Back in January, Oxfam published a statistic saying that 85 people have more wealth than the bottom half of the world population. It has become a widely circulated stat in the debate about inequality. (Forbes recently countered that the number is actually 67 people.) But what to do these numbers mean? I know full well that when most people hear “wealth” they envision how much money and stuff people own. That is incorrect. These are assets. Wealth is your assets minus your liabilities (i.e., debt). What difference does that make?
Felix Salmon, a writer at Reuters, did some digging into the Oxfam report to find the data upon which they based their claims. (See: Stop adding up the wealth of the poor) It comes from Credit Suisse’s 2013 Global Wealth Databook and here is a graph Salmon clipped showing another take on the data:
Notice the top left corner of the chart. It shows that 7.5% of North Americans are in the bottom 10%. If you look further down you will see that virtually no one from China is. How is that possible?
Take two hypothetical people:
1. American Physician – A new physician with a salary of $150,000 a year. She has $125,000 dollars in student loans and a car with a $25,000 loan. That totals to $150,000 of debt. She is renting an apartment. Her total assets including cash, car, and other items equal $50,000. That means her wealth is a -$100,000.
2. Chinese Peasant Farmer – A Chinese farmer who earns the equivalent of $3 a day, or $1,400 a year. He has managed to save $50 in cash and he has property worth about $250. He has no debt. His wealth is $300.
The physician would likely be found in the lowest decile while the farmer will be in the third or fourth decile. By Oxfam’s reasoning, the farmer is much wealthier than the physician! That is technically true but does this have any correspondence with what most people think of when the think of "wealth?"
Just as advanced economies have upper income levels that far outstrip the upper levels of emerging nations, so do they also have people with huge sums of net debt that far outstrip what people would have in emerging nations. Consequently, people from more advanced economies are going to dominate at either end of the wealth distribution. (You see evidence of this in the chart by the higher percentages at the extremes for North America, Europe, and Asia-Pacific excluding China and India.) People who are unable to earn or borrow much are going to be more toward the middle of the distribution. But as with the physician, high debt doesn’t necessarily mean deprivation.
Wealth is a useful measure for some purposes but if we want to get an accurate picture of economic well-being we most also include measures like income. Particularly important is consumption per capita because “income” doesn’t include transfers and non-cash assistance. Statistics often show people routinely consuming as much as double their cash income because of this discrepancy. Consumption tells much more about how people actually live. In short, Oxfam’s stat is great for sensational headlines but does little to educate us about the challenges people face.