Why we don't believe anything said about the wealth distribution

The World Inequality Report is out in a new and fresh edition. In it is the reason why we don’t believe anything anyone says about the wealth distribution. When looking at income the definitions are:

We call this “post-replacement, pre-income tax” income. This definition of income includes most incash redistribution, which occurs through pension and unemployment insurance. Another important income type corresponds to income measured after all income, wealth and consumption taxes are deducted, and after all non-replacement transfers (e.g. healthcare, disability and housing benefits) are added. We call this “post-tax income”. In this report, we alternate between the two concepts, using “post-replacement, preincome tax” as the benchmark

What matters is income after the influences of government on changing income. We might even add a third, after all the consumption available through the government provision of services - education say. But the base concept is clear. Government influences incomes, the correct measure of incomes as they are is after the influences of government upon incomes.

When looking at wealth however:

Household wealth is defined as the sum of financial assets (e.g. deposits, stocks, bonds, equity) and non-financial assets (e.g. housing, business), net of debts, possessed by individuals.

Wealth however is defined as being the pure market value. It does not take any account of what government does to influence. This is clearly an entirely different concept.

If we take a step back into the research by Saez and Zucman (two of the four who produced this World Inequality Report) we find this becomes absurd. Fully funded pension pots are wealth, the state pension is not, nor are unfunded pensions promises like certain public sector ones. When trying to determine how rich people are, the distribution of wealth among people, this is clearly untenable.

That paper even gives us the wealth measurement tool required. We can look at an income stream (and a stream of benefits from a service like health or education can be treated in exactly the same manner, should be in fact) and capitalise it, that capitalised value being the wealth. This is exactly how they treat possible wealth which doesn’t have an obvious market price. So, that’s what we should do to things that are wealth that don’t have an obvious market price.

What the factor used to create that net present value of the income/consumption stream is matters. Say, perhaps, 20x for market instruments, akin to a 5% discount rate. For something significantly reliable and inflation adjusted - government benefits say - 40 might be more appropriate, closer to 2%.

At which point:

Social protection and health together account for more than half of all of central government own expenditure. In 2020-21 spending on social protection increased to £242.7 billion compared to £221.2 billion in the previous year.

£250 billion among friends - £5 to £10 trillion when capitalised. We should add the NHS as well. After all, the selling point is the system’s equity so we really must include it in a calculation of how equal we all are. Add say another £7.5 trillion.

But total household wealth is £15 trillion. Yet, at an extreme valuation government is moving around £17.5 trillion in wealth already. We could even raise that number again by claiming that as all benefit equally from the entire £700 billion government spend then that’s the sum which should be capitalised.

Looking at the pre-government influence number for the wealth distribution is false. Worse than that, it’s not even a useful number.

No, think on it. Say that we instituted a universal basic income at the real living wage. That roughly £20,000 a year claimed. Not that we can, it’s too high but just imagine. That clearly changes the wealth distribution - every adult in the country has a £20k a year income, for a lifetime, that’s a significant chunk of wealth. We know how to value that too, it’s the price of an annuity that would produce that income - a £million or two say.

But by the current measures of wealth and the wealth distribution such a plan would change the wealth distribution by not one single farthing, groat or bawbee.

The entire analysis of and conversation about the wealth distribution is wrong and we don’t believe an iota of it. Simply because it is being measured in the wrong way. It is being measured before the influence of government upon that distribution. Which is not just wrong it’s absurd for it’s a prelude to a discussion of what government should do about that distribution. But if we don’t measure the effect of government then government action will change nothing, will it?

Until they fix this base logical problem the entire wealth distribution literature should be ignored. It won’t be, but should.