I may be mistaken with this first assumption: I assume Tim Worstall is, at least moderately, intelligent. Whether he is or not, Tim Worstall epitomizes the practice of using one's intelligence as a tool for developing and deploying subterfuge, to justify any and all nonsense one can come up with.
I typically try to ignore Worstall's garbage, but I found myself so annoyed by the ridiculous assertions in his current article that I had to respond — though unlike Worstall, I don't have the advantage of the asymmetric media exposure which confers columnists like him an incredible advantage when it comes to readership / reach. But, I have to try...
Worstall's Insane Assertion: Wealth is Not Counted ProperlyWorstall states:
"It is true that they [the top 10% of people] have 76% of the wealth as it is being counted. But that’s the very problem, the manner in which the wealth is being counted."Why does Worstall assert that wealth is measured wrong? In summary, he contends that this 76% of wealth held by the few is not defined accurately because it is financial wealth and it does not include a couple things: the value of human capital and, to a lesser degree, the (assumed future) value of pensions and retiree benefit plans.
When most people are asked to define wealth, they typically arrive at a definition that sure sounds like financial wealth, and this will almost invariably include the assets an individual currently holds and, when enumerated, this wealth will include things like: cash, cash equivalents (instantly accessible holdings at a bank, etc), physical property (the unencumbered portion of cars, homes, etc), stocks and bonds, and most anything they feel can be reasonably quickly converted into cash. These are core components of material prosperity, or, that is, being "rich" by way of having accumulated assets that can readily be converted to cash, traded for other items of value, or pledged as collateral against loans.
Redefining WealthNow, according to Worstall's view of reality, financial wealth doesn't properly reflect true wealth and its distribution throughout society. In order to market his absurd concepts and realize his agenda, he needs to convince people that "wealth" is not what most people consider it to be (i.e., financial wealth), but rather that it should additionally include unrealized-potential, of which, per his conjecture, there is a meaningful and measurable net-present-value (NPV) that will somehow dramatically alter the data and thus the statistical view of wealth distribution — and of course, he wants his proposed definition of wealth to somehow show that the "top" doesn't hold such a large proportion of all wealth.
There are so many holes in his proposed redefinition of wealth that I hardly know where to begin my analysis. Mr. Worstall apparently has an incredible ability to suddenly forget basic accounting and now confuse income-statement items with balance-sheet items. That is, within the foundation of his ideal new wealth-accounting mathematics there will be a ridiculous new condition where income is intentionally contorted into an asset. Income and wealth (assets) are two completely different things, Tim. I learned this very, very early on in life, as I am sure you did.
Even if you have a very high income, you may not be at all wealthy, depending on your spending habits. Wealth is what remains of your accumulate income, as assets, after you have made your expenditures and offset your liabilities. Assuming that you have started life with a zero balance, wealth is accumulated by retaining, repeatedly, a portion of your disposable income, and having overcome a propensity to consume, instead opting to fortify your personal balance sheet (i.e., your assets / wealth).
Unemployment Insurance = A Component of Wealth? Yeah, sure!In making his pitch for a new definition of wealth, Tim even hurls this incredibly weak profession:
"Unemployment insurance has a value – all insurance policies have a value. That if I get fired I have an income is a source of wealth to me. But that’s not counted."Well, duh, Tim... unemployment insurance is not counted as wealth because it is income, when actually collected, and this income is realized only upon becoming unemployed. This is further from being any part of wealth than the number of discarded aluminum cans laying beside a street when you walk or drive by: at least those cans can be collected and recycled for cash, without the need to be unemployed as a precondition to realizing that gain. Seriously, who falls for your baloney, Tim? If you are unemployed, and even if you are collecting unemployment insurance, it is not very likely that you are accumulating wealth; just ask all the long-term unemployed during the recent great recession that were lucky just to be able to keep their house!
Human Capital = Wealth?
"The ONS also produced figures for “human capital”, putting a monetary value on a person’s qualifications, age, health, personality and skills.
The value of the UK’s human capital increased by £890billion to £19.2 trillion last year"
Valuing Human Capital
"... 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) — a country famous for its class constraints.
Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes.
Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths."
Proof of Human-Capital Value in the Present (or lack of it)
And, I can almost guarantee that your landlord, if you rent, couldn't care less about any supposed future-production-potential-valued-in-present-"wealth", but only about whether you can pay your rent right now in that universally accepted bit of wealth that truly matters: cash on hand.
Human Capital and TaxesNext, if human capital is so important, why does the USA federal tax-code punish income resulting from the application of your human capital (i.e., you working) so much more than it punishes income resulting from putting existing financial wealth into play (i.e., investments)? Regular income — wages earned from working at a typical job — is taxed at a much higher rate than income, within the same total earnings bracket, produced from dividends or capital gains. Well, aside from the most egregious example of a tax that exempts a select few, via the "carried interest" tax treatment, that is.
If Worstall can somehow distort income and the possibility of future income into a form of current wealth, then shouldn't that wage income also be treated just like the financial wealth income when it is employed in investments? Wealth is wealth, according to Tim. So, why not lower the ordinary income tax rates for a married couple filing jointly, and making under $75K/year, from their current 15% down to where they match the zero percent tax that would accompany the same income if it were all produced from long-term capital gains [see table here]?
The simple fact is that there is a huge tax-code preference (favor; i.e., lower tax rate) for financial wealth derived from existing financial wealth as compared to income produced from human capital. Clearly the US tax code considers income from human capital to be something totally different from income produced from existing financial wealth. The tax code is clearly telling us all that it is better, more advantageous by far, to have financial wealth upon which income can be derived than to produce income from wages. That entire mess is a topic for another day, because it is almost certainly to blame for a large part of the real financial wealth-distribution issue, whereby most wealth is incredibly concentrated among the top few percent.
PensionsTim did mention one interesting bit regarding the measurement of wealth: how the funds held in a 401K are counted towards wealth, but how a defined pension future annual payout is not counted... again, my initial reaction is to simply say "duh, Tim"... as a 401K, in theory, can be reasonably quickly converted into cash in the present (less a huge tax-penalty) whereas the defined pension cannot (generally, to my knowledge). Again, Tim confuses (intentionally) future income with what can be attributed to current wealth.
I would argue that, when counting 401K values in financial wealth, that to be counted fairly in the present towards financial wealth, one would have to reduce the value of the 401K balance by the amount of any applicable taxes and penalties. Aside from that, the 401K can be a current cash-equivalent asset whereas the defined pension plan cannot, unless some corporation wants to buy the rights to your pension (if even assignable) and cut you a check right now. I am not sure about the logistics or legality of that... I will look into it more.