The first World Inequality Report
The aim of the World Inequality Report 2018 is to contribute to a more informed public discussion of inequality by bringing the latest and most complete data to all sides in the global debate. The report exhibits important analytical advances, yet there remain serious limitations on the world's ability to measure the evolution of income and wealth inequality. The aim is not to provide perfect data, but rather the best data by making explicit what we know and don't know about inequality.
The report reconciles in a systematic manner the different data sources: national income and wealth accounts; household income and wealth surveys; fiscal data coming from taxes on income, inheritance and wealth (when they exist); and wealth rankings. All the data is available on the World Wealth and Income Database (WID.world), which combines historical statistics in a consistent way. The computer codes, assumptions and detailed papers are online so that anyone can use them.The aim is to present data that are consistent with macroeconomic statistics such as GDP and national income, and which can be easily understood and used by the public to help ground debate, deliberations and decisions.
The report has an important message for Australia in that it also aims to put pressure on governments and international organisations to release more raw data on income and wealth. The lack of transparency undermines the possibilities for peaceful democratic discussion. It's critical that governments provide public access to reliable and detailed tax statistics, which in turn requires that they operate properly functioning reporting systems for income, inheritance and wealth.
Short of this, as public commentary in Australia often demonstrates, it's very difficult to have an informed debate about the evolution of inequality and what should be done about it. Australia falls short of best international practice, particularly in publishing data on wealth inequality. The reason for the report's emphasis on providing all the details about its sources and concepts is to enable citizens to make up their own minds about these important and difficult issues. As the report says, economic issues do not belong to economists, statisticians, government officials, or business leaders. They belong to everyone. The report's self-proclaimed chief objective is to boost the power of the many.
The World Inequality Report shows that income inequality has increased in nearly all regions in recent decades, but at different speeds. It is lowest in Europe and highest in the Middle East. The fact that inequality levels are so different, even when countries share similar levels of development, highlights the importance of national policies and institutions in shaping the outcomes. At the global level, inequality has risen sharply since 1980, despite strong growth in China, contradicting supposed common knowledge to the contrary. Because of high and rising inequality within countries, the top 1% richest individuals in the world captured twice as much growth as the bottom 50% since 1980. Most of the gains have accrued to the top 0.1%, an extraordinary inequality of outcomes that, in turn, heralds increasing inequality of opportunities.
The rise of the global top 1% and the stagnation of the global bottom 50%
Top 1% income shares have been steadily increasing in Anglophone countries since the early 1980s, after a historical decline throughout the first part of the twentieth century. Inequality has exploded in the United States: the top percentile income share there was less than 11 per cent in 1980, and it was slightly above 20 per cent in 2014. Britain’s top percentile share rose from less than 6 per cent in the late 1970s to a level comparable with Canada, where the top share increased from less than 9 per cent in 1980 to almost 14 per cent.
Australia and New Zealand had levels of inequality much lower throughout the entire period, with the top 1% receiving around 5 per cent of national income in the early 1980s and rising to less than 10 per cent, but this reflects the same disturbing pattern. The impact of the Global Financial Crisis is visible on top-income shares, which exhibit a marked declined after 2007. The most recent data suggest that top incomes have now either recovered their shares or are progressively recovering them.
The income of the top 1%
Economic inequality is largely driven by the unequal ownership of capital, which can be either privately or public owned, and is substantially more concentrated than income. The top 10% owns more than 70 per cent of the total wealth in China, Europe, and the United States, the bottom 50% owns less than 2%, and the middle 40% ('the global wealth middle class') owns less than 30%. The top 10% share ranges from 77 per cent in the United States to 52 per cent in the UK. A separate study for the Evatt Foundation has estimated that Australia's top 10% share is now at least 50 per cent, and perhaps as much as 55 per cent, roughly comparable with Europe.
Top 1% and Bottom 75% of global wealth: China, Europe and the US
In the United States, the top 1% wealth share rose from 22 per cent in 1980 to almost 40 per cent in 2014, with most of the gains going to the top 0.1%. The increase in the top wealth shares in France and the UK was more moderate. The Evatt Foundation has estimated that Australia's top 1% share is now at least 15 per cent, and possibly up to 20 per cent, which is, again, roughly comparable with Europe.
Top 1% wealth shares: the fall and rise of wealth inequality
The report shows that, since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. In other words, countries have become richer but governments have become poorer. Public wealth, the common wealth, is now negative or close to zero in the rich countries. Arguably this limits the ability of governments to tackle inequality; certainly it has important implications for wealth inequality among individuals. The combination of large privatisations and increasing income inequality has fueled the rise of wealth inequality. In Russia and the United States, the rise in wealth inequality has been extreme, whereas in Europe (and Australia) it has been more moderate.
The decline of public capital
Digging deeper into the report, rising wealth inequality is a function of rising national wealth and relatively small private ownership. Australia and Canada demonstrated comparable evolutions in their private wealth-national income ratios to France, Italy, and the UK. Canada’s private wealth more than doubled between 1970 and 2016, from around 250 per cent of net national income to more than 550 per cent, while Australia’s rise was from slightly less than 350 per cent of national income to over 550 per cent. In the United States, private wealth—relative to national income—rose by a half over the same time period, from less than 350 per cent of national income to around 500 per cent. As extreme as it now is, the ensuing concentration of wealth has not yet returned to its most extremely high early-twentieth-century (pre-WWI) level in the rich countries—the retrospectively so-called Belle Époque or Mark Twain's Gilded Age (or the hightime of Russel Ward's Australian Legend within a less well-developed but also extremely unequal country).
By systematically combining data on the patterns of saving, investment, and economic growth in developed countries since 1970, the report shows that both volume and price effects have played a significant role in the concentration of wealth. In the eight largest developed economies, about 60 per cent of national wealth accumulation between 1970 and 2010 can be attributed on average to volume effects, versus about 40 per cent to price effects, although there are large cross-country variations. Volume effects explain 72 per cent of the accumulation of national wealth in the United States between 1970 and 2010, while residual capital gains explain 28 per cent. Similarly, new savings appear to explain around 70–80 per cent of national wealth accumulation in Japan, France, and Canada between 1970 and 2010, while residual capital gains account for the remaining 20–30 per cent. Capital gains were larger in Australia, Italy, and the UK, where they accounted for more than 40–60 per cent of the increase in wealth. On the other hand, asset prices were reduced over the period in Germany, so savings accounted for all the rise in national wealth, while capital gains actually moderated this rise.
There has also been a huge rise in the foreign assets owned by countries since the 1970s, such that a significant share of each rich country’s domestic capital is now owned by other countries. The rise in cross-border positions is significant everywhere, being spectacularly large in Europe and a bit less so in the larger economies of Japan and the United States. In the States, net capital gains on cross-border portfolios represent one-third of total capital gains at the national level, and the equivalent of the total rise in the US national wealth-national income ratio since 1970. One implication is that capital gains and losses on foreign portfolios can be large and volatile over time and across countries. Foreign portfolios have generated large capital gains in the United States, the UK and Australia, and significant capital losses in some other countries, such as Japan, Germany, and France. In Germany, virtually all capital losses at the national level can be attributed to foreign assets.
The future is bleak under 'business as usual'
The report projects income and wealth inequality up to 2050 under different scenarios. In a future where 'business as usual' continues, global inequality will further increase. Alternatively, if in the coming decades all countries follow the moderate inequality trajectory of Europe, global income inequality can be reduced—in which case there can also be substantial progress in eradicating global poverty.
Yet inequality is not only about the outlook for the rich and the poor. The global wealth of the middle class will be squeezed under 'business as usual'. Assuming the established trends in wealth inequality continue, the top 0.1% alone will own more wealth than the global middle class by 2050. Even if the ascendancy of the global super-rich is accompanied by absolute rises in middle-class wealth, the scenario implies a loss of relative status, economic (and therefore political) power and social opportunities.
Squeezing the global middle class
Tackling global income and wealth inequality requires shifts in national and global tax policies. Educational policies, corporate governance and wage-setting policies need to be reassessed in many countries, including Australia. Data transparency is also key. Tax progressivity is a proven way to combat rising income and wealth inequality at the top. The report argues that a global register for recording the ownership of financial assets would deal severe blows to tax evasion, money laundering and rising inequality. More equal access to education and well-paying jobs are held up as the keys to overcoming the stagnating or sluggish income growth rates of the poorest half of the population. The general messge is that governments need to invest in the future to address income and wealth inequality. The World Inequality Report is the most rigorous assessment and evaluation published to date on the catastophe that increasing economic inequality ultimately promises, setting standards in reliability and methods that no other reputable study can ignore. For those with an interest in inequality, and this implicitly includes everyone, it's essential reading.
World Inequality Report 2018 is written and co-ordinated by Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez and Gabriel Zucman and was published in Paris on 14 December 2017 by World Inequality Lab. The report ultimately relies on the data collection, production and harmonisation work carried out by more than a hundred WID.world fellows located over five continents and contributing to the World Wealth and Income Database. Christopher Sheil is the President of the Evatt Foundation, a senior visiting fellow in history at UNSW, and co-author with Frank Stilwell of The Wealth of the Nation: Current Data on the Distribution of Wealth in Australia.
Christopher Sheil, 'The cutting edge of inequality', Evatt Journal, Vol. 16, No. 5, December 2017.<https://evatt.org.au/the-cutting-edge-of-inequality>