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Poor Definition of Income Inequality

Henri Erti
March 10, 2016
Daily Progress

 

Wealth inequality has become the new cause celebre in public discourse, but often inequality facts become fiction and conclusions become oversim plifications. Consequently, we may risk of embracing growth-stifling attitudes.

During the annual Davos Economic Forum in Switzerland, the Oxfam think tank published statistics according to which the world's richest 62 people own as much as wealth as the poorest 3.6 billion. At its face value, this revelation appears to be shocking. That is, until you examine the argument more carefully.

First, Oxfam's widely presented graph makes the cardinal mistake of using an insufficient time period. Rather than pulling wealth development data, for example, from the past century or even 50 years, Oxfam presents wealth divergence from the past 25 years. Such a narrow view is inconclusive and ignores the fact that globally in the past 50 years living standards — thanks to capitalism — have converged and improved immensely.
 
Secondly, Oxfam defines net wealth (assets/debt) as the guiding factor in determining inequality. However, the definition is rather myopic. According to Oxfam's model, a recent Ivy League graduate with student debt and very little tangible assets has no net wealth, putting him oddly on the same line with, for example, an average farmer in Africa. Most strangely, however, Oxfam excluded demographics from the equation. Frankly, an average 25-year-old should have, by default, fewer assets and less wealth than an average retiree, who over a longer period of working years has accumulated more wealth. Therefore, wealth accumulation among older individuals is hardly a sign of grotesque inequality.
 

Last but not least, Oxfam's claim ignores income bracket mobility, which in the U.S. is far from stagnant or fixed. In fact, Thomas Hirschl from Cornell University shows how 12 percent of the U.S population will be in the top 1 percent bracket for at least a year. Furthermore, 39 percent will be part of the wealthiest 5 percent, and 56 percent will be in the top 10 percent income group at least one year. Most importantly, 95 percent of the people at the bottom income bracket are not there during a 15-year timeline. (Reported in nytimes.com/2014/04/20/opinion/sunday/from-rags-to-richesto-rags.html?_r=0.)

In the light of such undisputed evidence, it appears that Oxfam's claims are more about opportunistic politics than sound economics.