Ten mistakes that permeated the Channel 4 ‘How Rich Are You?’ programme on inequality (part 1)

On Monday I appeared on a (recorded) Channel 4 ‘infotainment’ programme called ‘How Rich Are You?’ The appearance was sold to me as a serious attempt to discuss inequality: whether it mattered, its implications, and what policies we might adopt to deal with any of these problems. In truth, as anyone who watched the show would see, it was instead a programme with a highly biased reading of the literature on this subject and which was littered with economic fallacies, falsehoods and erroneous thinking. In this two-part article I set out 10 mistakes, fallacies, or misleading claims that sprung up at least once on the show (if not more often).

1) Getting confused between wealth and income

The show constantly conflated, and moved seamlessly between talking about, income and wealth. In the very first minute of the show, the presenter Richard Bacon spoke about ‘wealth extremes’ and explained to viewers that the show would allow them to find out where they stood. But that whole first part of the show was about asking people where they stood in the distribution of income. Indeed, the very first pie chart shown on screen claimed ‘only 2% of people correctly estimated their wealth’, when it was clear again that what was being discussed was where people stood on the income spectrum. This sort change of the actual topic under discussion occurred throughout the show, making it difficult to follow exactly what the problem was that we were all there to talk about.

2) That wealth is a fixed pie

Whilst I have no doubt the people who produced the show understand that economic growth can mean everyone can become better off over time, much of the early discussion on inequality was presented as if the stock of wealth or even overall income was fixed. This was done through lots of loaded language, like the rich ‘siphon off money’ etc., and at times assertions that bordered on saying the rich were only rich because of exploitation that made the poor poorer. This is, to put it lightly, historically ignorant. To pluck an example from Deirdre McCloskey’s recent book, the average Swede in 1800 made the equivalent of $3 a day – now it’s as high as $120 a day. That hasn’t come about because of redistribution or bargaining for a bigger piece of a fixed pie, but because of the dynamic gains coming from innovative capitalism. The irony here is that McCloskey’s work concludes that it was a shift in the ideas away from the kind of anti-wealth narrative which dominated the show that facilitated the great enrichment we have seen over the last two centuries.

3) That poverty and inequality are interchangeable

Another theme that ran through much of the show was the interchangeable discussion of poverty and inequality. There was lots of discussion of people struggling to get by on low incomes – contrasted with those doing well at the top. But, again, there is little evidence that the rich being rich has caused the poverty of the poor. In fact, in recent years poor productivity performance coupled with a very high cost of living have been the main reasons why living standards have worsened. But attempting to do something about these problems would lead you down a very different policy path to one in which you were concerned primarily with the gap between rich and poor.

There may well be policy changes that could reduce poverty AND inequality at the same time. Liberalising our planning laws, for example, could reduce house prices. But we would want to do these because they are good for the economy and pro-poor – as opposed to because they might reduce the income gap. Unfortunately, rather than discuss how productivity growth could be enhanced or the cost of living reduced, much of the show simply discussed undesirable outcomes that we might expect to be associated with low incomes – and laid the blame firmly at the door of inequality, calling for yet more redistribution as a solution rather than broader growth.

4) That inequality is in and of itself a serious problem

The question that John Cochrane has asked on this blog before is: ‘Why is inequality a problem in and of itself, rather than representing a symptom of problems that should be fixed for their own sake?’ I’ve re-watched the show a few times, but am yet to find a convincing answer. Sure, some activities may lead to both more inequality and worse living conditions for all. It may be that educational inequalities – due to lousy state schooling in some areas – lead to diverging outcomes. But we can deal with these problems at source. Once you strip out these reasons for inequality, often the fault of existing policies, the real questions that egalitarians have to answer are: why does Bill Gates getting rich from a new Microsoft product (which may increase inequality) harm the poor? What’s the transmission mechanism? In other words, why does some people earning much more than others matter?

5) That Spirit Level style analysis is slam dunk evidence there is a transmission mechanism

One section of the show echoed the infamous Spirit Level (SL) with evidence that inequality was responsible for a range of social ills – essentially with correlations showing that if the gap is bigger we are more likely to: die earlier, marry poorer people and have bad educational attainment. It should be pretty obvious that most of these things are determined by absolute deprivation, assortative mating at universities and poor state schooling in many areas – not the ‘gap’ between rich and poor per se. They may correlate with the gap, but this is not the same as explanatory power, and so is not a useful guide to policy. It’s for this reason that the Spirit Level, which was based on lots of these correlations, has been labelled as ‘pseudoscientific nonsense’, and is not regarded as important work by serious academics in this area. To take just one critique, my colleague Christopher Snowdon has shown (using the same data sources as Wilson and Pickett) that ‘the results have been influenced by the choice of countries and indicators. Including just a handful of additional countries is enough to make many of the SL graphs, which show data points scattering around a straight line, dissolve into shapeless point clouds.’ In short, their analysis – the type of analysis at the heart of the show’s approach – amounts to a load of scatter plots which show links between inequality and a range of negative indicators but fails to account for endogenous or control variables, or reverse causation, with the analysis highly influenced by the selection of countries and time periods. To say this level of analysis is not high quality or robust would be an understatement.

6) Dodgy and misleading statistics on the distribution of income and wealth

One of the key parts of the show entailed asking people how much they earned, and where they thought they were on the distribution of income. This was clearly designed to show that as a country, we are poorer than we think we are (so individuals found themselves much higher than they were expecting!). For example, if I were to answer the quiz, I would find myself just inside the top 15 per cent of earners – though I feel nowhere near the top of the income pile. This is designed to make me shocked about the low incomes received by many people in the country – and presumably, how small the group is who earn significantly more than me.

But this crude comparison of where we are on the income scale misses a few obvious realities. First of all, most of us would tend to unwittingly judge ourselves in comparison to our contemporaries – i.e. our age cohort – and to people with similar work patterns to us. It is quite difficult conceptually to judge where you on the income spectrum in relation to someone working part-time or, say, just a few hours a week on a Saturday. There is also a clear lifecycle effect such that as you get older, you are likely to move up the income scale too.

Perhaps more important than this comparison effect though is the fact that the data does not take into consideration living costs, pensions provision, household composition, or the existence of the welfare state. If you live in London, then high rent or housing costs might mean that although your earnings put you in a high income bracket, your real disposable income after essentials is much lower. If you have lots of dependents, then your position on a household basis may be much lower. If you are contributing lots into a pension to smooth your living standards including your retirement, then this will reduce your effective disposable income and make you feel poorer in income terms than you actually are (particularly now we have a flat-rate state pension). And of course, what ultimately matters for most people is their living standards after taxes and benefits – ignoring this means not informing people that we already have significant redistribution by the state. Recent ONS analysis on households shows the average income of the richest fifth of households is fifteen times higher than the poorest fifth before taxes and benefits – but this falls to just four times more afterwards. It would seem pretty important for a programme lamenting huge inequality and with many guests calling for much higher redistribution to mention this.

Perhaps more misleading still, however, were some of the statistics used on wealth – including the use of Oxfam’s ‘just 5 families have as much wealth as the poorest 20 per cent of the population’. This sort of measure has been highly criticised because it uses net wealth figures – which imply people who may have very high incomes and significant assets but also have significant debts (such as large mortgages) would be defined as ‘poor’. In other words, Oxfam’s methodology means that a child with £1 would be wealthier than thousands of people with household debts.  The effect of this methodology (adding negative net wealth values up) means that in order to get to a high total wealth number for those at the bottom end you have to move a long way up the distribution – giving us the meaningless statistic quoted above. Judging the wealth of the poor in this way makes no sense.

Mistakes 7-10 will be discussed in Part 2.

6 thoughts on “Ten mistakes that permeated the Channel 4 ‘How Rich Are You?’ programme on inequality (part 1)”

  1. Posted 13/11/2014 at 15:05 | Permalink

    “There is also a clear lifecycle effect such that as you get older, you are likely to move up the income scale too.”

    How generally true is this? Yes, for managerial/professional careers, but for retail workers, manual workers, taxi-drivers, lorry drivers, bank cashiers? Not meant as a criticism, I just don’t know how true it is.

  2. Posted 14/11/2014 at 22:59 | Permalink

    Just your opinion and you clearly are shocked that not everyone agrees.

  3. Posted 16/11/2014 at 11:37 | Permalink

    These shows are entertainment for those with juvenile minds. No real research is done, and there is no attempt to educate anyone. For what it is worth, I am very careful who interviews me or which forums, conferences, etc. that I attend. Many are a waste of time and nothing more than propaganda, as, apparently, was this program.

  4. Posted 16/11/2014 at 16:28 | Permalink

    Many great points are made in this post. A recurring theme is that the participants in your discussion erred by omission of essential points. A good theme and fair. You, however, have omitted something essential to a full understanding of the problem. As a result, your observations would likely have little or no impact on their thinking, or how they would conduct the program next time.

    In absolute terms, the poor in the US today have treasures beyond the dreams of the wealthiest kings of 300 years ago, e.g., access to healthcare which actually works, absence of warranted fear of famine, air-conditioning, instant/glorious/personalized entertainment, indoor plumbing. . . . Back then the absolute difference in standard of living between the poor and rich was not as great, nor as in the face of the poor as it is today. With respect to their standing in the community, many of the poor (and those who empathize with the poor) perceive themselves to be as farther behind in terms of pecking order than ever – and being out-paced at increasing rates. A major feature of the pecking order problem is that the poor view wealth as a reflection of power (e.g., ability to buy elections), another unquantifiable something which they believe they lack. They are probably correct to a significant degree (although the correlation between money spent and electoral success is not high).

    Because the value of pecking order (standard of living and power) is impossible to quantify or compare, the numbers and concepts you would throw at them (which have little to do with pecking order) will mostly fall on def ears.

    You make great points, but unless you can address the concepts which cause the inequality crowd to think and talk as they do, you will be mostly preaching to the choir.

  5. Posted 21/11/2014 at 18:56 | Permalink

    Whilst the show WAS full of junkonomics the basic theme of the show was correct, that unless you are already wealthy chances are your children (even today’s adult children) will NOT be able to afford to buy their own home.

    I have no problem with people earning billions, all I expect is that they pay a proportional part of their income in tax. If they did this and did not have offshore trusts etc we would not need to tax more than 20%.

    The banks used customer’s money paid into “safe” low interest deposit accounts to gamble. They invented complicated financial instruments to try and hide their bad investments. They sold “bets” on people going bust and of course when they ruined the economy it was us that bailed them out. Yet today our Country pays eye watering income on State debt.

    People with Cancer are kicked out of their homes for getting behind in their mortgage but the people responsible for the financial crisis have never been punished. We give tax breaks to people to buy up property in London only to leave it empty to avoid even more tax.

    The sheer greed of the likes of Westbrook who, despite promises not to, are happy to throw people on the street at Christmas http://bit.ly/1xCxreG has to be curtailed. What we have right now is a Government theme of KNOW YOUR PLACE, it does not matter if you are a millionaire, you are nothing. So whilst you can disown your participation into the programme, the underlying messages of unfairness are real issues in this country.

  6. Posted 22/11/2014 at 16:36 | Permalink

    Jon, You have taken some kernels of truth and ground them into mush.

    While what you say about poor children is statistically true, the chances to own a home of poor children who strive diligently taking advantage of the educational and other opportunities made available to them, work hard to find a job and work hard at it once obtained are quite good. Because so many poor children squander the opportunities made available to them, how much other people pay in taxes has little bearing on the outcomes for poor children you describe. It might be different if government really knew how to help poor children, but it either can’t or won’t.

    Wealthy people do take advantage of loopholes in tax laws, and do not pay a proportional percentage of taxes – they pay considerably more than their proportion part of taxes. The top 10% of income earners pay 68% of all federal income taxes, and pay a disproportionately high percentage of all other taxes. People are not suffering because the rich do not pay a “proportional part” of their income in taxes.

    You talk about a “need to tax more than 20%.” If the “need” is to prevent suffering, you are describing a fool’s errand. Suffering will occur no matter the absolute wealth of the poor. Much suffering (e.g., illness) cannot be eliminated no matter what government or anyone else does. Because government does not know how to help poor people without doing much damage to them. Other than in standard of living, the poor are suffering mightily after at least 50 years and trillions of dollars trying to put an end to the poor’s suffering – and they may be even more unhappy with their standard of living than they were before the War on Poverty began. It appears there is a strong correlation between unhappiness and government “assistance.” Moreover, the absolute standard of living of the poor will improve more rapidly the more government stays out of the way, especially with excessive taxes.

    Other than bankers and politicians, who get their campaigns funded by bankers, you would be hard pressed to find anyone who is in favor of bank bailouts. The banks took the crazy risks they did because they knew the government would bail them out if it went bad (which would necessarily be after they cashed big paychecks creating the problem). Government knew they were creating this moral and risking an economic catastrophe, but did it anyway. You seem to be suggesting politicians should be rewarded for these actions with even more control over the economy.

    While there is debate about how to do it, there is near universal agreement that the deserving poor should be helped (e.g., cancer victims who are bankrupted by medical bills). Businesses striving to make a profit, however, (even if it means some poor people may have to move as a condition of receiving benefits) is not a bad thing. [Your description of the timing of the move in the situation you referenced is both irrelevant to the poor’s standard of living and inaccurate.] Creating wealth is actually what has enabled the “bottom billion” to achieve the unprecedented phenomenal rise in standard of living over the recent history – for the first time ever in history. Are they “wealthy?” No. Are they fabulously wealthier? Yes. Is it because more wealth is tricking down to them? Yes. The absolute standard of living of poor people in wealthy countries has risen considerably as well.

    Whether millionaires know their place or not, and whether or not they shelter some of their income so that it does not get taxed, they pay the vast majority of the taxes to fund the welfare state’s redistribution policies. The value of the benefits received by the poor is far greater than the amount they pay in taxes. Who is paying their fair share is not as easy to answer as your post suggests.

    The poor will always demand that more be redistributed whether or not they understand that the more redistribution there is, the slower the improvement in everyone’s standard of living. Including the poor. Sheer greed on the part of the poor? If one were loose with such epitaphs, one could say so. Regardless of their income, almost everyone always wants more. Whether the poor’s desire for more is greater than the rich’s desire or vis versa would be impossible to determine. It is not impossible to determine that the poor in wealthy countries have amenities which exceed the wildest dreams of kings not long ago. And wealth transfers can only provide amenities, they cannot provide happiness.

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