The multinational charity Oxfam has released a report that from the headline on down is little more than political rhetoric. The title is “An Economy for the 1%”, which immediately identifies Oxfam with the left-wing obsession over the wealth of the rich.
It tots up the wealth of the poorest half of the world’s population, and finds that it equals that of the richest 62 people on earth. This is a cute statistic, and a certain headline-grabber, but what exactly do they propose to do about this? If you were to redistribute the $1.76 trillion that Oxfam attributes to these 62 people to the poorest half of the population, each would receive $475. Even in the best-case scenario, assuming that there is no adverse effect on investment, employment, production or prices, that wouldn’t last anyone very long.
The report notes with despair that the wealth of the poorest 10% of people in the world has risen by only 3$ in 25 years. That ignores the fact that this category isn’t forever composed of the same people, however. People enter the economy with low income and little wealth, but many improve their circumstances over time.
Oxfam’s point is also tautologous. The curve from poor to rich is anchored at zero. If you marked poor to rich on a rubber band, pinned at one end, the 10% closest to the pin isn’t going to move much, even when everyone gets substantially richer. Conversely, inequality will increase as the rubber band is stretched, without making anyone poorer.
It is true that there are social implications to income inequality, not the least of which is political stability. It is also true that economic growth helps more to reduce poverty in countries with lower income inequality. But while the Oxfam report is all about taxing the super-rich, the prerequisite for poverty alleviation remains economic growth, and growth is a function of capitalism and free markets.
The reason Oxfam’s report does not mention poverty in the headline is because the news is unremittingly good on that front. Despite having raised the poverty threshold to $1.90 per day in October 2015, the World Bank reported that the number of people living in extreme poverty fell below 10% of the global population for the first time. It declined in both absolute and relative terms in the last few years, from 902 million people or 12.8% in 2012 to 702 million or 9.6% of people in 2015.
The very first of the UN Millennium Development Goals, set in 1990, was to halve the extreme poverty rate by 2015. This goal was achieved in 2010. In the developing world, the UN reported a decline in the extreme poverty rate from 47% in 1990 to a mere 14% in 2015. The absolute number of people in poverty declined by more than half, from 1.9 billion to just over 800 million. Most of the progress was made since 2000. It also reports that the working middle class – living on more than $4 a day – has tripled between 1991 and 2015 in developing regions, where it now makes up half the workforce.
According to Oxfam’s own source, Credit Suisse, the average wealth rate per adult grew by 3.5% per year, from $31,727 in 2000 to $52,432 on 2015. It does point out that growth outside North America and China has stagnated since the financial crisis of 2007/8, but adds: “the restrained performance in recent years is largely due to appreciation of the [US dollar]. When measured at constant exchange rates, wealth has grown at a consistent, albeit modest, rate during the whole post-crisis period.”
Only charities dependent on maintaining the illusion that the world will go to hell in a handbasket without the generosity of donors could morph this tremendous success into “an extreme inequality crisis”.
Beyond the neat bullet points that made it to the headlines – that the richest 1% own more than 50% of the world’s wealth, and the richest 62 own more than the poorest half of the population – Oxfam makes a nod to reality, acknowledging that the extreme poverty rate has halved between 1990 and 2010. But noting this, they say, “is to miss the point”. Although fewer people are poor, and the rate of poverty alleviation has accelerated since the year 2000, Oxfam feels that because of rising income inequality, there has been “much slower progress in reducing extreme poverty than could otherwise be achieved”.
It seems churlish to reduce the success of handily beatingthe UN’s ambitious development goals to “slow progress”.
The middle class has grown in both numbers and wealth, which suggests a degree of upward mobility, but the Credit Suisse statistics do show that new wealth creation has been biased towards the rich in the years since the 2008 economic crisis.
This is not because the rich use tax shelters, which is the dead horse the Oxfam report keeps flogging. In a pretty non-sensical but revealing statement, Oxfam reports that, “Globally, it is estimated that a total of $7.6tr of individuals’ wealth sits offshore.”
Offshore from where? The globe? Which countries do not deserve to be part of the globe? Those that choose to tax their residents at a lower rate than, say, the UK or Sweden?
The obvious target here is the idea that individuals and companies who seek out low-tax countries in which to hold their wealth are somehow doing something wrong. But even if they were, believing that their tax will make an appreciable difference to poverty is based on nothing but unicorn sneezes.
Besides, the focus on the rich is hugely ironic, when the executives of charity groups are paid whopping salaries themselves, and admit to paying some staff “peanuts”. They certainly don’t believe in income equality in their own organisations.
Recall that around the world, the remedy for the financial crash was to bail out failing banks with taxpayer money, and then to “stimulate” the economy by printing even more money and injecting it at the top of the financial pyramid. Unsurprisingly, the result has been that the majority of post-crisis growth has been in financial assets, as opposed to non-financial assets such as land or housing, and the majority of new wealth has been concentrated among the rich who invest in bonds and stocks. You can dress it up in a glossy report, but it’s still a trivial truism. It’s what you get if you let governments collect money, or create it, and pump it in at the top of the system.
Government intervention created this situation, yet by blaming the rich, Oxfam is content to trust governments to counteract their own monetary and fiscal policies.
There’s a much deeper point to be made here, however. If you kept up with your holiday reading, you might have spotted an article by Noah Smith for Bloomberg View a few weeks ago. It cited a 2013 study that tested under what conditions inequality is harmful to economic growth and poverty alleviation. In particular, it looked at the influence of political connections.
“We find that wealth inequality reduces economic growth, but when we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect,” the study found.
In other words, inequality is not a problem in itself, and cronyism lies at the root of harmful wealth inequality. Ironically, if the rich were taxed at a higher rate, or those who use tax shelters were forced to repatriate their assets, this would just contribute to the amount available to fund cronyism. After all, even when they are not corrupt, governments have proven themselves far more likely to bail out banks than provide for the poor.
So sure, noisy claims about how rich the rich are might get you headlines. But if you want to help the poor, focus on those who earned their money from exclusive concessions, generous subsidies, and government contracts. And if you really want to make a difference, start dismantling the government policies that allows cronyism and corruption to flourish in the first place. DM