How not to report on the poor and the wealthy

By Felix Salmon
July 23, 2012

The media has not exactly covered itself in glory when reporting on money-related research of late. For instance, consider Martha White’s blog post at Time.com on Friday. Here’s the headline:

Would You Pay $520 in Interest to Borrow $375? 12 Million Americans Did Last Year

White cites “a payday lending report” from Pew for her datapoint — but, unforgivably, doesn’t link to it. If she had linked to it, she might have read the report a bit more carefully: it’s clear that the average interest paid on a $375 loan is $65, not $520. The $520 figure comes from multiplying the $65 number by eight, on the grounds that the average payday borrower takes out a loan eight times per year. Which in turn means that the $520 in interest is paid on $3,000 in loans, not $375 in loans.

(Update: The vast majority of payday borrowers never take out more than one loan at a time, so most of the time, the maximum principal balance is $375. The Pew report was careful to say it was talking about eight $375 loans, which is a more accurate way of putting it than saying $3,000 in loans. But it’s doing 12 million Americans a disservice to imply that they are willingly entering into deals knowing that they will pay back $520 in interest on a single $375 loan, even if that’s how it often ends up.)

Then, over the weekend, a series of stories — starting with the Observer, and moving on to Reuters and elsewhere — started writing about the trillions of dollars sitting in offshore bank accounts. All of them use the word “hidden” or its cognates, and all of them were based on a report from the Tax Justice Network (me neither), which is very long on hyperbole. This, for instance, from the main section of the report, gives a flavor of how it reads:

The subterranean system that we are trying to measure is the economic equivalent of an astrophysical black hole… The way is hard, the work is tedious, the data mining is as mind-numbing as any day below surface at the coal face…

The assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments… In terms of tackling poverty, it is hard to imagine a more pressing global issue to address.

The report does concede, grudgingly, that in fact the governments in question don’t have net debts at all: these countries, on a sovereign level and taking into account no private assets at all, are net creditors rather than net debtors. But still we’re told that “ordinary people” are shouldering massive debts which should somehow by rights be either serviced or paid off using the wealth of these countries’ plutocrats.

The reality is that the wealth of the global super-elite does not, actually, cause poverty; nor is there any obvious way of using it to alleviate poverty. Bill Gates, for instance, the richest of the lot, is putting an absolutely enormous amount of effort into trying to use his wealth to alleviate certain pockets of poverty; the jury’s still out on whether or when he might see real success on that front.

The conceit of the report is that if all offshore wealth was instead held onshore, and if that onshore wealth produced a certain amount of income, and that if all that extra income were taxed at top marginal rates, then there would be lots of lovely money for governments to spend on making poor people rich. Or something.

But the fact is that there’s a good reason why countries tax income and not wealth: for all that I personally think that a wealth tax is a very good idea, I can’t think of any country in the world, other than the USA, which could effectively levy such a thing.* The world’s wealthy don’t pay taxes on their wealth; they never have, and they never will. And because of the way they live, in a stateless cocoon, it’s a bit silly to expect them to reinvest most or all of their wealth back into their country of origin.

If you’re extremely wealthy and you come from one of the countries on the list here — Russia, Brazil, Mexico, Venezuela, Argentina, Indonesia, Nigeria, Malaysia, Ukraine, you get the picture — then obviously you’re going to keep a huge amount of money offshore, whether you made your money in a legal or in an illicit manner. And while some of the reason might well be tax avoidance, much of it is going to be simply the fear of expropriation and/or confiscation — again, be that legal or illicit. And since your investments are going to be global, it does make sense to park your money in jurisdictions which have proven themselves good at safeguarding individual wealth, as opposed to plundering it.

The total amount of wealth in the world is not an easy number to estimate, but it’s probably somewhere in the $250 trillion range. A lot of that wealth is financial, and a lot of financial wealth is held “offshore”, whatever that means these days. This new report says that roughly $25 trillion is held offshore by the wealthy, which just means that roughly $25 trillion is held offshore: after all, poor people by definition don’t have bank accounts in the Cayman Islands. That’s an interesting datapoint, but it’s not much more than that.

What’s unhelpful and sensationalist is to lead off your press release (and therefore lots of news articles) by saying that that amount “is equivalent to the size of the United States and Japanese economies combined”. That’s just a cheap way of comparing a stock with a flow, since GDP figures don’t measure wealth at all, but rather income.

“Rich people are rich” is not much of a story, although I can see why certain people want to make it one, by reframing it in terms of inequality or tax evasion. Similarly, “poor people find it difficult to stay on top of their finances” is not news either, and there’s therefore a temptation to sex it up a bit by making it seem that people are paying more in interest than they’re borrowing in principal. But as a rule, if you see a headline about these kind of issues and the story cites a report without linking to that report, be very suspicious. There might be a lot less there than the story you’re reading would have you believe.

*Update: There are in fact six countries with a wealth tax: France, Switzerland (in certain cantons), Liechtenstein, Holland, Norway, and Italy. In none of them is it an obvious success.

18 comments

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Unless you’re writing all of these off as ineffective, I think you might be missing the fact that some countries have a wealth tax.

http://en.wikipedia.org/wiki/Wealth_tax

Not saying it’s perfect (or even a good idea), but some countries try. (And even make individuals’ wealth public information!)

Posted by absinthe | Report as abusive

According to that report, the average loan is paid back in 18 days. That’s $65 interest on a $375 loan for 18 days. Some of you financial types, help me, but that sounds like a 4-digit APR.

The absolute dollar amount of interest is not as important as the percentage, if you are talking about how much was paid in a year, as only $375 was borrowed and at risk at any given time. The loans were outstanding for an average of 144 days each year, for which they paid $520 in interest on $375.

That’s what you call usury or loansharking or racketeering. Sounds like a job for RICO.

Posted by KenG_CA | Report as abusive

On the payday loans, the interest amount can’t be evaluated without knowing how long the loans are outstanding. The report says the average borrower has eight loans averaging 18 days each. At $375 per loan that works out to $520 of interest on an average outstanding balance of $148. So if Martha White’s post was read to mean interest on borrowing $375 for a year, it was misleading because the reality is actually worse.

Posted by srb4761 | Report as abusive

KenG_CA, I agree with you and so did most State attorney’s general until 1978. But the Supreme Court of the United States ruled, in Marquette Nat. Bank of Minneapolis vs. First of Omaha Service Corp. that as long as the State of South Dakota wants to not have a limit on interest rates, we all have to go along with it and allow ursury. Runamok capitalism will always win.

Now my understanding is murky after that, because most fly-by-night payday lending outfits aren’t nationally chartered banks.

Posted by Strych09 | Report as abusive

What srb4761 said. On what planet is borrowing $375 for 144 days the same thing as “$3,000 in loans”?

Posted by Greycap | Report as abusive

Martha graduated from Princeton apparently but one can’t easily find out what her major was. I have often discovered that graduates from prestige universities think they know almost everything about everything and need no training before pronouncing on this and that. I have no idea what her grades were either.

Posted by Chris08 | Report as abusive

Switzerland has an asset tax and their system seems to work as well as ours. Some might think better. A reasonably equitable distribution of wealth makes an economy stronger – more money in circulation – more goods and services and, generally, less poverty. The use of offshore accounts to hide (and hoard) wealth is a symptom of an extractive elite.

Posted by sandblast | Report as abusive

Your article is pure propaganda for the exploitative uber-rich who evade paying their fair share to society – “there’s really nothing to worry about, nothing you can or should do, just accept and be grateful to them”. No, we are fed up with them escaping all responsibility while the world grows more unequal. Anger is growing.

Posted by Refractious | Report as abusive

The obvious way for the uber-wealthy to address poverty is for them to hire workers at living wages rather than at profit-maximizing wages. I can understand, however, why that is a non-starter for those who use their billions to keep score in the game. Felix perhaps would prefer a system that runs the redistribution through government pockets?

Posted by TFF | Report as abusive

Voters in Switzerland have rejected Capital Gains Tax in a recent Referendum. Everyone’s happy with the Wealth Tax though – it’s fair to all, and is levied at very low interest rates with a substantial lower band in which it does not apply. It’s a very effective way to tax Capital without disturbing financial transactions.

Posted by FifthDecade | Report as abusive

I’m a banker. The idea of charging someone $65 eight times on a balance never exceeding $375 dollars is unethical, amoral and preditory.

The hard truth is that most of those customers would be pushed out of the lending system without those sickening rates. In my view they would be better off in the long run off without access to payday loans.

It depresses me to say it but what we need is a national forced savings program. Impose a 10% leavy on all wages with minimal access prior to age 67. Let people borrow against their accounts at 5% over the 5 year treasury and withhold their tax refunds if they fail to pay themselves back.

The last thing I want to see is another goverment mandate… but the alternitive the prudent face is paying 50% higher taxes just to fund the status quo.

Posted by y2kurtus | Report as abusive

Lots of negativity toward Felix in the comments, but I thought it was a good post. His point on stocks and flows reminds me of The Liar’s Poker anecdote about John Gutfreund bragging about how at the time (mid-80s) Salomon Brothers had assets equal to the Gdp of one of the 40 largest countries in the world, and another (Jewish) exec replying, c’mon, John, we’re not the Netherlands, we’re a bunch of leveraged Jewish guys in New York.

Posted by realist50 | Report as abusive

In the first part, you said the problem was the absence of a link: providing the link, the author would have read the article better.
There is a clear counterpoint to that. You provided the link to the countries with a wealth tax, but still you made a mess of the list. Italy has no wealth tax.

By the way, there are much more countries with a wealth tax on the middle-class. Indeed, most countries has a tax on real-estates: you can’t offshore your villa in Tuscany. Of course the issue is that for the 99% of the households real estates (your house) cover around 80% of total wealth.

Posted by Bobon123 | Report as abusive

“Which in turn means that the $520 in interest is paid on $3,000 in loans, not $375 in loans.”

Felix, you need to brush up on finance math. The loan balance is $375. It’s outstanding for less than a year, and they pay an aggregate of $520 interest. In fact, the loans were only roughly half a year outstanding, so this is much worse

Posted by dorfl68 | Report as abusive

I’m a fan and follow your posts, but I’m not sure about these two underlying assumptions in this post: “The reality is that the wealth of the global super-elite does not, actually, cause poverty; nor is there any obvious way of using it to alleviate poverty.”

It is very clear that in some countries an extractive elite is responsible for poverty: Angola, Equatorial Guinea, Nigeria, Russia, Turkmenistan, Uzbekistan all come readily to mind.

What is less clear is the extent of outflows in countries where the extractive behavior of elites is less well recognized. Attempting to quantify it is therefore interesting, and the question that I would like to know: how well did the report do this? I would be interested to know what academics, the IMF, etc. had to say about this. This seems especially relevant given the discussion of tax evasion in the Greek context.

Your point about the existing stock of wealth now being out of reach of the ability of governments to tax might be valid. But a discussion of the size of that stock is important to recognizing the cost in term of lost government revenue of failing to take collective action on tax havens, etc, to account for outflows in the future.

On another subject, the bit about “poor people find it difficult to stay on top of their finances” not being news, I would argue that in the US context at least, that there has been a failure of regulation that has enabled predator practices on the poor. The failure of regulation has been happening particularly at state level, and it is important to have a sense of practices in states overall to have a comprehensive overview. Not enough research has been done on this, and good that Pew and others are attempting to put this together.

Posted by CheekyBlueBird | Report as abusive

Felix as almost every poster has pointed out – you need to adjust the beginning of this post.
The $520 is an understatement not overstatement and the $3,000 figure just plain wrong.

Also regarding the hidden trillions – I am glad you are pointing out the clear spin behind the numbers.
However, I suspect that a great number of those trillions would have resulted from capital gains which when onshored would result in substantial tax burdens. Hence we MIGHT claim that a nice redistributive move would be to force wealth onshoring.

Posted by TinyTim1 | Report as abusive

From the PEW report:

“Lenders usually charge about $15 per $100 borrowed per two weeks (391 percent Annual Percentage
Rate or APR).”

But, there are additional fees if the loan cannot be paid back in full and needs to be rolled over.

“For example, a person who borrows $400 for a $60 fee for two weeks would have paid approximately $480 in fees after renewing the loan for four months, but would still owe the original $400.”

That is $480 in interest and fees for a $400 loan – not far off of $520 for a $375 loan.

Posted by Ragweed | Report as abusive

Based on the averages from the Pew report, the effective interest rate is 790.83%…

Posted by MaxMeridius | Report as abusive