Posts Tagged ‘wealth creation’

Opportunities for wealth creation needed rather than just redistribution of wealth

October 13, 2015

Credit Suisse has published its Global Wealth report and its accompanying Databook. The data are based on the world’s adult population of about 4.8 billion. What is immediately obvious is that the wealth is very badly skewed with 71% of the world’s adults having a net worth of less than $10,000, 21% have net worth between $10,000 and 100,000 while just 8% have wealth of over $100,000. (I have also added the line of those in extreme poverty).

However my take is that the pyramid is actually a reflection of wealth creating ability.  The challenge is to make wealth creation opportunity less sensitive to the having of wealth. That suggests to me that it is not just a redistribution from rich to poor that is required in the first instance, but the provision of wealth creation opportunity for those having lower net worth. If extreme poverty can be eliminated, and wealth creation opportunity be made less dependant upon having wealth, then we will have a resultant wealth distribution that automatically matches the wealth creation ability of individuals.

CS global-wealth-report-2015 (pdf)

CS global-wealth-databook-2015 (pdf)

The global wealth pyramid is particularly interesting (wealth being taken as net worth):

It has a large base of low wealth holders and upper levels occupied by progressively fewer adults. We estimate that 3.4 billion individuals – 71% of all adults in the world – have wealth below USD 10,000 in 2015. A further billion adults (21% of the global population) fall in the USD 10,000–100,000 range. While average wealth is modest in the base and middle tiers of the pyramid, total wealth here amounts to USD 39 trillion, underlining the economic importance of this often neglected segment. Each of the remaining 383 million adults (8% of the world) has net worth above USD 100,000. This group includes 34 million US dollar millionaires, who comprise less than 1% of the world’s adult population, yet own 45% of all household wealth. We estimate that 123,800 individuals within this group are worth more than USD 50 million, and 44,900 have over USD 100 million.

Global Wealth Pyramid - adapted from Credit Suisse

Global Wealth Pyramid – adapted from Credit Suisse

The take-away from this depends somewhat on from which side of the political spectrum the data are viewed. Looking from the left it is a strident call to arms to “take from the rich and give to the poor”. But this, I think, is just a little too simplistic. How net worth is distributed generally reflects not only wealth concentration but also wealth creation. Merely redistributing existing wealth will actually reduce the total amount of wealth that is created. The bulk of wealth creation thus lies at the initiative of those having the most wealth. It is this coupling between having wealth and wealth creation opportunities which needs to be addressed. It is wealth creation opportunities for those at the lower reaches of the pyramid which is the real need. It is the cliche – but true – of giving a man a fish (wealth) or teaching him how to fish (or create wealth).

Just redistribution will not increase the world’s wealth creation and it is more likely that it will reduce most for those having the lowest net worth. And that would be entirely counterproductive.

However there is little denying that at the top of the pyramid, the concentration of net worth can be almost obscene. Just 123,800 individuals are each worth over $50 million and 44,900 of them are each worth over $100 million.

Top of the wealth pyramid from Credit Suisse

Top of the wealth pyramid from Credit Suisse

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Wealth inequality: The poor are not poor “because” the rich are rich

January 21, 2015

In the run-up to Davos, the headlines have been about 1% of the world’s population owning half the world’s wealth. (The Wealth “bible” is the Credit Suisse Wealth Report). The richest 80 people (0.1% of the 1%) have more wealth than the poorest half of the world’s population. Obama is talking about an additional tax on the wealthy. In his State of the Union address yesterday he declared that the economic crisis was over and about “spreading the wealth”. He prioritised the working families and the “middle class”. In Davos, 2,500 delegates arrived in 1,700 private jets.

Most people on the left of the political divide want more to be taken from the rich to be “given” to the poor. The Robin Hood syndrome. Note that when the intention is to “give to the poor” and not for “making the poor greater creators of wealth”, the driving force is mainly envy. It is when the desire to deprive the rich is more important than any desire to improve the lot of the poor. Concern is over-ridden by envy. Sometimes it seems to me that the real difference between left and right is that the left wants to spread the consumption of existing wealth (and hope that total wealth increases), while the right want to focus on creating wealth (and hope that it trickles down and gets equitably distributed).

But there is a fundamental fallacy in the view that the poor are poor because the rich are rich. There may well be some of the rich who are exploiting some of the poor and where the poor are not getting a just opportunity to be creators of wealth. There may well be members of the rich who create no wealth but remain rich because of inherited wealth. But by far the greatest majority of the rich are rich because they created more wealth than others. The real question is whether each individual gets an equitable opportunity to create wealth and then gets to retain an equitable portion of the wealth he has created. (It is a different matter but I still do not understand why it is the creation and the retention of wealth that attracts more penalties in the form of taxation than the destruction or consumption of wealth).

What constitutes wealth is a different matter, but no matter what definition is used, wealth is not something static. The “wealth of the world” is always changing. It is constantly being created and consumed and destroyed. The key point is not how much the rich have but whether the “poor” are increasing their creation of and their stock of wealth.

And the simple fact is that the “poorer half” of the world has been steadily increasing its wealth creation and its wealth retention. Between 2000 and 2014 the total stock of “wealth” in the world increased by over 250%!

Wealth Report Figure 1 Credit Suisse

Wealth Report Figure 1 Credit Suisse

It is during periods of growth that inequality reduces and this is very striking when comparing the 2000-2007 period with the 2007-2014 period.

Inequality trends for individual countries are explored in more detail in Table 2, with countries listed in order of the increase in inequality since 2000. The most striking feature is the contrast in experience before and after the financial crisis. In the period from 2000 to 2007, 12 countries saw a rise in inequality while 34 recorded a reduction. Between 2007 and 2014, the overall pattern reversed: wealth inequality rose in 35 countries and fell in only 11. The reason for this abrupt change is not well understood, but it is likely to be linked to the downward trend in the share of financial assets in the early years of this century, and the strong recovery in financial assets since 2007.

The “poor” have to leave the ranks of the poor. They are not poor because the rich are rich – but because they do not have the opportunities to create and retain wealth. And that will only come in growing economies and not by increasing public expenditure where the emphasis is on consuming existing wealth rather than creating new wealth.

Tax on income is easy to levy but fundamentally unsound

September 18, 2012

The latest Mitt Romney “gaffe” is getting much attention. But I was a little surprised to find that while what he said may well be a gaffe in electoral terms – and he may even have lost the Presidential election here – his statement was actually quite correct. I had not appreciated that almost half of all US households paid no federal income tax at all. In the US, federal income tax is a major source of tax revenues and contributes about half of all tax revenues (tax revenues about 15.4% of gdp in 2011 with federal income tax providing 7.3% of gdp). Romney in his leaked video said:

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