FT piece on global inequality

This is the text of my piece on global inequality from last Friday’s Financial Times.

It is perhaps the ultimate killer fact: Oxfam, the aid organisation, estimates the 85 richest people in the world own as much wealth as the bottom half of the global population. The figure grabbed global media attention and was even cited by Christine Lagarde, managing director of the International Monetary Fund.

Numbers do not speak for themselves, but no doubt many people find the contrast unsettling. In a world still blighted by poverty, how can 85 people have as much wealth as more than 3.5bn others? Only a small minority is likely to feel confident arguing that such a heavily skewed distribution of wealth can be justified morally.

But statistics should not be taken at face value. The first question to examine is whether the estimate is accurate. For one thing the super-rich do not usually disclose the exact value of their vast portfolios of assets.

Even if the figure turns out to be reasonable, any grounds for objection are open to debate. In a properly functioning market economy the rich do not directly expropriate resources from the poor. Any transfer of wealth happens organically as part of its normal operation. Objections to extreme inequality, whether moral or practical, should be spelt out.

Ricardo Fuentes-Nieva, head of research at Oxfam GB, says the idea of compiling the figure came to him when he was reading Credit Suisse’s Global Wealth Databook 2013. It was there that his eye was struck by the sentence: “The bottom half of the global population together possess less than 1 per cent of global wealth.”

So the starting point for his calculation was an impeccably capitalist source. From there, Fuentes-Nieva, along with Nicholas Galasso, a policy adviser to Oxfam America, could start their calculations. From Credit Suisse’s database they could estimate how much wealth the bottom half of the world’s population owned. They could then work their way down the Forbes rich list to calculate how many of the world’s richest individuals owned an equivalent amount of wealth. This was the basis for the headline figure in Oxfam’s report, Working for the Few: Political Capture and Economic Inequality.

Fuentes-Nieva also points out that when Forbes – a publication that calls itself “the capitalist tool” – recalculated the data using the Forbes list for 2014, it concluded that only 67 billionaires owned as much as the world’s poorest half. Since the super-rich had prospered over the year it took fewer of them to match the wealth of 3.5bn people.

As long as it is recognised as a rough estimate, then, the claim that the 85 richest people own as much as half of the world’s population is reasonable. It only represents an order of magnitude rather than a precise number.

The implicit call for redistribution conjured up by the number is, however, open to debate. Deirdre McCloskey, a professor of economics at the University of Illinois at Chicago, argues in her forthcoming book, Bourgeois Equality, that redistributing the $1.5tn collectively owned by the 85 richest people would have a much smaller impact than widely assumed.

She estimates that if it were all redistributed to the poorest half of the population it would only amount to $428 per person. But that would only be a one-off figure – there would be no further transfer in subsequent years. If, instead, the $1.5tn were prudently invested at, say, 5% a year, it would be a perpetual gain of $21.40 a year for each person in the bottom half of the world’s population – good but not that large in the scheme of things.

For McCloskey, the emphasis should be on economic growth rather than redistribution. “Charity won’t help poor people very much,” she says.

“What does help poor people, and has massively helped poor people in the long run, is the massive expansion of income.” In her view, it would be much better to have a society in which the poor have dignity, including political rights and ample resources, rather than material equality.

As it happens, the Oxfam paper does not call for a global equalisation of wealth but advocates redistributive transfers, the strengthening of social protection and progressive taxation. Perhaps even more surprising is Fuentes-Nieva’s insistence that he is not opposed to inequality in itself. “You need some inequality to reward entrepreneurship and to reward talent and merit and hard work,” he says.

Oxfam’s main concern is not inequality itself but plutocracy. As the report’s subtitle suggests, in a world with highly concentrated wealth there is a risk that the super-rich will “capture” the political system for their own use. “With this massive concentration of income and wealth what you see is a bias of political institutions towards the interests of the few,” says Fuentes-Nieva.

McCloskey concedes this is a potential problem but looks elsewhere to resolve it. “The way to solve that is to make the government smaller,” she says. A more limited state has less capacity to interfere in people’s lives in detrimental ways. She also argues that other forces besides the wealthy, such as trade unions, can capture the government to further their own interests.

The claim that the world’s 85 richest individuals own more than the poorer half of the world’s population is certainly an arresting figure. But in itself it says nothing about the best way to free the world of the scourge of poverty.