Monday, April 7, 2014

JW Mason — Wealth Distribution and the Puzzle of Germany

There’s been some discussion recently of the new estimates from Emmanuel Saez and Gabriel Zucman of the distribution of household wealth in the US. Using the capital income reported in the tax data, and applying appropriate rates of return to different kinds of assets, they are able to estimate the distribution of household wealth holdings going back to the beginning of the income tax in 1913. They find that wealth inequality is back to the levels of the 1920s, with 40% of net worth accounted for the richest one percent of households. The bottom 50% of households have a net worth of zero.
There’s a natural reaction to see this as posing the same kind of problem as the distribution of income — only more extreme — and respond with proposals to redistribute wealth. This case is argued by the very smart Steve Roth in comments here and on his own blog. But I’m not convinced. It’s worth recalling that proposals for broadening the ranks of property-owners are more likely to come from the right. What else was Bush’s “ownership society”? Social Security privatization, if he’d been able it pull it off, would have dramatically broadened the distribution of wealth. In general, I think the distribution of wealth has a more ambiguous relationship than the distribution of income to broader social inequality.
Last summer, the ECB released a survey of European household wealth. And unexpectedly, the Germans turned out to be among the poorest people in Europe. The median German household reported net worth of just €50,000, compared with €100,000 in Greece, €110,000 in France, and €180,000 in Spain. The pattern is essentially the same if you look at assets rather than net worth — median household assets are lower in Germany than almost anywhere else in Europe, including the crisis countries of the Mediterranean.
At the time, this finding was mostly received in terms the familiar North-South morality tale, as one more argument for forcing austerity on the shiftless South. Not only are the thrifty Germans being asked to bail out the wastrel Mediterraneans, now it turns out the Southerners are actually richer? Why can't they take responsibility for their own debts? No more bailouts!
No surprise there. But how do we make sense of the results themselves, given what we know about the economies of Germany and the rest of Europe? I think that understood correctly, they speak directly to the political implications of wealth distribution....
Resolving paradoxes of income and wealth. A lot of analysis depends on the construction on which it is based.
The question is, what is the relationship between the level of market production in an economy, and the claims on future production represented by wealth? It’s a truism — tho often forgotten — that the market production counted in GDP is only a part of all the productive activity that takes place in society. In the same way, not all market production is capitalized into assets. Wealth in an economic sense represents only those claims on future income that are exercised by virtue of a legal title that is freely transferable, and hence has a market value.
For example, imagine two otherwise similar countries, one of which makes provision for retirement income through a pay-as-you-go public pension system, and the other of which uses some form of funded pension. The two countries may have identical levels of output and income, and retirees may receive exactly the same payments in both. But because the assets held by the pension funds show up on balance sheets while the right to future public pension payments does not, the first country will have less wealth than the second one. Again, this does not imply any difference in production, or income, or who ultimately bears the cost of supporting retirees; it is simply a question of how much of those future payments are capitalized into assets.
The Slack Wire
Wealth Distribution and the Puzzle of GermanyJW Mason

9 comments:

Anonymous said...

Isn't that just a way of saying that in the countries that have lower average private wealth, but seem intuitively prosperous, more of the nation's wealth has been socialized?

Brian Romanchuk said...

It's a problem how why define wealth. A pay as you go system holds no assets, and we do not capitalise the earnings streams associated with thr pension payments. But if you buy an annuity to get the exact same income streams, it shows up in wealth.

Defining national wealth is effectively impossible. The cash flows to a government are taxes, and those tax flows grow in line with GDP. If GDP growth is higher than the discount rate, the value of those streams is infinite.

Anonymous said...

It's a problem how why define wealth. A pay as you go system holds no assets, and we do not capitalise the earnings streams associated with thr pension payments. But if you buy an annuity to get the exact same income streams, it shows up in wealth.

But the annuity doesn't add to national wealth, only to the wealth of the individual who holds it. In the national accounting the asset is offset by the liability on the side of whomever issued it, right?

Anonymous said...

Defining national wealth is effectively impossible. The cash flows to a government are taxes, and those tax flows grow in line with GDP. If GDP growth is higher than the discount rate, the value of those streams is infinite.

Don't follow that. Yes, they are infinite in the limit out to an indefinite future, but what does that have to do with defining national wealth at any one time. GDP would also be infinite out to an indefinite future.

JW Mason said...

Isn't that just a way of saying that in the countries that have lower average private wealth, but seem intuitively prosperous, more of the nation's wealth has been socialized?

I would prefer to say, "a smaller share of claims on social production have been capitalized." Let's not treat money-claims as the default.

Note also that the issue isn't private wealth, but household wealth. The real assets of German corporations are private wealth, but they don't show up on the balance sheets of German households because the rights of financial asset-owners over those real assets are limited.

My larger agenda here is to clarify that markets (or "the economy" if you like) is a distinct activity within the larger world of human productive activity, and that capitalism is a distinct process within the world of markets. I think there are many important questions that are hard to answer when we mix these three layers up, so I'm always looking for ways of illuminating the distinction between them.

Tom Hickey said...

My larger agenda here is to clarify that markets (or "the economy" if you like) is a distinct activity within the larger world of human productive activity, and that capitalism is a distinct process within the world of markets. I think there are many important questions that are hard to answer when we mix these three layers up, so I'm always looking for ways of illuminating the distinction between them.

Good distinctions, and I would add a prior — human social activity, which we call society.

Human productive-consumptive activity, which we call the economy, is an aspect of the material life-support system of a society.

Markets are the distributive aspect of the economy in a market-based system.

Capitalism is a particular type of economic system that is established and supported by an appropriate legal system, which in turn is an aspect of a type of political system.

All these systems are interrelated and interdependent and exist within the context of a complex adaptive system whose framework is a culture. Different cultures adapt different systems to their needs and preferences through, e.g., traditions, customs, conventions and institutional arrangements depending on the characteristics of the population, environment, and historical times, and other such relevant factors that differentiate peoples and cultures.

Considering any of these aspects in isolation from the whole, that is, independently of context, is bound to lead to errors and the illusion of knowledge rather than actual knowledge. In addition the complexity of the system, which includes radical uncertainty, makes the system inherently unknowable in its entirety. Therefore, life is experimental, knowledge is tentative, and history developmental.

Therefore, the potential for achieving a single overarching social theory consisting of laws is remote, at least without a level of artificial intelligence that greatly exceeds anything that lies in the realm of foreseeable potential, if it is even possible at all.

Unknown said...

I think a large part of the reason might be german house prices, which are low on average compared to other countries.

http://www.forbes.com/sites/eamonnfingleton/2014/02/02/in-worlds-best-run-economy-home-prices-just-keep-falling-because-thats-what-home-prices-are-supposed-to-do/

Matt Franko said...

Brian already touched on this in his review of the Picketty book...

"The cash flows to a government are taxes, and those tax flows grow in line with GDP."

Brian I would point out that govt spends first and THEN collects the taxes. So imo gdp growth is necessarily a function of the "spends first" part.

This angle that both Brian and JW bring up wrt 'wealth' and how the public components of 'wealth' are usually left out of its calculation is interesting...

rsp,

Brian Romanchuk said...

OK, I wrote too quickly. An annuity would count as wealth to the individual holding it, but not a pay as you pernsion. It will count as part of private wealth in aggregate to what extent the annuity does not hold stuff that is netted out, like domestic corporate bonds.

For my point about infinity, I should have written "government wealth" and not "national". The value of an asset is not its historical cost, rather the capitalised value of future cash flows. And those can be infinite for a government, which makes the concept fairly pointless.