From a study that has generated some headlines:
The richest 2% of adults in the world own more than half of global household wealth according to a path-breaking study released today by the Helsinki-based World Institute for Development Economics Research of the United Nations University (UNU-WIDER).
The most comprehensive study of personal wealth ever undertaken also reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total. In contrast, the bottom half of the world adult population owned barely 1% of global wealth…
‘One should be clear about what is meant by “wealth”,’ say co-authors James Davies of the University of Western Ontario, Anthony Shorrocks and Susanna Sandstrom of UNU-WIDER, and Edward Wolff of New York University. ‘In everyday conversation the term “wealth” often signifies little more than “money income”. On other occasions economists use “wealth” to refer to the value of all household resources, including human capabilities.’
‘We use the term in its long-established sense of net worth: the value of physical and financial assets less debts. In this respect, wealth represents the ownership of capital. Although capital is only one part of personal resources, it is widely believed to have a disproportionate impact on household wellbeing and economic success, and more broadly on economic development and growth.’
That last sentence deserves some scrutiny. The link between wealth and economic well-being is not a direct one: wealth generates income, and income is linked to welfare. Neither relationship appears to be very strong.
Firstly, wealth is not just physical and financial: human capital matters, too. My co-author Pascal St-Amour calculates that in the US, human capital is almost an order of magnitude larger than tangible capital. Human capital is of course not equally distributed – inequality in earned income is high and rising – but it is much less concentrated than nonhuman wealth.
Secondly, although it is a commonplace to note that income isn’t the same thing thing as welfare, it’s still an important point to remember. And again, the news here may not be so bad. As the World Bank’s Charles Kenney put it in the title of a 2004 article in World Development, "Why Are We Worried About Income? Nearly Everything that Matters is Converging":
Convergence of national GDP/capita numbers is a common, but narrow, measure of global success or failure in development. This paper takes a broader range of quality of life variables covering health, education, rights and infrastructure and examines if they are converging across countries. It finds that these measures are converging as a rule and (where we have data) that they have been converging for some time.
Inequality is an important issue. But we should be focusing our attention on forms of inequality that matter most for economic welfare.
Worthwhile Canadian Initiative 
My big problem with worrying about inequality is that it tends to lead people in the wrong direction.
Why is inequality a problem? Usually people who worry about it have one of two issues that perturb them (or both). 1) They hate the rich on general principle, which is an unhealthy obsession in my opinion. 2) They want to help the neediest in society.
I won’t dwell on group #1, but if the goal is to help the poor to move up the income curve, it is helpful to think about whether this goal is helped or hurt by hurting “the rich”. The poor can move further up the income curve by squeezing the curve to make the tails disappear in effect, or one can move the whole curve to the right. If moving the whole curve to the right is a more effective way to move the poor to the right, then this implies that obsessing about inequality will tend to create the impetus to move in the exact opposite direction one should go in, namely trying to hurt the top of the income ladder in the hope that somehow this translates into helping the bottom of the ladder. I’m inclined to think it merely lowers the entire ladder, leaving everyone on the same rung as before.
I believe the best approach therefore is to have policies that create new wealth in general instead of focusing on redistributing existing wealth. The size of the pie is not fixed, and by making a bigger pie we can all get a bigger slice.
I suggest eliminating or reducing as many investment taxes as possible (capital gains, dividends, corporate taxes), since this is the most likely tax group to invest the newly untaxed money instead of consuming it, while at the same time not discouraging anyone from creating new wealth via working instead of sitting home receiving a government check.
Second, as much as my hero Milton Friedman liked the flat income tax, that seems politically implausible in any developed country that currently has a graduated income tax, although I applaud its implementation in any country that is mostly poor, such as the trend of its implementation in eastern Europe. Therefore I suggest simply abolishing any income taxes that remain on the working poor in “rich” countries. Along the same lines, I think that the Social security payroll taxes are a bad idea. If these payroll taxes are supposed to reach x dollars, I suggest instead earmarking the first x dollars from the general corporate tax proceeds to Social Security, apportioned to future retirees the way it would have been if it had come from payroll taxes. This approach ends a disincentive to hiring and to giving raises to workers.
I also suggest two other ways to help those on the bottom, both inspired by Phelps’ writings post-Nobel announcements. Enact corporate tax deductions based on wages paid to low wage workers, gradually phasing out the deductions as wages rise. This would tend to reduce machine replacement of labor if nothing else, and would encourage more new businesses aimed at hiring low skill workers, and help expand such exisiting businesses as well.
The other suggestion is regards to globalization layoff issues. Job retraining paid for by government is notoriously (in my mind anyway) ineffective. Instead I suggest implementing corporate tax deductions (again!) for worker (re)training. The devil is in the details. Outsourced training seems unambiguous enough and not open to fraud. Internal training seems harder to implement without tax scheming that doesn’t represent genuine training. I suggest having a formal contract between employer and employee, stating that upon completing x training, the employee get y raise. It ought to be possible to at least give a deduction based on the employee raise that indirectly (partially) compensates for the (re)training costs. Another possibility is to skew the tax deductions towards new employee training, while retaining some deductions for preexisting employee training. The whole point being that businesses that spend money on training employees in new skills will be far more likely to be leveraged into employed skills than if the government funded it blindly.
Finally, I am still much more in favor of the usual poverty mitigation
of the EITC (or something similarly structured) than a handout to people on the condition that they don’t work, the latter of which has obvious negative disincentives.
Finally (again lol), if one is appalled at poverty around the world while people in the “rich” countries have the majority of the wealth, then neding international trade barriers seems an imperitive, since most of the gains go to such dirt poor countries. Most, but not all. The fact remains that “rich” countries gain by increased international trade too,so for selfish reasons we ought to drop, or better yet, eliminate our trade barriers to increase our own prosperity. Also, the poorest among any rich country disproportionately spend their income on food and clothing compared to those with higher incomes. Since among the biggest gains from increased trade are lower cothing and food prices, this would seem to be a no-brainer.
Hopefully it is clear that most of my proposals might likely get nixed by those focusing on inequality rather than poverty reduction because they might also “help the rich”.
Message to Bono and Bob Geldof: Support Property Rights and Take Some Time Off
It is not surprising that measures of world-wide wealth inequality highlight how well-off the richest people are in Europe, North America, and some parts of Asia, in comparison, especially, with most people in Africa.