atmosphere will develop. In both leftist and rightist circles, countermeasures such as a guaranteed minimum income are in the talking stage.

In summary: much of the talk about "inequality" is grounded on incompetence; however, from an economical viewpoint, there exists a serious side of the issue.
Brendan D.

CEO @ C-BIA Consulting Ltd

7y

Another 'serious side of the issue' is our capability to continue to grow the global economy (the traditional response to inequality) given finite resources, population growth etc. I think the context for these discussions has and is shifting and will be the major forces that shape responses going forward - even with Trump!

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