Fixing inequality is a tricky business

The gap between rich and poor is a growing problem. But fixing inequality isn't as simple as just squeezing the rich till they squeak, says Merryn Somerset Webb.

Ray Dalio

© 2018 Bloomberg Finance LP

The growing wealth gap in the US is, says billionaire investor Ray Dalio in the Financial Times, a national emergency. If we don't do something about it, he says, "we are all going to try and kill each other". In general, I think it is better for multibillionaires to refrain from 1) criticising the system that made them multibillionaires, and 2) suggesting ways for other people to have fewer chances of becoming multibillionaires than they had.

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You can't negate your own use of system failure by demanding the system be fixed when you have finished with it. And it isn't nice to demand that the "rich" are soaked when you yourself are so rich that no tax can ever begin to make a dent in your own lifestyle. It also isn't a given that the wealth gap is as much a problem as publicity-hungry billionaires like to pretend they think it is.

It is true that US household wealth as a proportion of GDP has jumped from a longer-term average of under 400% of GDP to more like 550%. And its distribution has shifted: according to James Ferguson of MacroStrategy, the top 1% has seen its percentage share of wealth grow from 24% to 29%, while that of the middle class has fallen from 32% to 21%.

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But this isn't as simple as it seems. The first thing to note, says Ferguson (who will be at our Wealth Summit on 22 November come and argue this one with him on the day) is that much of the rise in wealth comes from the bond market (we talk this week about why stockmarkets are shrinking and debt markets growing). But as interest rates rise and defaults begin, much of it will evaporate. Secondly, a big part of the rise in wealth inequality is about people living longer. Older people are automatically richer than the young. Historically the main trigger for wealth redistribution has been their deaths. So lots of those in the bottom wealth quintiles are less unnaturally poor, than just young. And those in the top quintiles, less unnaturally rich than just old.

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Still, none of this will make the topic less politically fraught. And there are statistics that should worry us. Dalio notes that 50 years ago, just 6.5% of corporate revenues went to shareholders. Today it's 13%. Less is going to workers in the US and less to the taxman. Corporate profits have ballooned since the mid-1970s. But as Pictet Asset Management's Luca Paolini points out, corporate tax revenues have not.

You can debate the extent to which this is part of a cycle, or a market failure that government must correct. But either way, politics is about to make it swing in the other direction we talk in this week's magazine about how a socialist government could make that happen in the UK (with the inevitable unpleasant overshoot of course).

We also have a chart showing how the US equity market has disconnected itself from corporate profits over the last three years. It has risen. They have stayed flat. A bull market is usually driven by rising margins. If margins are no longer rising and are soon to be squeezed by a rising share of profits being redirected to workers and the taxman, should you worry about investing in large US stocks? Probably.

The UK suffers many of the same issues too: but the real yield on the FTSE 100, along with polls suggesting that a Corbyn government is still very unlikely, should give investors here a level of comfort. The UK remains one of the few good value markets in the world.




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