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Friday, October 17, 2014

U.S. Median Wealth Up from 27th to 25th

Today Credit Suisse released its Global Wealth Databook 2014 to go along with the Global Wealth Report issued Monday. Global wealth hit another new record of $263 trillion as of mid-2014, up 8.3% from mid-2013 (Report, p. 3). Rich people are doing well, but how about the middle class? One measure of this is median wealth per adult, the exact midpoint of the wealth distribution.

In the United States, mean wealth per adult reached $347,845, and median wealth per adult hit $53,352 (Databook, Table 2-4). This represents an increase in median wealth of 18.8% over 2013, enough to move the U.S. up two places to 25th in the world.

Before we congratulate ourselves too much, we need to remember that $53,352 is not all that much money, especially for retirement (don't forget that figure includes home equity). With 49% of Americans in the private sector having no retirement plan at all, and only 20% having a defined-benefit pension, a retirement crisis is looming for younger baby boomers and all later middle-class retirees. Meanwhile, if Republicans take control of the Senate in this year's elections, we are likely to hear increasing demands for cuts to Social Security, when what we actually need is to raise Social Security benefits.

The relatively low median wealth also points to persistent inequality in the United States. While only 25th in median wealth per adult, the U.S. ranks 5th in mean wealth per adult. With a ratio between mean and median wealth per adult of 6.5:1, this is higher than any of the other top 25 countries. Number one Australia has a ratio of less than 2:1. Without further ado, here is the list of all countries with median wealth per adult above $50,000.

Cross-posted at Angry Bear.

Median wealth per adult, mid-2014

1. Australia                  225,337
2. Belgium                   172,947
3. Iceland                    164,193
4. Luxembourg            156,267
5. Italy                         142,296
6. France                     140,638
7. United Kingdom     130,590
8. Japan                       112,998
9. Singapore                109.250
10. Switzerland           106,887
11. Canada                    98,756
12. Netherlands             93,116
13. Finland                    88,130
14. Norway                   86,953
15. New Zealand          82,610
16. Ireland                     79,346
17. Spain                       66,752
18. Taiwan                    65,375
19. Austria                    63,741
20. Sweden                   63,376
21. Malta                       63,271
22. Qatar                       56,969
23. Germany                 54,090
24. Greece                     53,375
25. United States          53,352
26. Israel                       51,346
27. Slovenia                  50,329

Source: Credit Suisse Global Wealth Databook 2014, Table 2-4

Monday, October 13, 2014

Is Piketty wrong on British and Swedish wealth?

Embarrassingly, I missed this reply by Tim Worstsall to my post "Understanding Piketty, part 1." My apologies to Mr. Worstall and my readers; despite his writing it August 14, I just discovered it the other day when I was mindlessly looking at site traffic data from Alexa.

In his post Worstall takes issue with Piketty's claim (which I endorsed) that if Financial Times author Chris Giles was correct about the level of British wealth concentration (the top 10% controlling 44% of UK wealth), then British wealth inequality in 2010 was lower than that of Sweden and, indeed, lower than even the lowest share ever held by the top 10% of wealth owners in Sweden (about 53%) which, he said, "does not look very plausible."

Worstall's point was that, surprisingly enough, if we measure wealth inequality by the Gini index, Sweden in 2000 had greater inequality than did the U.K, 0.742 to 0.697 (higher is more unequal). His ultimate source (according to the Wikipedia article he cites) was work by the creators of the Credit Suisse Global Wealth Report, a research effort which Piketty praises as "innovative" in capital21c, p. 623 n. 8.

Let's first note that even if that were true, it does not get Giles off the hook. Giles, whose error was to tack survey-based UK wealth data for 1990-2010 on to earlier tax-based wealth data (thereby biasing it severely downward; see also Howard Reed in The Guardian), does not dispute that the proper measure for inequality is the wealth share of the top 1% and top 10% of wealth owners. Giles makes no appeal to alternate measures to save himself. Thus, on their agreed measure of wealth inequality, Giles fails to make a dent in Piketty's data.

However, Worstall's point is an interesting one on its own merits to Piketty's attempted reductio ad absurdum. While in part 1, I pointed out that income inequality measured by the Gini index is lower in Sweden than in the United Kingdom, the further fact that wealth inequality is always higher than income inequality within each country does not mean, as I blithely assumed, that the country with lower income inequality will necessarily have lower wealth inequality as well.

The question then becomes which is the more meaningful measure of wealth inequality. The U.K. has higher top 1% and top 10% shares but, evidently, a lower Gini coefficient. As I noted in part 3, Piketty deliberately avoids using the Gini index. As Piketty's sometime-collaborator Facundo Alvaredo writes, "The most commonly used measure of inequality, the Gini coefficient, is more sensitive to transfers at the center of the distribution than at the tails." This is not a problem for the top shares measures; they have a much more intuitive meaning than the dimensionless Gini index. One might well argue that there is more political significance for the top 1% of wealth owners to increase their share from 20% to 30% than there is for owners at the 85th percentile to gain a corresponding amount of wealth from those below them. But to make that argument doesn't prove it's true.

Alvaredo also elaborates on a way to adjust the Gini index for variations at the top of the distribution, which he attributes to Atkinson. As Alvaredo shows in his paper, it is possible for the unadjusted Gini index to be falling even as the adjusted Gini index is rising. I took a stab at adjusting the figures given by Worstall by taking the top 1% share of Sweden in 2000 as 20% and the U.K.'s as 30%. That gives adjusted Gini indices of (.742*(1-0.2)) + 0.2 = 0.7936 for Sweden and (0.697*(1-0.3)) + 0.3 = 0.7879 for the UK. These are much closer, but the U.K. is still slightly more equal if I have gotten this right. In any event, while Swedish income inequality remains robustly lower using either top shares or Gini index, wealth inequality for Sweden is only lower using income shares, but still not Gini.

There remains an obvious question for Worstall: What is the trend of U.K. wealth inequality using the Gini index? If it increased, then Piketty's finding of an increase using wealth shares will be robustly backed up with this measure Worstall is preferring. Gini may give Worstall a desirable result for a comparison, but still unpleasantly show that Britain is more unequal in wealth than in 1980. That's the actual question Piketty and Giles were disputing. However, I have yet to find a such a 1980 Gini index for wealth; as Piketty notes in capital21c, the drawback of the Credit Suisse research is that it does not go back in time very far. Perhaps a reader knows where a series of Gini indices for wealth (unlike income, which is easy to find) can be found.

So the answer to the question in the title is that we don't actually know. Likely, however, it doesn't matter as far as trends in inequality since 1980 are concerned. It's definitely worth thinking about what it might mean that the two wealth inequality measures diverge for ranking Britain and Sweden in 2000, even if we eventually conclude that one measure is definitely better than the other.

And it's not like Piketty is unaware of a potential for greater wealth inequality in Sweden. In June, he lectured in Helsinki, arguing against a recent trend in the Nordic countries to abolish estate (inheritance) taxes. Sweden abolished its inheritance tax in 2005. Not only does this shift the tax burden to those with lesser wealth, as he argued in Helsinki, but it follows from the argument of the book that it takes away the possibility of generating the most reliable form of data on wealth inequality itself.

Cross-posted at Angry Bear.