Pethokoukis, Economics, U.S. Economy

Why the much-hyped Oxfam study on global inequality is misleading

Oxfam

Oxfam

The planet’s richest 1% have stolen all the money. That’s pretty much the bottom line suggested in a new report on inequality from Oxfam, the international anti-poverty organization. (And just in time for Davos!) First, Oxfam says, almost half of the world’s wealth is now owned by just 1% of the population. Second, the richest 85 people in the world own the same amount of wealth as the bottom 50% of the world’s population.

Before even addressing causality, Oxfam presents this data as prima facie evidence that global capitalism is broken: “This massive concentration of economic resources in the hands of fewer people presents a significant threat to inclusive political and economic systems.” Then the group posits a mechanism: “When wealth captures government policymaking, the rules bend to favor the rich, often to the detriment of everyone else. The impact of political capture is striking.”

Oxfam’s analysis is problematic.

First, does Oxfam’s simplistic narrative of crony capitalism tell the economic story of the past three decades better than the 80% decline in extreme poverty? And why exactly are there 250 million fewer extremely poor people in the world today? As economist Deirdre McCloskey puts it, “The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy … And then China and India exploded in economic growth.” [See below chart from Mark Perry].

wordpoverty2

Second, while high-end inequality has risen within many nations, inequality between nations has undergone an “unprecedented decline in the last decade,” according to “The world distribution of income and its inequality 1970-2009″ by economist Paolo Liberati. And when you combine inequality measures, “the world distribution of income forty years ago does not appear fundamentally changed in most recent times.” [See chart below].

112713inequality

Third, high-end income inequality in the United States seems more a result of globalization and technology than cronyism, though the latter is probably a factor. What’s more, the evidence linking inequality to anemic economic growth, job creation and mobility is weak. Finally, income inequality and wealth inequality are not the same thing. Economist Edward Wolff: “[US wealth] inequality in 1983 was quite close to its level in 1962. Then, after rising steeply between 1983 and 1989, it remained virtually unchanged from 1989 to 2007.”

Finally, the Oxfam policy agenda is heavy on wealth redistribution rather than wealth creation. And certainly in some nations a vastly stronger safety net is needed, along greatly expanded opportunities for women. But Oxfam offers little on increasing economic freedom and promoting free enterprise as poverty-reduction measures. Also, from the US perspective, the Oxfam report is likely to be used as another bit of political ammo in the upcoming midterm elections.

 

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas

14 thoughts on “Why the much-hyped Oxfam study on global inequality is misleading

  1. From the Liberati paper:

    “Fourth, the fact that total inequality has slightly declined is not necessarily an indicator that world resources are better shared. In 2009, the Gini coefficient of world income is still measured around 0.65, which is a level of inequality that would probably be intolerable in any single country. Despite the rapid growth of few Asian countries (that incidentally are the most populous countries in the world), the rest of the world is not significantly moving; South American and South Central Asian regions are more or less on the same relative position they occupied forty years ago; African regions, in relative terms, are in some cases worse now than before; while Europe, North America and Oceania perpetuate their ‘splendid isolation’. Since from 1970 to 2009 a significant and persistent globalisation wave has characterised the functioning of the economic systems, one may cast some doubts about how the potential benefits of this structural change have spread across countries.”

    • “the rest of the world is not significantly moving”
      “one may cast some doubts about how the potential benefits of this structural change have spread across countries”

      Comparing the economic growth between countries with completely different cultures and political systems is inherently problematic. Without a culture that favors wealth creation, and a legal structure that protects it, a country is not going to see much economic growth.

      • I agree, but the paper JP cites questions its own conclusion that between nations inequality is declining–a point JP makes to try to overcome the rise in within nations inequality.

      • I agree, but the paper JP cites questions its own conclusion that between nations inequality is declining–a point JP makes to try to overcome the rise in within nations inequality.

      • Even so, Mr P’s argument is akin to saying no one will freeze to death in Chicago because the average annual temperature is 49.
        All one needs is the right country pair, China and the US, for example, for equality measures to shift markedly: Fewer Chinese in poverty, fewer factory jobs in the US and slim pickings in blue-collar America. Those in the US who count on investment income win twice: new markets in China, lower costs in the US.

        http://www.businessweek.com/articles/2013-05-16/caterpillars-doug-oberhelman-manufacturings-mouthpiece

        “Oberhelman’s activism has also made him a target of criticism from those who say Caterpillar is thriving at its workers’ expense. Last year, as the company racked up a record $66 billion in sales, generating $5.7 billion in profits, it repeatedly landed in the news for clashing with production employees.”

  2. I just started to dig in the source of Oxfam claims. This source seems to be the “World Top Incomes Database” (http://topincomes.g-mond.parisschoolofeconomics.eu). And while searching for the sources of their US data I stumbled across their definition of income. Specifically, it is as follows:

    “We define income as the sum of all income components reported on tax returns (wages and salaries, pensions received, profits from businesses, capital income such as dividends, interest, or rents, and realized capital gains) before individual income taxes. We exclude government transfers such as Social Security retirement benefits or unemployment compensation benefits from our income definition. Non-taxable fringe benefits such as employer provided health insurance is also excluded from our income definition. Therefore, our income measure is defined as cash market income before individual income taxes”

    http://elsa.berkeley.edu/~saez/saez-UStopincomes-2012.pdf

    So, the claim that the graph in question represents, in the words of Oxfam, “[t]he share of national income going to the richest one percent” seems to be, to put it bluntly, a lie.

  3. The idea that China exploded in growth from liberal economic policies is true, but that ignores how much is still state managed, and how truly poor most of the country still is, and the same goes for India. Also in the case of China, the capacity was always there, it’s just that Mao’s terrible ideas put them so far behind that almost any policy that wasn’t Mao’s would result in massive growth.

    Also, I fail to see the misleading part, as things like technology grows poverty will decrease, but that doesn’t mean that such large portions of wealth being held by such small numbers is not still a political and economic problem. It’s like saying 60 years ago the poor didn’t have a T.V., but now they do, what’s the big deal.

  4. The economy can no longer grow primarily due to natural resource shortages, amongst other structural reasons that cannot be solved, and therefore wealth creation is not possible anymore. So the only way now to alleviate income inequality is via wealth “redistribution” (this term seems to imply that the billionaires actually deserved their billions in the first place…) via progressive taxation of the wealthy.

  5. “First, does Oxfam’s simplistic narrative of crony capitalism tell the economic story of the past three decades better than the 80% decline in extreme poverty? And why exactly are there 250 million fewer extremely poor people in the world today?”

    Just because we are all debt slaves to the elites doesn’t mean the poorest debt slaves can’t enjoy a rising standard of living due to fossil fuel use. The wealth inequality is still there like before, however. For example, a hypothetical debt slave in Africa who could borrow $5000 over his lifetime now, can live a better life than one from 30 years ago who couldn’t get any debt (or money) and starved. This is entirely due to fossil fuels and the Green Revolution which use up fertilizers and groundwater unsustainably.

    Contrast this with the typical American debt slave whose net worth is the same as the African’s, i.e. ZERO, when you subtract liabilities from assets, but who can go into more debt than the African can (let’s say, $300,000 of debt) and buy more things and eat better. But at the end, before they die, they own the same amount of stuff — zero.

    In both cases, the real assets of the world are still owned by those same 85 people; it’s just that the lives of the poorest debt slaves have been improved because they are now able to go into enough debt to provide for themselves over their lives. Then they die. The elites still own it all.

  6. I notice the author does not dispute the numbers Oxfam cited.

    Instead he compares apples to oranges in a classic misdirection move.

    Nice try.

    You can pick any prize on the bottom shelf.

  7. Pethokoukis’ response reflects his bias. Oxfam was not even attempting to researching all aspects of global economic development. Such a report would be hundreds of pages in length and was clearly not the scope of this report. Thus, the fact they did not address the reduction in poverty in countries such as China does nothing to refute the fact that income distribution has grown dramatically worldwide and poses significant challenges going forward. Contrary to Pethokoukis, both may be true.

    Furthermore, Pethokoukis does not refute the facts presented by Oxfam, instead electing to stand on economic theory. Of course theory is cheap and anyone with a box may stand on a street corner shouting their religion.

    Pethokoukis offers no solutions for what is a growing trend and problem in many regions of the world. Growing income distribution is a major and growing concern in China, even as incomes of the poorest have grown over the past 15-20 years. The political elite are terrified that this issue may result in future political unrest.

    The divide between women and men in many regions of the world, or unequal access to quality education (again in many countries around the world), poses serious fuel for political unrest.

    So Pethokoukis and his brethren may choose to stick their heads in the sand and take cheap shots at studies that draw attention to this global issue, or they may contribute to identifying solutions. Their sonnets of more free market solutions simply perpetuate the economic divide.

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