Friday, December 15, 2006

Sources of inequality

Recently we saw the release of two interesting reports on household wealth: the Canadian household wealth figures for 2005 from Statistics Canada, and a report from the UN University's World Institute for Development and Economics (WIDE).

The WIDE release and the StatsCan release cover a lot of ground. Incidentally, the StatsCan release is the first of is kind to offer such detailed data on Canada's household wealth distribution since their last such release in 1995 (we're a bit behind the U.S. and the U.K. in the frequency in which we collect this particular type of data). An attempt is made to actually isolate the sources of inequality, which makes for a unique (as far as I know) opportunity for cross country comparisons of sources of inequality.

What can we learn about the sources of inequality of wealth in Canada?

One thing we know is that the middle class holds the majority of their wealth in the form of their principal residence .
Graph via TD
For comparison:

Graph source: WIDE

Secondly, the richest Canadians are likely to hold a greater portion of their wealth in stocks, relative to lower classes.

TD economists Don Drummond and David Tulk offer their analysis on this:

A distinguishing feature of the 1999 and 2005 wealth surveys is the decline in the real value of stock holdings. As the wealthy hold a disproportionate amount of stocks, the decline in the real value is the principal reason why the concentration of wealth in the highest quintile did not increase by more. If investment returns rise the trend towards growing wealth disparities will likely intensify. This could be compounded by sluggish wage gains in the low end and the financial challenge of immigrants – the main source of growth in the younger, less affluent population.

The National Post says tomato differently:

Net wealth -- non-financial and financial assets minus liabilities -- jumped to 640% of annual disposable income in 2005 from 527% in 2000 and just 370% in 1995, when the country was struggling to emerge from a recession.
The surge in wealth in 2005 reflects rising stock markets and once again the positive terms of trade shock where a stronger dollar is making imports cheaper while export prices surge.
That appears to more than offset total debt of 126% of disposable income in 2005.

The point is, the source of household wealth differs across classes in Canada.

I have two thoughts on this. First, equality varies across time and space. Placing countries on an ordinal scale seems bizarre (to me, anyway), likewise to drawing conclusions based on "trends." The richest Canadians hold a high portion their wealth in stocks, which vary in their returns across time, therefore "equality" is not a stationary measure. Further, there's of course often heterogenity in the data across regions. Perhaps one of the key benefits of these studies is that they allow us to examine the nature of sources of wealth, rather than pointing us to "trends," or forcing cross-sectional data into ordinal scales where both are inappropriate beyond very general terms.

Second, there are policy implications. By understanding the sources of inequality we can fight the impulse to redistribute wealth based on "trends." Further, it should be perfectly clear to policy makers that the needs of investors should be accommodated (since we know where household wealth is concentrated). Onay oremay orporatecay axestay. Right? Clear.

There's so much to explore on this subject, but I'll quickly note one of the many interesting aspects of equality: tax shifting, which neither study had anything to say about, unfortunately (but perhaps understandably so in the Canadian context). Alan Reynolds from yesterday's WSJ (h/t Greg Mankiw):

As was well-documented years ago by economists Roger Gordon and Joel Slemrod, a great deal of the apparent increase in reported high incomes has been due to "tax shifting." That is, lower individual tax rates induced thousands of businesses to shift from filing under the corporate tax system to filing under the individual tax system, often as limited liability companies or Subchapter S corporations.

As far as I can tell, this doesn't seem like a big problem in Canada. Jack Mintz and Michael Smart (2001):

Canada integrates corporate and personal taxes by providing a dividend tax credit and excluding a portion of capital gains from taxation. At the small business level, the combined corporate and personal tax rate on equity income is roughly equal to the personal rate on employment and interest income, while for large companies combined tax rates on equity income exceed that of other income. When the small corporate tax rate has been changed in the past, governments have typically adjusted dividend and capital gains tax rates to maintain integration at the small-business level, in order to minimize incentives for shifting between corporate and personal tax bases.

The subject of "equality" often makes me want to rip my hair out, but there are surely thousands of useful, interesting ways to look at it, as StatsCan and WIDE have proven. What a thick and intriguing subject. Please, let's stop dissing it.


amphimacer said...

Keep your hair, t.d. The reason the upper crust doesn't want to discuss equality (this includes successful university professors, politicians, economists, etc., etc.) is that they are among the unequally wealthy. No, I wouldn't call it a conspiracy, but yes, they are, in a sense, without necessarily having coordinated anything, in it together.

true dough said...

First, anyone, rich or poor, can appreciate the fact that a wealth differential of 0 is ludicrous (or an income differential of 0, for that matter). Of course, the poor have a unique incentive to care about inequality because, well, they're poor. But I wouldn't conclude that they're the only ones who gain from living in an economy that encourages capital accumulation (or, going back to income, that pays commensurate to productivity). Critics of equality studies, rich or poor, are disgusted by the idea that equality is viewed as some sort of stable equilibrium, and so they should be.

Second, I should say that I'm not suggesting that all equality studies are dismissed strictly on such simple grounds. Case in point: there are some excellent criticisms coming out against Piketty and Saez's paper (if you've been keeping up with that), based on their methodology. And THAT's the kind of criticism I don't mind reading.