World inequality--BECKER

A recent UN report on world inequality of wealth attracted widespread media coverage. The Report finds that the richest 2 percent of adults own half the world's assets, which clearly indicates a very skewed world distribution of assets. When put into context, however, the inequality in wealth appropriately defined is not nearly as large as the report might suggest, and wealth inequality in the world has almost surely become smaller over time, not larger as some in the media reported. The UN Report was prepared by very good economists, and does a commendable job in what it tries to do. That is to measure the value in 2000 of the world distribution of physical and financial assets, net of any debt--this is usually called net worth. The authors had direct wealth data for countries that have more than half the world's population, and an even larger share of its wealth, and they infer wealth in countries missing from their data. Their results do show both considerable inequality in assets, and a long tail at the upper end of asset holdings--called skewness in statistical language. The report does not even attempt to show what happened to world inequality over time, even though some of the media reports that it demonstrates that inequality greatly increased in recent decades. World inequality in wealth is to a large extent determined by inequality across nations. Comprehensive data on what happened to the distribution of assets in the world over time are not available, but the income data show a sizeable decline, not increase, in world income inequality since 1980. This is mainly but by no means entirely due to the remarkable rate of growth in incomes in two quite poor nations, China and India, which contain about 37 percent of the world's population. Studies also show that both the number of and the fraction of the world's population who live on either $1 or $2 of income per day has fallen quite sharply during the past 25 years, again partly due to China's and India's growth. Earnings, not incomes from physical or financial capital, are the predominant determinant of incomes for the vast majority of persons in the world in rich as well as poor nations. Put differently, human capital, not assets, is the most important form in which people hold their wealth. Human capital is itself determined by education, training, nutrition, and other forms of health investment. Human capital wealth that determines earnings is about three times as large as wealth in the form of physical assets of all types. Such wealth from human capital is much more equally distributed and is much less skewed in its distribution than are assets. Even earnings and money incomes exclude the contribution of better health to people's "real" income, defined as the incomes that produce wellbeing. World inequality in health among countries has declined greatly since 1960 when measured by life expectancy at various ages, even thought the AIDS epidemic in Africa has largely eliminated the gains in life expectancy in that continent after 1970. Inequality in "full" income among countries has declined much more rapidly than inequality in per capita GDP since 1960, where the growth in full income is defined as the sum of the growth in GDP plus the value placed by individuals in different countries on the improvements in their life expectancy--for definitions and various results on world inequality, see the article by Becker, Philipson, and Soares in the American Economic Review, March 2005. Income inequality within the United States and many other countries has indeed grown a lot since 1980, in part due to much greater returns on education and other human capital, and in part due the somewhat related growth in incomes at the upper end that Posner discusses. This widening inequality appears to be largely due to technological and other changes, such as globalization, that have increased returns to persons with more education and other human capital, including high-end abilities. However, inequality in life expectancy has fallen within most of the developed countries as a result of more equal access to health care---in the U.S. due mainly to the growth since 1970 of Medicare and Medicaid. So while inequality in full income probably also grew, and perhaps substantially, it grew more slowly than did inequality in earnings and incomes on assets. My discussion should not be construed as complacency about the inequality found within countries like the United States, or among countries. For example, America should do a much better job of providing a way for able young persons from more disadvantaged backgrounds to finish high school and go to college--the past 25 years have been devastating for persons with little education. This is not an easy problem, but head start and related early childhood programs seem to be effective, legalization of drugs would reduce the temptation for inner city youth to drop out of school to sell drugs, and I also support greater competition among schools. Unlike Posner, I do not support the estate tax because it brings in little tax revenue relative to the large costs involved in legally avoiding this tax--through trusts and the like-- and also in illegally evading this tax (see my more extended discussion of the estate tax in my post on May 15, 2005). Many other poor countries should be following China and India's example and open up their economies to competition and world trade, so that they too can grow faster. Similarly, the rich countries have to reduce their restrictions on imports of goods produced by developing countries, and by countries that want to be developing. To conclude, it is worth remembering that world inequality in "real" incomes has declined, not increased, a lot during the past 25 years. Much more can be done to equalize opportunities both within and between nations, yet it is unwise to concentrate attention primarily on inequality in assets. This is one component of inequality, but it is by no means the major determinant of inequality in wellbeing.

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