Inequality is the buzzword of the 21st Century. In the last year, we witnessed Thomas Piketty’s book on the distribution of capital become a New York Times bestseller. President Obama promised to increase taxes for the wealthy in order to fund community colleges; Pope Francis took to Twitter to proclaim inequality the root of all social evil.
In 2014, Australia’s seven richest individuals held more combined wealth than those in its bottom 20%. Statistics like these have been dominating political forums and newspaper headlines. However, there is an unseen danger to accepting such figures on face value.
Take for example the startling statistic published this month. According to Oxfam, the combined wealth of the world’s richest 1% will overtake that of the remaining 99% by 2016. This is a troubling thought, even for the most hardened conservatives.
However, let us more closely examine how this figure was generated. Although this study purports to be a measure of wealth, it is actually a measure of net worth. Net worth is calculated by subtracting the value of total debts from total assets. This technical distinction is important; in including debt in its measurement of wealth, the study confuses real wealth inequality with disparities in access to credit.
To understand why this is problematic, consider a farmer in provincial China and an American college graduate. The former earns a meagre income and carries no debt, while the latter commands a six-figure salary and carries a large outstanding student loan. Intuitively, one would assume the latter to have more wealth than the former. However, the latter is said to have less ‘net worth’, for his outstanding student loan is greater than his financial assets.
Applying this measure of wealth to the entire world leads us to conclusions equally troubling and baffling. Speaking in terms of net worth, America has more than 7% of the world’s poorest citizens, second only to India. On the other hand, China has almost no citizens in the bottom 10%. Clearly, these measures of net worth do not accurately reflect the global distribution of wealth.
Without a carefully considered understanding of how figures are generated, our understanding of global inequality is warped. However, this is not to entirely discount the findings of the Oxfam study. For example, viewed from another perspective, the study contains an important insight regarding disparities in access to credit. As banks are more willing to lend large sums of money to wealthy individuals, having a negative net worth may actually be a sign of economic privilege.
While the Oxfam study may not accurately represent the reality of global inequality, it provokes a much-needed discussion on indebtedness and access to capital. As we navigate these conversations, it is important to be wary of statistics. Bandying around provocative numbers may be an effective way of selling papers; they should never be a substitute for careful economic analysis.