How should global inequality be measured?

Eight

Earlier this month, Oxfam published their yearly headline grabbing inequality stat. The global anti-poverty organization reported that the 8 richest men have as much wealth as the poorest half of the world’s population. The bottom half of the population is a group of about 3.6 billion people. They are matched in wealth by a group of 8. Not 8 million, not 80,000, not even 8,000 or 800. Eight.  You could fit them all in a minivan if you made Bill Gates sit in the trunk[1].

This metric is very good at grabbing attention. Unfortunately, it’s has one really annoying problem.

2nd_gen_Town_and_Country_minivan.png

Wealth Inequality

Wealth is an important aspect of inequality because it accumulates and persists over time. Due to this, wealth inequality is almost always much more pronounced than income inequality. The global wealth distribution is very concentrated in the hands of a small group of people. 73% of people have wealth under $10,000, accounting for 2.4% of global wealth. To be in the top half of the half of the world’s wealth distribution requires a net wealth of only $2,200. The top 1% (those with a net wealth of $744,000 or more) now own as much wealth as everyone else.

poorhalf

Many people have even less than little. The bottom decile is in debt and therefore has a negative wealth. Those in the second decile have pretty much no wealth at all. After that, wealth starts to accumulate, with each decile having a larger share than the one that preceded it.

How it treats debt is probably the most common criticism of this metric.[2] The people with the least wealth, per this report, are those who are indebted. Often though, those who are most in debt are often not particularly poor.  It takes a certain level of affluence, and functioning credit markets, to get a significant debt going.  The archetypical example is a recently graduated North American college student. They might have a lot of debt, but they are likely living a more comfortable lifestyle than many of the people who have no wealth. When calculating the total wealth owned by the poorest half, the negative value cancels out much of the wealth of the other deciles. This makes a noticeable difference on the final calculations. Leaving this out increases the wealth of the bottom half to $1.5 trillion (about 56 of the wealthiest people).

Volatility is Annoying

I am not too bothered about how the report treats debt. It seems like when measuring net wealth, debt should not be ignored.

The thing that bothers me about this number is how very volatile it is. Oxfam are kind enough to report it every year, In 2014 they said it was 85, In 2015 it was 62, and in 2016 it was 8. That’s a big change. So what happened? The world’s wealthy might have gotten richer in 2016, but surely, they didn’t get nearly 6.8 times richer. Did they? The world’s poor might have gotten poorer but surely, they didn’t lose that much?

The Data

What changed was the estimate for the poorest half of the population.

The data for the world’s wealthy are taken from Forbes’ list of stupendously wealthy people. There isn’t a great deal of ambiguity in this data, we pretty much know how much wealth each of these people has. The other part is much harder. Wealth is a complicated thing, and half of the world’s population is a huge amount of people.

The best source for this, and the one that Oxfam used, is the global wealth report that Swiss bank Credit Suisse puts out each year. From this, Oxfam determined the amount of wealth that the poorest half of the world’s population had, and then went down the list of wealthiest people until they had a roughly equivalent amount.

0.2%

Between the 2015 and 2016 reports, Credit Suisse got new and better data sources which altered their estimates of how much wealth the poorest half had. The new data showed that there was less wealth in India and China and more debt in general.  The original 2015 estimate was 0.7% of global wealth. The 2016 figure with improved data was 0.2% of global wealth, recalculating this figure for 2015 results in an updated figure of 0.2%, which is equivalent to the 9 richest people[3].table.PNG

This is all fine. Using better data is good, so is revising estimates to more accurately reflect the world.

But…

Rich people are not a Unit

The impact of this change on the headline figure is not proportional to the underlying change in the poor’s share of global wealth. The original estimates for 2015 were that the poorest half had 0.7% of all the world’s wealth, under they improved methodology that figure changes to 0.2%.

Measured in the fortunes of the wealthy, this change is from 62 to 9 which makes the revision look more dramatic than it actually was. The change is dramatic because wealthiest people are not a consistent unit. Bill Gates is the wealthiest person in the world, with a total wealth of $85.9 Billion. The 48th wealthiest person, Ray Dalio has, a frankly pitiful, $15.6 Billion[4]. Not only must this be disappointing for Mr. Dalio, it is a problem for anyone wanting to interpret changes in Oxfam’s stat. The further down the list of wealthy people, the less wealth each wealthy person has.  Going from the top eight wealthiest people to the top nine is a change of $42.1B, much more substantial than going from 45 to 46 ($15.6B).

addingupthewealthy.PNG

This depicts the amount that each additional billionaire contributes to the total. Since there are ties, some of the numbers in the x-axis repeat. For example, going from the 9th richest person to the other 9th richest person still adds another $40 Billion. Data is here.

Not only does it make it difficult to interpret changes when revisions occur, it makes it difficult to interpret changes over time. A good metric should let its audience know if things are getting better or worse, and by about how much. This doesn’t do that very well.

Mental Images

Despite the difficulty of interpreting the magnitude of changes, this is a very clever metric. It is designed to grab headlines and get people talking about global inequality. It clearly succeeds.

Abstract wealth can be a hard thing to grasp. It’s easy to imagine some of the trappings of wealth: private Jets, mansions in Aspen, Ferraris, and the like.  These mental images fall short when trying to conceptualize, for example, the fifteen-billion-dollar difference in wealth between Bill Gates and Warren Buffet.

If it’s hard to grasp the differences between Billionaires, getting an intuitive sense of global inequality is even more difficult. Partially, this is the fault of the scale of the numbers involved. Total global wealth is about $256 trillion, and there are about seven billion people on earth. These are not numbers our brains are good at handling. We hear these numbers and think something like “golly, that sounds like a whole lot”.

Of course, there are other ways to measure inequality that are easier to interpret, but they don’t offer as clear a mental picture. Saying the least wealthy half of the world’s population have just 0.2% of the world’s net wealth, is a more easily interpreted metric, but it doesn’t have the same sort of immediacy.

This stat is clever because it turns something we can’t easily imagine-global inequality, into something that we can-a minivan full of wealthy people, with Bill Gates in the trunk. It’s tricky for the exact same reason.

 

 

 

[1] Bill seems like a chill dude, I suspect he’d be cool with it.

[2] For example: here, here, and here.  Some other common criticisms include susceptibility to exchange rate fluctuations, and the decline in absolute poverty.

[3] I couldn’t find any explicit mentions of it but I’m going to assume that the reason .2% is equal to 9 billionaires one year, and 8 the next, is due to changes in billionaire wealth, rounding, or both.

[4] Based on this data

 

REFERENCES, SOURCES, and FURTHER READING

Reporting

https://www.theguardian.com/global-development/2017/jan/16/worlds-eight-richest-people-have-same-wealth-as-poorest-50

http://fortune.com/2017/01/16/world-richest-men-income-equality/

http://www.huffingtonpost.com/entry/income-inequality-oxfam_us_58792e6ee4b0b3c7a7b13616

http://www.aljazeera.com/news/2017/01/oxfam-men-rich-world-170116080621379.html

http://www.post-gazette.com/business/money/2017/01/16/World-s-8-Richest-Have-as-Much-Wealth-as-Bottom-Half-of-Global-Population/stories/201701160107

http://www.csmonitor.com/Business/2017/0117/Oxfam-World-s-eight-richest-people-have-same-wealth-as-poorest-half

 

Credit Suisse Wealth Report

Oxfam Report Methodology

Oxfam Press Release

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