Photo Illustration by Getty, Elena Scotti/Fusion

Does wealth inequality matter? If so, why does it matter? And how should we measure it?

The intuitive answer to these questions is not the correct one. After all, inequality is a major global problem. If you want to measure the increasing gap between the rich and poor, the first thing you’re going to want to do is measure how rich everybody is. And the most obvious measure of how rich you are is how much money you have, aka your net worth.

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The result is found in reports like this one, from Oxfam, which I was rude about when it came out in January. Other publications, too, like the Economist and Vox, shared my worries, which were in large part based on the fact that Oxfam was being misleading when it combined a lot of positive and negative numbers to end up at zero.

That line of criticism was met with no little pushback. Oxfam itself re-ran the numbers to see what they looked like without the negative-net-worth cohort; Branko Milanovic explained that studying wealth inequality can sometimes be helpful, even though consumption inequality is the best way to look at differences in standard of living. And the New Yorker said that I was “missing the point,” which is that “wealth is associated with power, political and otherwise, and Oxfam worries about the concentration of power in the hands of the affluent élite.” That point was driven home this week by Oxfam’s Nick Galasso, who says that wealth and power are basically the same thing.

In one sense, that’s unarguably true: wealth is, indeed, associated with power. But that doesn’t excuse Oxfam’s paper. It’s just as silly to add up billions of people’s wealth as it is to try to add up billions of people’s power. Looking at one person’s wealth, if that person is very rich, may or may not give you a vague indication of how powerful that person is. But that kind of analysis doesn’t aggregate. It makes no sense to say that a million people with net worth of $1,000 each have the same power as one person with net worth of $1 billion. It doesn’t even make any sense to say that a person with net worth of $6 billion (or $6 million, or $6,000) has twice as much power as a person with net worth of $3 billion (or $3 million, or $3,000).

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Indeed, in general it’s much easier to turn power into wealth than it is to turn wealth into power. Vladimir Putin might well be worth billions, but that’s just a function of the fact that he’s powerful. While just about everybody on the planet with more money than Putin still doesn’t have nearly as much power as he has.

In Fusion’s millennial-inequality calculator (below), we look at income, for a number of very good reasons. Firstly, it’s relatively easy to measure: most people know how much they earn, while calculating net worth can be very difficult, especially if you have a pension or life insurance or own your own home. What’s more, income is usefully granular. Everybody who’s ever got a 20% raise knows that such a thing makes a substantial difference to your quality of life. And it makes a substantial difference to your place on the pecking order, too: if you have an income of $32,000 then that puts you in the top 41% of millennials, while a 20% raise to $38,400 would put you in the top 24%.

With wealth, on the other hand, such distinctions are much less useful. Someone with net worth of $1,200 is not appreciably richer or more powerful than someone with net worth of $1,000. Wealth, it turns out, is a very crude way of measuring how rich someone is, compared to income.

That’s because for nearly everybody, wealth is primarily deferred consumption: it’s money we haven’t spent today, so that we can spend it instead tomorrow. It’s also a form of self-insurance: as Milanovic says, wealth can help you weather things like a medical emergency or temporary unemployment.

But similarly, wealth can simply be an indication that there’s no social safety net. The Chinese have been climbing up the global wealth rankings faster than they’ve been climbing up the global income rankings because they have a huge savings rate: they save between 40% and 50% of their income. In this case, “saving” money means lending it to financial institutions of dubious solvency. That’s not a sign of things getting better, and it’s certainly not a sign of increasing political clout. Rather, it’s a sign that there’s no social safety net and that China’s citizens are scared to spend their money lest they need it in the future.

Most of us face a choice, when it comes to big purchases: do we save up for them, or do we buy them on credit and then pay them off over time? In both cases, our income and consumption work out to more or less the same thing over the medium term. Even though the saver has significantly more wealth than the borrower, there’s very little real difference between them.

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The fact is that not all wealth is power. Most Americans, for instance, have a huge proportion of their net worth in the Social Security trust fund. That’s a great place to put it: it’s very safe there, and it can’t be touched even by bankruptcy. But being owed money in retirement by Social Security doesn’t give anybody much power. There’s $2.8 trillion in the Social Security trust fund alone, and trillions more in various public and private pension plans. Does all that massive wealth give tomorrow’s retirees power? Not really: it’s just money waiting to be spent in retirement.

And in other countries, there isn’t even a government trust fund to be measured. When the government promises its citizens a pension, that’s a valuable promise, but it’s not one which turns up in global wealth statistics. (In fact, it’s unclear whether the Social Security trust fund is included in the Oxfam statistics.)

When Oxfam says that wealth is power, then, what they’re really talking about is the wealth of the top 1%, and really of the top 0.1%. They’re talking about wealth which transcends “money I haven’t spent yet” — wealth which becomes a dynastic power source in its own right.

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The money that Oxfam is concentrating on is money which, in large part, will never be spent, at least not by its present owners. If you have that kind of money, then you can indeed try to use it to gain power, since there’s no way you’re going to be able to spend it on consumption. As David Carr put it this week, writing about Rupert Murdoch and Michael Bloomberg, “neither seems particularly interested in money in the way that only the fabulously rich can be uninterested in money.” (Although there are, also, lots of high net worth individuals who live quiet lives and don’t look to leverage their wealth in such a manner.)

So while Oxfam is absolutely right that the amount of wealth controlled by the top 0.1% is worryingly large (and growing), they’re wrong that we can learn anything useful by comparing it to the aggregated net worth of the bottom 50% or even 90% of the population. In doing that, they’re comparing apples with oranges. The overwhelming majority of the world’s population lives on labor, not capital. They might have a modest amount of wealth, earned through their labor, or maybe inherited, but it’s not actually a defining feature of their lives.

Then there’s the very, very top of the wealth distribution: the people who can afford to live on their wealth, rather than on their labor, and who can use their wealth to shape the world they live in. These people are getting richer, and arguably more powerful. But you can’t get a sensible measure of the magnitude of their wealth, or even their power, by trying to add up the modest savings that the rest of us haven’t got around to spending yet. Wealth and power scale in mysterious ways. You can’t just add them up.