Social Issues

Are the poor getting poorer and the rich getting richer?

poor billionaires

The title of this post has always been quoted to go ideologically against capitalism (whatever that means), so as to demonstrate that we are in a wrong “economic system” which has as its only consequence the increase in poverty and inequalities. But is this actually the case?

Based on the results of studies by Piketty, Saez & Zucman (2003, 2018) using income tax data, the idea that inequality has grown dramatically since 1960 has become one of the major narratives of recent years. This has led to speculations such as that this inequality leads to reduced economic efficiency and stagnation of middle-class wages due to negative changes in bargaining power.

Taking inspiration from the first paper (Auten & Splinter, December 2019), the authors contest the various works of Piketty by adjusting his assumptions but always based on the same starting data. To try to redistribute the total national income (wage income, capital income, state transfers after taxes, spreading public consumption such as health and education), it is necessary to make hypotheses, and it is shown how his studies are flawed by various errors at an econometric and definitional level, given that we have to agree on the term “income” which varies from country to country according to local accounting. It starts with income reported from tax receipts and develops a market income measure adjusted for tax reforms and social problems such as declining marriage rates.

By calculating only the positive incomes and excluding the negative ones, the authors, through internal audits, calculate that this unobserved part is 16% instead of 50%, decidedly under-reported compared to the previous results. This generates a final discrepancy of results in the order of 2.2%. Using tax revenue data, Piketty and his co-authors argue that the top 1 percent of income earners have seen their share of wealth increase dramatically since 1960, not accounting for tax reforms and unreported incomes. The two authors (Auten & Splinter) adjust the results and demonstrate how the share of after-tax wealth in the hands of the top 1% has instead remained stable, contradicting the previous results on which Piketty built his career .

Instead of the second paper (Catherine, Miller & Sarin, February 2020), the authors start from the definition of wealth given by Piketty (2013): the market value of all household assets, net of debt. They demonstrate that this definition of “wealth” is an incomplete concept, adjust their results, and, incorporating redistribution through social security programs, demonstrate that in 1989, for the bottom 90% of the distribution, it accounted for 17 .2%, while in 2016 it came to represent 63.4%. Further adjusting the results for systematic risk, we arrive at 14.2% first and 57.7% later, respectively. Furthermore, in 2016 Social Security exceeded the market value of wealth by the same 90%,

By including these two results in the calculation and calculating that the number of poor people in the world has been steadily declining for decades (figures 4 and 5), we can say with absolute certainty that the economy is not a zero-sum game, that the cake is over, that it is possible to create wealth for everyone and that the profit of one does not automatically equate to the loss of the other. The free market has allowed hundreds of millions of people to get out of poverty, has allowed emerging countries to modernize and gain ground compared to countries on the technological frontier and will continue to improve the living conditions of the populations as it has always done.

Yet year after year, Oxfam reports confuse us: “The rich get richer, the poor get poorer. Inequality causes poverty. If the Scrooges didn’t evade taxes, there would be the resources to provide universal and free health and education services, putting an end to the privatization of public services”. It describes how a large part of the world’s income is in the hands of a tiny fraction of people. The report is based on a study by Credit Suisse, the “Global Wealth Report” which offers, for each country, an estimate of households’ net wealth, ie the difference between assets and debts. This implies, for example, that a wealthy young man in New York who takes out a mortgage to study at Harvard appears statistically poorer than a farmer in Laos who, having nothing, he will never even be able to get a loan. According to Credit Suisse, the percentage of adults with a net worth of less than $10,000 is 40.6 percent in Germany but only 14 percent in Greece and even 8 percent in Italy. Should we continue to suffer this empty rhetoric? The conclusions on the correctness of these measurements are up to you.

What can we conclude with this analysis? Piketty & Co. have certainly based a large part of their success on this mantra of inequality, whose erected wall is slowly coming down, piece by piece, starting with the numbers. We learned earlier how in their analyzes, they underestimated — or even excluded — important social security, medicare and other welfare state programs that inevitably go in favour of the bottom 50%. This is because only two types of income are erroneously considered: that from work and that from capital. In 2010 Piketty himself argued that of the $54 trillion in US wealth, the top 10% owned 70%, the middle class (10–50%) 25%, and the bottom 50% “only” 5%. With a series of corrections dictated by taxes and welfare,

In this regard, Zitelmann himself writes: «Other authors have published exhaustive criticisms of Piketty’s data collection and methodological errors, forcing him to retract some fundamental principles of his book. But I want to ask an entirely different question, one that I think has more meaning to most people than Piketty’s concern about wealth inequality. Whether capitalism tends to raise or lower overall living standards seems to me far more relevant than any alleged increase in inequality in the distribution of wealth. In other words: “What is more important for these hundreds of millions of people: that they no longer die of hunger,

I predict that the debate around inequality will change in the coming years while keeping the same relevance in the spotlight. It will finally become less ideological and more concrete, more consistent with the real purpose of the economy: allocating scarce resources in the best possible way. Thomas Piketty will be forced to retract his writings to maintain his professionalism. The result will be an interesting series of papers that could change the tables on redistribution and taxation, leaning towards what many call the “free market”. And I personally hope all of this happens.





4. Rainer Zitelmann: The power of capitalism

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