Opinion

# Felix Salmon

## Stop adding up the wealth of the poor

April 4, 2014

Itâ€™s the meme that refuses to die. It started, back in 2011, with the Waltons: six members of the family, we were repeatedly told, were worth as much as the bottom 30% of all Americans combined. I tried to address this silly stat back then, but now itâ€™s gone global: back in January, Oxfam announced that the worldâ€™s 85 richest people had the same wealth as the bottom half of the global population. And now Forbes has come along to say that, actually, itâ€™s not 85 people â€” itâ€™s a mere 67.

Oxfam does a pretty bad job of footnoting its report, but I did manage to finally track down how it arrived at this conclusion. The 85 (or 67) number is easy: you just start at the top of the Forbes billionaires list, and start counting up the combined wealth until you reach \$1.7 trillion. The harder question is: where does the \$1.7 trillion number come from?

The answer is that it comes from a pair of tables in Credit Suisseâ€™s 2013 Global Wealth Databook. First of all, you have to find the total wealth in the world, which you can find at the bottom of the fourth column on page 89: itâ€™s \$241 trillion. Then, you flick forwards to page 146, where you find the proportion of all global wealth held by each of the worldâ€™s income deciles. The top 10% have 86% of the wealth; the next 10% have 7.8%, and so on. Add up the bottom five deciles, and you get 0.7% (not 0.71%, which is the number in the Oxfam report; I have no idea where that extra basis point came from). And if you multiply \$241 trillion by 0.7%, you get \$1.7 trillion.

All of which makes a certain amount of sense, until you start looking a bit closer. For instance, notice anything odd about this chart?

The weird thing is that triangle in the top left hand corner. If you look at the tables in the Credit Suisse datebook, China has zero people in the bottom 10% of the world population: everybody in China is in the top 90% of global wealth, and the vast majority of Chinese are in the top half of global wealth. India is on the list, though: if youâ€™re looking for the poorest 10% of the worldâ€™s population, youâ€™ll find 16.4% of them in India, and another 4.4% in Bangladesh. Pakistan has 2.6% of the worldâ€™s bottom 10%, while Nigeria has 3.9%.

But thereâ€™s one unlikely country which has a whopping 7.5% of the poorest of the poor â€” second only to India. That country? The United States.

How is it that the US can have 7.5% of the bottom decile, when it has only 0.21% of the second decile and 0.16% of the third? The answer: weâ€™re talking about net worth, here: assets minus debts. And if you add up the net worth of the worldâ€™s bottom decile, it comes to minus a trillion dollars. The poorest people in the world, using the Credit Suisse methodology, arenâ€™t in India or Pakistan or Bangladesh: theyâ€™re people like JĂ©rĂ´me Kerviel, who has a negative net worth of something in the region of \$6 billion.

America, of course, is the spiritual home of the overindebted â€” people underwater on their mortgages, recent graduates with massive student loans, renters carrying five-figure car loans and credit-card obligations, uninsured people who just got out of hospital, you name it. If youâ€™re looking for people with significant negative net worth, in a way itâ€™s surprising that only 7.5% of the worldâ€™s bottom 10% are in the US.

And as you start adding all those people up â€” the people who dominate the bottom 10% of the wealth rankings â€” their negative wealth only grows in magnitude: you get further and further away from zero.

The result is that if you take the bottom 30% of the worldâ€™s population â€” the poorest 2 billion people in the world â€” their total aggregate net worth is not low, itâ€™s not zero, itâ€™s negative. To the tune of roughly half a trillion dollars. My niece, who just got her first 50 cents in pocket money, has more money than the poorest 2 billion people in the world combined.

Or at least she does if you really consider JĂ©rĂ´me Kerviel to be the poorest person in the world, and much poorer than anybody trying to get by on less than a dollar a day. All of whom would happily change places with, say, Eike Batista, even if the latter, thanks to his debts, has a negative net worth in the hundreds of millions of dollars.

Now \$1.7 trillion is undoubtedly a lot of money: there is an astonishing amount of wealth inequality in the world, and itâ€™s shocking that just 67 people are worth that much. You could spread that money around the â€śbottom billionâ€ť and give them \$1,700 each: enough to put them squarely in the fourth global wealth decile. But letâ€™s look at just the top two-fifths of the 3.5 billion people referred to in the Oxfam stat. Thatâ€™s 1.4 billion people; between them, they are worth \$2.2 trillion. And theyâ€™re a subset of the 3.5 billion people who between them are worth \$1.7 trillion.

The first lesson of this story is that it’s very easy, and rather misleading, to construct any statistic along the lines of â€śthe top X people have the same amount of wealth as the bottom Y peopleâ€ť.

The second lesson of this story is broader: that when youâ€™re talking about poor people, aggregating wealth is a silly and ultimately pointless exercise. Some poor people have modest savings; some poor people are deeply in debt; some poor people have nothing at all. (Also, some rich people are deeply in debt, which helps to throw off the statistics.) By lumping them all together and aggregating all those positive and negative ledger balances, you arrive at a number which is inevitably going to be low, but which is also largely meaningless. The Chinese tend to have large personal savings as a percentage of household income, but that doesnâ€™t make them richer than Americans who have negative household savings â€” not in the way that we commonly understand the terms â€śrichâ€ť and â€śpoorâ€ť. Wealth, and net worth, are useful metrics when youâ€™re talking about the rich. But they tend to conceal more than they reveal when youâ€™re talking about the poor.

If you take a serious look at retirement planning, you start to realize that the large majority of your “net worth” at age 30 is represented by your future savings stream. (Some describe this as “human capital”.) Our actual investments didn’t surpass our future savings until our early 40s and we’ve always been good/fortunate savers.

So yes, the typical measures of “net worth” are even more meaningless than the typical measures of “income”. (We recently “discovered” that most of those in the 1% are there for just a single year, as the result of a capital event. Business sale, retirement bonus, sale of a house, etc.) Just one of many reasons why economists are FOS.

Posted by TFF | Report as abusive

You’re right, Felix, it is a useless statistic, but probably not because of the analysis you have done. I would bet that there are 3.5 billion people on the planet with zero assets. That means any one with measurable assets is wealthier than all of those people put together.

However, the larger point is that income and wealth distribution has narrowed greatly over the last few decades, and it is a big problem. Wealth is accumulated income, and provides at least a rough indication of how long income distribution has been narrowing.

It’s not a question of whether it is fair or not, but whether economies and societies are sustainable when an increasingly larger share of income is taken by a smaller segment of the population. If you starve your customers (because all customers need to make money, so if they earn less, they spend less), they won’t be your customers for long.

So if a useless stat can focus attention on how the distribution of income is reducing the number of customers in the world, let’s go with it.

Posted by KenG_CA | Report as abusive

@KenG, has the wealth truly narrowed on a global scale? Would be interested in an unbiased study of that question.

Posted by TFF | Report as abusive

TFF, I think the 0.1%, and especially the top 10% of that group, has increased their share of the pie.

I think it has happened on a global scale, that is why the dollar can’t be replaced as the reserve currency – every major economy has to borrow heavily to keep their economies from crumbling, and that is mostly because their middle and lower income groups are not earning as much.

You can say that there are a lot of people in China earning more than they used to, but the workers they have displaced were earning more, and the savings are mostly going to the top of the pyramid. As a result, China prints money, the U.S. prints money, and the EU prints money. They’re printing money because less margin dollars are being recycled back into the economy, and are getting accumulated which does no good.

Posted by KenG_CA | Report as abusive

The Piketty book suggests that wealth distribution in the post-WWII era was uniquely “fair” — developed country income quintiles were more closely clustered than ever before. Since the 1980s, the English-speaking countries have drifted back near nineteenth century distributional patterns. European continent still mostly holding out. Note that accretions of wealth usually comes with accretions in political power to lock in the distribution.

Posted by crmorris | Report as abusive

TFF: Yes, wealth inequality has definitely increased / wealth become more concentrated. The Piketty-Saez research shows it clearly (see, for instance:
http://www.slate.com/blogs/moneybox/2014  /04/02/wealth_inequality_is_it_worse_th an_we_thought.html ), and there’s plenty of other evidence. On the income side, which is easier to measure, the widely-quoted statistic is that, since the beginning of the recovery in ’09, approximately ALL gains of income have flowed to the top 1% — everyone else is flat or down. And of course housing (the main source of wealth of the middle class) has not had the same kind of bounce-back and run-up as financial assets (which are largely held by the very-rich).

Posted by Auros | Report as abusive

The sad truth is that the bottom 40% of America owns only 0.2% of the wealth. The next 40% own only 14.9% of the wealth. The top 20% owns all the rest, 84.9% of the wealth. America is quickly turning into an oligarchy. Soon, the bottom 80% of the country will own very little indeed.

Posted by AttyFAM | Report as abusive

“If youâ€™re looking for people with significant negative net worth, in a way itâ€™s surprising that only 7.5% of the worldâ€™s bottom 10% are in the US.”

Not just individuals – countries as well. If debt is considered as negative wealth; the U.S. with its vast cumulative deficits would be among the poorest countries on earth.

Posted by walstir | Report as abusive

Since I only take my cues about major problems in the world from WELL SOURCED memes, I’m going to assume that I can now dismiss my concerns about income inequality. Now that this is done, I’m hoping Mr. Salmon will move on to other important topics, like IS winter, in fact, coming, and CAN ONE simply walk into Mordor?

Posted by ShillyD | Report as abusive

Thanks, KenG. Auros, I’ve seen those studies, but they seem to be focused on Americans, not global income/wealth. Is why I was curious about the latter claim.

Posted by TFF | Report as abusive

This type of analysis is inherently misleading. It suggests (to the man in the street) vast and growing inequality in consumption. In reality it only reflects growing inequality in the control of assets. As the world economy becomes more integrated financially, and legally and technologically complex, many operations (even farming and the sale of hamburgers) tend toward oligopoly. It is far better for the people who understand these enterprises to exercise control through ownership than as pals of the current dictator.

Posted by ekasilicon | Report as abusive

So what if there is huge wealth inequality around the globe? Governments will never be able to correct it on a society wide basis, let alone a global one.

No, the best way to extract wealth from the rich is to provide them with a service or product which they cannot live without. They will gladly, and I mean gladly with a smile on their face, hand you more money than you will ever believe.

The only difference between the rich and the middle class is that the middle class buy products, the rich buy services.

The internet has made it so that only the least imaginative cannot engage in some form of entrepreneurial enterprise.

Governments will never be able to extract and redistribute to any one person to change any individual’s lives. But one individual can indeed tap into the trillions that flow around the world if they provide a quality, superior level of service at a superior price.

Posted by SouthOhioGOP | Report as abusive

The rich buy services true, such as labor, so they can make money. This does not equate to a middle class person buying consumer goods because he is not exploiting anyone. The rich and wealthy own and run corporations by utilizing services of their employees (their labor) to make record profits. I don’t see how you can’t equate that only 67 or 85 people own the majority of the wealth in the world and not equate it to economic imbalance. The fact is the wealthy and transnational corporations own the marketplace and will be able to dictate wages and prices as long as people have to work for them.

Posted by Sensibleslant | Report as abusive

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