Comment on inequality

Today Fund Strategy published a comment by me on global inequality:

Is the world, and particularly America, as unequal as often assumed? And what are the investment implications of such inequality?

Before examining these questions it is important to be clear about definitions. Terminological confusion abounds in this area more than in most others.

Fortunately a speech last week by Ben Bernanke, chairman of America’s Federal Reserve, made some of the key concepts clear. For a start, in absolute terms most Americans are far better off than in the past. For example, in real terms – after adjusting for inflation – the reward for an hour of work has more than tripled over the past 60 years.

However, in relation to economic outcomes, the Fed chairman conceded that inequality has risen for the past three decades or more. The general trend has been for the wages of highly paid workers to rise faster than those at the bottom of the income distribution.

America is not the world. European countries tend to have a more even income distribution whereas developing countries are more unequal than the US. However, the US provides a useful first approximation for grasping the difficult question of inequality.

One often-quoted fact on America is that the share of national income going to capital is at an all-time high, and the share going to labour is at an all-time low. Stephen Roach, chief economist at Morgan Stanley and one of Wall Street’s leading bears, frequently makes this point.

But others argue that Roach’s reading of statistics is misleading. Jason Benderly, president of Benderly Economics, an economic consulting firm based in Colorado, points out that the figure for corporate profits includes money generated by American corporations abroad. Therefore, the ratio of GDP to profits is bolstered by overseas profits, while the figure for economic output is only national.

Also, the long-term decline of the ratio of wages and salaries to GDP disguises the fact that workers are receiving other types of remuneration. These could include pension provision and medical care.

James Carrick, an investment strategist at Legal & General Investment Management, takes the argument even further. He contends that an impending fall in basic commodity prices should benefit the mass of society more than the relatively rich.

None of this is to deny the existence of inequality or to claim that it is irrelevant. But the picture is more complicated than is often assumed.