Source: Tim Worstall, forbes.com
It is possible to take this as a sign of the approaching Apocalypse – that 15% of American households own less than nothing. It is also possible to simply observe that if you’ve got $10 in your pocket and no debts then you’ve got more wealth that 15% of those American households. And the way this works is that that ten buck bill means that you have more wealth that that 15% of American households put together. We can then go on to start chuntering about how the revolution is imminent as the oppressed masses begin to rise up against their plutocratic overlords. How can we allow a system to persist where the Waltons have that $100 billion derived from Walmart and yet near one sixth of us all have nothing, in aggregate?
Except, actually, we ought to examine this all a little more – for there is this basic truth that we ever should recall. We can only divine what an economic number is telling us when we understand firstly how it was calculated and then secondly what isn’t included in the calculation. And the truth here is that this isn’t, at least not in total, a shocking indictment of the way the country and the economy work. Rather, it’s a description of the fact that people age. Plus, a slight failure in how we actually count wealth.
The new information comes from this very interesting report from the Federal Reserve Bank of New York.
“We estimate that 15.1 percent of the households in the U.S. population have net wealth less than or equal to zero, while 14.0 percent have strictly negative wealth. Because of differences in measurement—such as in determining who is included as a household member—estimates vary across surveys and also vary somewhat over time. For example, the share of households with non-positive wealth was estimated to be 18.1 percent in the 2011 panel of the Survey of Income and Program Participation, 12.9 percent in the 2013 Survey of Consumer Finances, and 19.4 percent in the 2013 Panel Study of Income Dynamics. Our 2015 SCE estimate of the share of households with negative wealth falls within the range observed.”
There are people who have no net wealth and who are unlikely to ever have much. But that’s not the reason why we’ve such a large portion of the population with a negative net value:
“What are the characteristics of households with negative wealth? We find that the heads of such households are younger than their counterparts in households with non-negative wealth—an average age of 43 compared to 51. They are also slightly less likely to have a college or postgraduate degree—43 percent and 12 percent, compared with 45 percent and 15 percent, respectively. Moreover, we find the association between having negative wealth and the head of household’s age to be stronger for those with a college degree and especially so for those with postgraduate degrees. These results are consistent with standard life-cycle models of consumption and savings, which predict that agents smooth the marginal utility of consumption by incurring debt—for instance, student loan or credit card—when young and then steadily increasing savings until retirement. In particular, those models predict that young and educated households might have negative wealth as their incomes will likely grow with age so that they will be repaying what they have borrowed when young.”
“Consistent with intuition, households with negative wealth have much lower average annual incomes than households with non-negative wealth, $39,077 versus $86,309, respectively.”
That’s our first and major point to make. Negative net wealth is part and parcel of certain life points. We do borrow to invest when young – thus we have negative net wealth at some point in life. That’s not the whole story though and this chart is very useful indeed:
I wouldn’t insist that this next is absolutely true but it’s a useful way to read this. Those people with the minimal negative net wealth (and there will be a corresponding group just the other side of the line with minimal positive net wealth) are those who actually are poor. The precariat we might call them, living in rental accommodation, living from paycheck to paycheck. This will also be a function, in part, of the way that the welfare system works. Many welfare benefits insist that you have no substantial (or even unsubstantial, numbers like $3,000 in savings fly around here) savings if you are to be eligible for those welfare payments. So, entirely logically, those whose incomes lead to welfare eligibility tend to make sure that there’s no savings around which would limit those welfare payments. No, this is not a dig at welfare recipients – it’s an entirely logical response to the incentives of the system.
The other two groups with negative wealth shown there are those who are making that lifecycle decision. It’s obvious how that concentration of student debt makes such a difference. At which point what we’re also seeing in part is just a part of the definition of how we count wealth.
So, think about it for a moment. We know that having a college degree raises your lifetime income (on average of course, and MBA rather more than an MFA in Puppetry). Having a degree is thus a source of income and wealth is just another way of saying the net present value of future income. Thus your college degree is, in any real sense, wealth. That’s why you borrowed money to go and get it of course. And yet when we calculate wealth in the manner this report does (and this is the standard method too) we only look at the debt incurred to gain that asset of the degree and not the value of the asset, that degree, itself. This, of course, completely messes up any reasonable wealth calculations.
Finally, there’s one more point to make. That welfare state itself, the Great Society stuff, is a source of wealth in itself. That there is unemployment insurance if I should need it is wealth to me – sure, it’s insurance only and I might not need it but that it is there makes me richer. Social Security will be wealth when it starts paying out. That if I am poor then the government will aid me in finding housing and food is wealth too. That poverty leads to Medicaid eligibility is a source of wealth as well and so on. It might not be worth what I’ve got to pay in taxes to gain it but it is still, absolutely no doubt about it, wealth. And yet all of our wealth calculations deliberately and specifically exclude such governmental transfers as being wealth. As Saez and Zucman say:
“Our definition of wealth includes all pension wealth—whether held on individual retirement accounts, or through pension funds and life insurance companies—with the exception of Social Security and unfunded defined benefit pensions. Although Social Security matters for saving decisions, the same is true for all promises of future government transfers. Including Social Security in wealth would thus call for including the present value of future Medicare benefits, future government education spending for one’s children, etc., net of future taxes. It is not clear where to stop, and such computations are inherently fragile because of the lack of observable market prices for this type of assets. Unfunded defined benefit pensions are promises of future payments which are not backed by actual wealth. The vast majority (94% in 2013) of unfunded pension entitlements are for Federal, State and local government employees, thus are conceptually similar to promises of future government transfers, and just like those are better excluded from wealth.”
Nothing the government does is treated as wealth which is a really odd decision, because much of what government does is an attempt to both equalize the wealth distribution and also make us all wealthier at the same time. Because we do think that having a welfare system that picks us up when we’re down and out does make us wealthier.
So, the actual truth here is that rather than it being entirely true that a $10 bill and no debts makes you richer than 15% of American households that entire truth is that the way we count it a $10 bill and no debts makes you richer than 15% of American households. And the way we count it isn’t very good because the crude calculation doesn’t take account of lifecycle effects, assumes that a college degree (or other training) is not an asset and entirely ignores the things government does to make us all wealthier. Other than those problems it is true, which is to say it’s not really very true at all.