Thursday, January 29, 2015

More on Comparative Wealth Reports

Source: The Economist
I recently posted on the interpretation of stories on the distribution of global wealth. The Economist magazine has published an article on the same subject, from which I drew the above graphs. Oxfam, a charity, recently published that the world’s wealthiest 1% will soon hold more net wealth than the other 99% put together.
Oxfam’s projection (see left-hand chart) should be treated with caution. The charity uses a straight-line projection of the trend in wealth shares in 2010-14 to forecast that just 50m adults will hold the majority of the world’s household wealth by next year. That is both too simplistic and arbitrary. If Oxfam had based its forecast on the trend in 2000-14, then the crossover point would have been 2035. 
Measuring wealth is in any case problematic. Oxfam’s numbers piggyback on Credit Suisse’s “Global Wealth Report”, published in October, which found that 48% of the world’s $263 trillion in net household wealth (ie, after subtracting debts) is in the hands of the richest 1% of its citizens. The Swiss bank’s report is fairly well-regarded but data on household wealth across the globe are sketchy. And measuring net wealth leads to some very odd outcomes: the owners of the 5.1m underwater homes in America will count among the world’s poorest.
 I have not looked into the Credit Suisse methods, but I would bet that it does not measure human capital -- the investment that has been made in the education, health, and culture of citizens of different nations.

I suspect that it also fails to attribute public capital to households. I live in a home that has concrete sidewalks, a well maintained road in front, good piped potable water, functioning sewerage, electrical power, and fiber optics telecommunications. There is a bus that stops at the corner, and it takes me to a metro with good, fast trains to all parts of the city, which in turn is connected by high speed highways, railroad and airlines to the rest of the country and even the rest of the world.  I live in a community similarly served, and the businesses in which my neighbors work are the beneficiaries of even greater public capital investments allowing those neighbors to earn good incomes.

The Economist correctly points out that other economic indices may be more accurately measured. Of course, one is better informed taking many such indicators into account rather than focusing on a single one.

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