Yesterday’s Guardian led with the headline “Britain’s five richest families worth more than poorest 20%“. The story came from this Oxfam report which said:
The richest 5 families in Britain are wealthier than the bottom 20 percent of the population in the UK (with a wealth of £28.2 billion and £28.1 billion respectively).
The basis of the calculation:
Oxfam used the latest list of billionaires from Forbes released on March 4, 2014 to calculate the accumulated wealth of the richest families in Britain and data from Credit Suisse Global WealthDatabook to calculate the wealth of the bottom 10 and 20 percent of the population.
Oxfam don’t say what they mean by a family or how many people they have included in each one but even if they mean an extended family of 100 people, that would still be 500 people with the same wealth as the bottom 20 percent.
At first this sounds crazy but they are not talking about income here, they are talking about accumulated wealth. The poorest, of course, have very few assets and spend most of their income. The total accumulated wealth of the poorest 20 percent probably consists of the houses belonging to the minority and a few pension investments. Could it really be that the wealth of a handful of people exceeds that of the bottom 12 million or so?
Someone else with more time than me can pick away at Oxfam’s sources if they want. Chances are, though, that even if five families don’t already own more wealth than the bottom 20 percent, they soon will.
Last week, the English version of Capital in the Twenty-First Century came out. It was written by Thomas Piketty, professor at the Paris School of Economics and the man behind the World Top Incomes Database that I have referred to in a number of posts. In his new book, he argues that the concentration of wealth is a process that was interrupted by high growth and the wars of the twentieth century. Now all that is over, the accumulation of wealth by the few has resumed. As a result, inequality is rising again.
Given that it only appeared last week I haven’t read it but even the reviews are fascinating.
This one on Amazon gives a succinct summary:
The major conclusion can be summarized very briefly: Piketty has found that, over the long run, the return on capital is higher than the growth rate of the overall economy. In other words, accumulated and inherited wealth becomes a larger fraction of the economic pie over time. This happens more or less automatically, and there is no reason to believe this trend will change or reverse course.
Piketty argues that the reduction in inequality in developed countries after World War II was a “one-off” that was driven entirely by political choices and policies. It did not happen automatically. Those policies have now been largely reversed, especially in the United States. As a result the drive toward increased inequality is likely to be relentless.
As the Economist says:
It is, first and foremost, a very detailed look at 200 years’ worth of data on the distribution of income and wealth across the rich world (with some figures for large emerging markets also included). This mountain of data allows Mr Piketty to tell a simple and compelling story. Wealth as a share of income held steady at very high levels in the 18th and 19th centuries, contributing to stark inequalities in wealth and income. Rising worker wages in the late 19th and early 20th centuries stabilised growth in wealth concentrations but did nothing to reduce inequalities, which were only eliminated by the great shocks of the period from 1914 to 1950. Economists tricked themselves into thinking that the resulting compression in the income and wealth distribution was a natural feature of the maturation of capitalist economies. But as the shocks receded wealth began to accumulate again and growth in income inequality resumed. From the perspective of 2014, concentration of wealth and income begins to look like the natural state of capitalism rather than an exception.
So we were duped by the upheavals of the twentieth century, and the resulting government policies, into thinking that the trend towards greater equality was normal and would continue.
In Mr Piketty’s narrative, rapid growth—from large productivity gains or a growing population—is a force for economic convergence. Prior wealth casts less of an economic and political shadow over the new income generated each year. And population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012. America’s breakneck population and GDP growth in the 19th century eroded the power of old fortunes while throwing up a steady supply of new ones.
In other words, high economic growth reduces Old Money’s share of wealth and allows the plebs to even things up a bit, at least, for a while.
Tumbling rates of population growth are pushing wealth concentrations back toward Victorian levels, in Mr Piketty’s estimation.
The New York Times ran a Q&A piece with Thomas Piketty last week. In the author’s own words:
In the very long run, the most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital r to exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future.
The reduction in inequality was mostly due to the capital shocks of the 1914-1945 period (destruction, inflation, crises) and to the new fiscal and social institutions that were set up in the aftermath of the World Wars and of the Great Depression. There was no natural tendency toward a decline in inequality prior to World War I. During the 20th century, rates of return were severely reduced by capital shocks and taxation, and growth rates were exceptionally high in the reconstruction period. This largely explains why inequality remained low in the 1950-1980 period.
This graphic and commentary comes from the New York Times review of the book.
Income inequality and returns to capital are increasing worldwide. The figures for France are interesting, given that it’s often depicted in the British and American media as some kind of socialist throwback. They explain why the French left is so keen on wealth taxes.
Inequality is rising in most OECD countries. A series of studies by the OECD (see previous post for links) found that, while inequality between countries is falling, inequality within countries is rising. Around the world, there is that same tendency for wealth to accumulate and concentrate in the hands of fewer people.
As the wealth and income of the richest 1 percent has pulled away from that of everyone else, even those adjacent to them in the income hierarchy have started to notice. If Thomas Piketty is right, and there is strong evidence to suggest that he might be, this is going to get worse. Or, if you are one of the lucky few, better.
It’s another shattering of post-war assumptions though. After the war, and certainly after the 1960s, most of us thought that society would become more equal. The rises in inequality during the Thatcher/Reagan era were, at first, regarded as a blip, especially by those on the left. A temporary setback after which things would ‘get back to normal’ once the postwar egalitarian consensus was restored. Now, though, it’s starting to look as though it’s the postwar period, with its rapid growth, rising share of wealth going to labour and falling inequality that was the aberration. ‘Back to normal’ is a world where, once again, a large share of national wealth goes to a very small group of people.