Another inequality column

The inequality scribblings have come thick and fast of late, with David Lazarus -- a business and consumer columnist for the Los Angeles Times -- one of the more recent to serve up a big batch of half-truths and nonsense on the subject. I posted a number of my objections to his piece on Twitter where, as a fairly active Twitter user, he no doubt saw them but declined to respond. Since he didn't, I'll lay out my objections in more comprehensive fashion in this blog post. Here's how the column begins:

Let's get our heads around that. Only a tiny fraction of the roughly 7 billion people in the world accounts for 46% of the estimated $241 trillion in money, property and other material resources available.  

The richest 10%, meanwhile, can claim 86% of global wealth, leaving 90% of the world's population to divvy up whatever's left.  

These extraordinary figures were included in a report this week from Credit Suisse Research Institute. It found that the gravy train is chugging along, but with relatively few passengers.

Right away the agenda is transparent, less from the facts themselves than the way they are used. The claim that "90% of the world's population [is left] to divvy up whatever's left" implies that the world is one giant piñata, where wealth mysteriously appears and is subsequently claimed by a lucky few. The reality, however, is that wealth must first be created before it can be consumed, and many of those who account for an outsize share of global wealth also account for an outsize role in its production. Lazarus's reference to a "gravy train" is similarly ridiculous, with its strong implication that some people are simply lucky enough to get a ticket to board while other unfortunate souls are left at the station -- it's all just down to good fortune.

He continues:

Former Labor Secretary Robert Reich has been sounding the alarm over wealth inequality for years. He's at the center of a recent documentary, "Inequality for All," which explains the problem in frightening detail. 

"When so much of the purchasing power, so much of the economic gain, goes to the very top," Reich told me, "there's simply not enough purchasing power in the rest of the economy." 

Robert Reich, readers will recall, is the guy chronicled by this blog as peddling unsubstantiated statistics and advancing a bizarre interpretation of history to support his views on income inequality.

That has profound implications. In the United States, consumer spending accounts for about 70% of all economic activity. If most consumers are getting by with less, the inevitable outcome is that they'll have fewer dollars to pump into the economy. 

But why should we assume people are getting by with less? Does Lazarus not realize that while someone's slice of a pie can shrink that its overall size can still increase as long as the pie is also growing? It's also not apparent why the 70% figure is significant. While it's true that household final consumption expenditure accounts for 72% of US GDP according to the World Bank, it is only 54% of GDP in Australia (which has not experienced a recession in a generation), 58% in Canada and 48% in Sweden, neither of which are considered economic basket-cases. Why then must this figure be maintained?

Reich noted that wealth inequality was greatest in this country in 1928 and 2007. In both years, the top 1% represented about a quarter of total income. 

And shortly thereafter, in 1929 and again in 2008, the U.S. economy tanked, dragging down the rest of the world with it.

Note that no causal connection is presented, likely because none exists. It should furthermore be kept in mind that Reich is discussing wealth inequality rather than income inequality, which is much more dependent on asset prices such as real estate or stocks. Both 1929 and 2008 saw the popping of massive asset bubbles which had driven up the wealth of those with large holdings in those assets -- i.e. the rich. The bubbles were the problem, and the fact that wealth inequality had zoomed upwards was a symptom of that rather than the underlying cause.

Other nations, Reich said, have taken steps to address wealth inequality. They've invested more in infrastructure and education in an effort to create more economic opportunities throughout the social spectrum. 

The United States, for its part, has been content to let the problem grow. 

"We are far more unequal than any other advanced society in the world, and we are surging toward greater and greater inequality," Reich said.

It is unclear how infrastructure is related to wealth inequality, or how education would impact the equation. Indeed, it's worth noting that the US, as measured by the percentage of its population with a tertiary degree, already ranks 4th in the world. Also note Lazarus's assertion that wealth inequality is a problem, even though he has yet to explain why it should be regarded as such.

The Credit Suisse report bears that out. Average adult wealth in Switzerland is $513,000, the world's highest, followed by Australia ($403,000), Norway ($380,000) and Luxembourg ($315,000). 

Average adult wealth in the United States is $301,000, but that number is heavily skewed by the fact that this country has, by far, the greatest number of "ultra-high net worth" individuals, with personal assets exceeding $50 million.

Where to begin? Perhaps let us first note that while Lazarus makes a special effort to downplay the significance of average adult wealth in the US, he makes no effort whatsoever to note special factors which impact the other countries he cites. While he argues, for example, that the US figure is skewed by rich individuals, the Credit Suisse report notes (page 24) that Switzerland has 3,460 ultra-high net worth such persons, which translates to about 1 in every 2,321 of its roughly 8 million citizens. For the US, meanwhile, the comparable figure is 1 in every 6,878 (314 million divided by 46,650) -- about three times less!

Other unique circumstances go unremarked upon, even though they are highlighted in the report. On page 52, for example, the report points out:

Most of the rise in [Swiss] wealth since 2000 is due to the appreciation of the Swiss franc. Measured instead in Swiss francs, household wealth fell in 2001 and 2002, and then showed a gentle upward trend, interrupted only by the global financial crisis. 

Australia (page 57):

Interestingly, the composition of wealth is heavily skewed towards real assets, which amount on average to USD 294,100 and form 59% of gross household assets. This average level of real assets is the second highest in the world after Norway. In part, it reflects a sparsely populated country with a large endowment of land and natural resources, but it is also a manifestation of high urban real estate prices. 

Unlike Switzerland and Australia, Norway and Luxembourg are not profiled by the report, but it is fairly common knowledge that Luxembourg is a tax haven where banking constitutes the largest economic sector, while Norway is a small country (population of 5 million) sitting upon enormous natural resource wealth and is home to the world's largest sovereign wealth fund. Curiously, Lazarus found none of that worth remarking upon -- it's almost as if he's more interested in advancing an agenda than the truth or something! 

Furthermore, given how easily it seems this figure can be skewed, it's not even apparent why Lazarus has seized upon wealth inequality as a useful metric.

Being successful, obviously, isn't a bad thing. There's much to be said for the whole land-of-opportunity idea, in which people are rewarded for a job well done. 

But that's not what's actually happening. The rich are gaming the system so they can accumulate a greater share of wealth to the detriment of others. 

They do this by using their financial (and hence political) clout to reduce their share of taxes, thus placing a greater burden on the rest of society to fund government programs and the public sector's investment in economic growth.

Reduce their share of taxes? No, sorry, that is just empirically not true. Rather than declining, the percentage of the tax burden borne by the rich has steadily risen over the last 30+ years and their share is higher in the US than many other industrialized countries. This is not a matter of opinion -- Lazarus's assertion that the rich are "using their financial clout to reduce their share of taxes" is simply false. 

While the column continues on, I think the evidence presented thus far is sufficient to demonstrate that Lazarus is not a man searching for truth or to educate his readers, but to push a preferred narrative. If he has to present misleading data, obfuscate or say things that aren't true, so be it apparently. That those who warn about inequality do this so often suggests a group not fully confident of winning their argument on a level playing field. If that's the case, I don't blame them.