Newswire: 6/3/2020
- A small but growing group of economists is challenging the assertion that wealth inequality has sharply increased. Two recent studies argue that previous estimates of wealth inequality rely on flawed assumptions, and that after adjusting for these measures, wealth inequality has actually remained stable since the mid-2000s. (The Economist)
- NH: While everyone agrees that income inequality is rising, how much it is rising is subject to a great deal of dispute. This is doubly true for wealth inequality, for the simple reason that wealth is much harder to measure than income. Income is (more or less) reflected in annual tax returns. But wealth? Most of the top 1.0% or 0.1% own lots of illiquid assets--proprietorships, partnerships, nontradable shares, intangibles, real estate, collectibles, and so on. How do you price any of it?
- Most economists who want to calculate a wealth number start by measuring how much income is being generated by an asset and then impute backward (using an RoR for that asset class) to an asset value. If you're averaging across many people, this method probably works pretty well. The controversy arises over the RoR. If you want to show the wealthy have more assets, you choose a smaller rate. If you want to show they have less, you choose a larger rate.
- The other question raised in one of these studies--whether or not to include Social Security "wealth"--has long been debated. IMO, this introduces far too much complexity. What discount rate do we use to calculate the present value of future benefits? What about differential future life expectancy or changes in benefit formulas? And why stop at Social Security? We could also try to throw in Medicare, other means-tested benefits, taxes, human capital embodied in offspring, family members available as caregivers... all kinds of things could be regarded as substitutes (of sorts) for wealth.
- My suggestion: Keep these measures very simple. Otherwise, they become incomprehensible.
