December 15, 2017

The bottom half of adults own less than 1% of total global wealth. The top 10% owns 88%.

Half of the world’s household wealth is in the hands of the richest 1%.

These are the findings of Credit Suisse’s latest Global Wealth Report, published last month.

The figures are unlikely to surprise anyone – since French economist Thomas Piketty published Capital in the twenty-first century in 2014, income and wealth inequality have been trendy topics. But as we end 2017, a decade on from a financial crash whose shadow continues to threaten the capitalist consensus, the figures should still make us pause. In advanced, Western economies the old adage that a rising tide lifts all boats no longer appears true. Assets – financial and non-financial – are increasingly out of reach for even those on middling incomes, and the intergenerational divide is growing. If capitalism is to survive, the capitalists are going to have to share their wealth.

Wealth inequality is getting worse

“Our calculations show that the top 1% of global wealth holders started the millennium with 45.5% of all household wealth. This share was about the same until 2006, then fell to 42.5% two years later. The downward trend reversed after 2008 and the share of the top 1% has been on an upward path ever since, passing the 2000 level in 2013 and achieving new peaks every year thereafter. According to our latest estimates, the top 1% own 50.1% of all household wealth in the world.”1

Take a moment to reflect on that: in the wake of the crash, at least in part caused by wealthy but irresponsible bankers, the top 1% have actually increased their proportion of global wealth. And while the wealthy have been getting wealthier, “in all regions except China, median wealth per adult is below the level recorded in 2007”.

Between 1983 and 2010, almost 40% of wealth growth went to the top 1%, three quarters went to the top 5%, as the bottom 60% saw their wealth decline
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This is exactly what the Resolution Foundation found in their analysis of UK wealth – while total wealth has increased since the crash, the wealth of a typical adult has fallen.2 In the US, the wealth gap has been widening for some time. The Economic Policy Institute found that between 1983 and 2010, almost 40% of wealth growth went to the top 1%, three quarters went to the top 5%, as the bottom 60% saw their wealth decline.3 Even the staunchest defender of capitalism would be hard-pressed to justify that.

Which is the nub of the issue: at the heart of the Anglo-Saxon capitalist model is a belief in fairness, that hard work and ingenuity pays. Wealth is fine, if its earned (just look at who Britons and Americans see as deserving of their wealth: inventors, engineers, scientists and founders of manufacturing companies). The problem is too much of it isn’t. While a shift worker turning up to work, day in day out, is relatively worse off than before the crash, those with substantial assets are doing just fine. That’s because asset price inflation is outstripping the rise in incomes.

Wealth creates wealth

This summer, Lloyds Bank reported that UK household wealth rose by 9%, or £892 billion, in 2016.4 In September, the latest US data revealed that household wealth increased by 1.8% during the second quarter of 2017.5

According to Lloyds, since 2006, the value of private housing stock in the UK, for example, has increased by £1.7 trillion, driven by a 51% increase in average house prices, and just a 9% increase in the number of privately owned homes. In America too, house price increases are making a sizeable contribution to wealth growth. Over the past few decades home owners, despite the financial crash, have seen their assets soar, while more and more people are being priced out of the property market, deepening the wealth inequality divide.

Quantitative easing (QE) has been a boon to the wealthy. The Bank of England’s extensive QE programme has inflated the value of financial assets, with 40% of the gains of rising share and bond prices going to the richest 5% of households
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The value of private pensions, which make up the greatest proportion of total UK wealth (followed by property and then financial wealth), have increased by 65% in a decade. The total amount invested in pensions has been boosted by auto-enrolment, which requires firms to sign up workers to occupational schemes, but also by the returns to equity, which UK pensions funds have tended to invest in more heavily than other countries’ funds. The Credit Suisse report points out equities have shown strong growth recently. Record high stock prices have been the key driver behind the wealth growth in America during the first half of 2017. It’s a good time to own shares.

And, of course, quantitative easing (QE) has been a boon to the wealthy. The Bank of England’s extensive QE programme, for example, has inflated the value of financial assets, with 40% of the gains of rising share and bond prices going to the richest 5% of households.6

So those fortunate enough to own property or shares, to have been able to save into a pension or other financial product, get wealthier just from owning wealth. Many will have worked hard to get to a position where they can invest, but once there, they can sit back and watch their money grow – benefiting from the frontline workers that make a business a success, and thereby drive up its share value; and the public infrastructure, like good schools and transport links, that drive up property prices.

Millennials are the biggest losers

The Credit Suisse report paints a particularly depressing picture for millennials, who “are not only likely to experience greater challenges in building their wealth over time, but also greater wealth inequality than previous generations.”

As the baby boomers enjoy their capital gains, Millennials are struggling to get a foot on the property ladder. The earnings squeeze is making saving and investing a distant aspiration, while many are paying back student loans their parents and grandparents never had to take out. And, at least in the UK, the meagre contribution levels expected of both employer and employee in auto-enrolment will deliver pensions worth a fraction of the generous final-salary schemes that baby boomers are enjoying.

A YouGov poll published last month found 44% of American Millennials would rather live in a socialist country, compared to 42% who would pick a capitalist one, and young Britons are similarly more disposed towards socialism, with more 18-24 year olds describing themselves as socialist than capitalist.
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Which brings us back to the question of fairness – the capitalist promise that hard work, talent and creativity will be justly rewarded.

Millennials can work as hard as previous generations, yet struggle to develop even remotely comparable wealth – all but priced out of asset ownership. Which helps explain why so many young people are disillusioned with capitalism. A YouGov poll published last month found 44% of American Millennials would rather live in a socialist country, compared to 42% who would pick a capitalist one, and young Britons are similarly more disposed towards socialism, with more 18-24 year olds describing themselves as socialist than capitalist.

So, as we reflect on the extreme concentration of wealth, we should ask ourselves whether a new approach is needed. It is easy to dismiss the critics of wealth inequality, many of whom, like Piketty, are advocates of wealth taxes. And countries like Sweden and France have backtracked from theirs, citing millionaire flight and disincentives to entrepreneurialism. But much of the asset inflation of the past few decades is the result of luck not endeavour, and that sits uncomfortably for many people – especially when taxes on earnings (the proceeds of labour) are higher than those on unearned income (capital gains).

Perhaps we have too easily bought into the idea that the super wealthy will up and leave at the first sight of fair taxation – an American study published last month certainly seems to challenge this, finding millionaires are just as place-orientated as the rest of us. There are numerous forms that wealth taxes can take – from capital gains to mansion taxes, from super taxes on luxury goods to a small percentage tax on net worth – and each comes with varying degrees of practicality and risk. But now is the time to look more closely at those options, because achieving a more even wealth distribution would be a small price to pay for saving capitalism.

FOOTNOTES
  1. .Global Wealth Report 2017, Credit Suisse Research Institute, November 2017
  2. .‘Britain’s increasingly unevenly shared property wealth is driving up inequality after a decade-long fall’, Resolution Foundation, 18 June 2017
  3. .The State of Working America: Wealth, Economic Policy Institute
  4. .‘UK household wealth rises to over £10 trillion’, Lloyds Bank, 8 August 2017
  5. Sho Chandra, ‘U.S. household wealth rises $1.7 trillion to another record’, Bloomberg Markets, 21 September 2017
  6. Larry Elliott, ‘Britain’s richest 5% gained most from quantitative easing – Bank of England’, The Guardian, 23 August 2012

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