On wealth, debt and inequality – in response to some criticism

(author: Ricardo Fuentes-Nieva @rivefuentes)

It’s been an exciting week for Oxfam. Our newest piece of research Wealth: Having it all and wanting more conducted by Deborah Hardoon has received a lot of attention around the world, including coverage by the Economist, CNN, the BBC, etc. The report has sparked a global conversation about wealth and inequality, in the run up to the annual meeting of the World Economic Forum. While the most of the coverage has been positive, over the last few days, several people have also criticized in one way or another the results we presented. Fair enough. I want to focus on one issue in particular here: the use of wealth (assets minus debt) in our calculations.

The database we use is built by Credit Suisse under the leadership of Economists Jim Davis and Tony Shorrocks. This works follows up a long-term academic project that has been peer-reviewed.

The issue comes with the fact that there are a few million people with more debt than assets, which implies they have negative wealth. Felix Salmon and Ezra Klein, among others, have taken issue with this and suggest that Oxfam is misleading the public with these results. They both use this graph from the Credit Suisse report to make their case.

Both Salmon and Klein argue that the fact that there are so many Americans in the bottom decile invalidates our claims. Klein’s headline is “the combined wealth of my two nephews is already more than the bottom 30 percent of the world combined… They just have a piggy bank and no debt.”

Interestingly, they both Klein and Salmon resort to anecdotes to prove their point: Salmon argues that our calculation would include Jerome Kerviel, the French fraudster who was sentenced to pay around $6 million (although he doesn’t mention that Kerviel is not expected to pay it). Klein talks about Bill and Hillary Clinton, who were millions of dollar in debt at the end of their time in the White House. I won’t go into why I find these anecdotes a poor way to make a point. I’d rather look at the numbers

Salmon and Klein are concerned about the top left hand corner of the graph above. So, what if we redo the calculations taking out that corner, or the whole decile?

The bottom 10% of the global population are, on average, in debt. The total amount of their debt is $684 billion. There are a number of Americans and Europeans in this group, which is what both Klein and Salmon indicate asa a methodological problem.

Let’s see what happens if we exclude the bottom decile from our analysis altogether – conscious that we will be excluding from our analysis some of the poorest people in the poorest countries in the world, with no wealth at all.

Deciles 2 through 5  hold 1% of global wealth, or $2.6 trillion. Decile number 2 has very little wealth (0.1%) but it’s positive. The money in Klein’s nephews’ piggy bank is irrelevant.

In March 2014, 147 billionaires on the Forbes list had a collective wealth of $2.6 trillion. That means that two busloads of billionaires control the same wealth as, at least, 40 percent of the world.

What happens to the wealth share of the richest 1% if we exclude the bottom decile? It makes no real difference. Where before the top 1% had 48.1% of global wealth, without the bottom decile it decreases to 47.9%. Not a big difference.

During a one year period between 2013 and 2014 the billionaires on the Forbes list increased their net wealth by over $1 trillion, that’s 1 ½ times as much as the negative wealth of the bottom 10%.

Enough wonkiness. To Salmon and Klein’s credit, they acknowledge that the broader issue – the trend of the concentration of wealth in the hands of a few – is worrying. We can quibble  about the data or the calculations, but the trend still stands. And even more important, the consequences of the concentration of wealth are potentially dire. As this interview with Branko Milanovic put is:  “For political reasons, ownership of wealth is important. Without unleveraged capital, even if you have a nice life, you won’t be able to have much political influence.”

It’s that link between wealth and power that benefits the few to the detriment of the rest.

Over the weekend, the Financial Times did a similar calculation to what I just presented with similar results – the extent of the concentration of wealth does not change dramatically if we exclude people with negative wealth – the share of wealth controlled by the 1% barely moves. They went on to conclude that “”The precise figure for the share of wealth of the global elite, and judgement calls between different measurement conventions, may not be too important . The figure is a good piece of rhetoric designed to draw attention to something that many of those at Davos already agree on but can’t decide what to do about; access to wealth across the world is intolerably unequal.”

That is a fair conclusion. The judgement calls in the use of data are always necessary but the overall result: the concentration of wealth at the top is extremely high, does not change. And it’s increasing.

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