Monday, January 2, 2017

Steve Roth — How Do Americans Get Rich? (And Stay Rich?)


Wealth is generally conceived as a stock that is increased by the flow of income. But some wealth grows by itself, for example, equity prices based on market cap and real estate based on land rent. While interest is considered a type of income and is booked periodically (and is taxable in the period), asset appreciation that increases wealth is not considered income but capital gains and it is not booked (or taxed) until it is realized  even though it results in actual wealth accrual. Steve Roth poses some questions about this.
A huge aid to answering that question arrived last month. Gabriel Zucman, Emmanuel Saez, and Thomas Piketty (PSZ) released one of the most important pieces of economic research in the last century. Their Distributional National Accounts (DINAs) reveal the distribution of national income to different income classes, wealth classes, age groups, and genders (and potentially different races, etc. etc.). This has been unavailable in the national accounts, and as a result it’s absent in most macroeconomic empirical work.…
But impressive as they are, the DINAs don’t fully answer the question of how Americans accumulate wealth. Because the DINAs only tally income, and income doesn’t include households’ holding (or “capital”) gains on stock portfolios, real estate, etc. Income does include much “property income” — dividends, interest, etc. That’s income from owning things. But it’s not everything that households receive from ownership. Holding gains figure large in that picture.
Any investor will tell you: cap gains are a big part of their wealth accumulation. Total return — dividends plus capital gains — is the measure that most savvy stock-market investors care about, long-term (and that fund managers like to tout, loudly). And much of Americans’ retirement saving — especially middle-class Americans — is accrued through capital gains on their homes.
The DINAs’ central goal is to match income as presented in the national accounts, and to reveal a multidimensional pyramid of distributional data underneath that income measure. A deeply worthy goal. But as a result, the DINAs can’t and don’t reveal the whole picture of household wealth accumulation (change in assets and net worth), or its distribution.…
Wealth accumulation greatly exceeds saving from income, pretty much always and everywhere, over very long periods. And holding gains are not a small part of wealth accumulation, especially for already-wealthy households....
Evonomics
How Do Americans Get Rich? (And Stay Rich?)
Steve Roth | Publisher of EvonomicsSae

9 comments:

Random said...

Capital gains on property (as in houses, not in general) are usually tax free too.

Random said...

"even though it results in actual wealth accrual"

Even better than that: through the magic of remortgages it produces cold hard cash.

The numbers in UK are clear: 60%-70% of English voters (those that actually vote) are property owners, and over half of them have fully paid their mortgages, and most still have very comfortable lifetime pensions paying 60-70% of final salary on top, pensions often beginning at 55-60 rather than 65, and sometimes earlier for workers in property-protection jobs.

All of them are thinking that they have made in the upper class, and can live well off their pension property and their housing property.

Of the 30%-40% that are not property owners, perhaps half are the expectant future heirs of the 70% that are already property rentiers.

Thus most voters and the vast majority of the middle class, rather than just a small number of "masters of the universe" in the City, have adopted the politics of "f*ck you, I got mine".

A lot of delusional lefties still seem to believe that 90% of people think they are laborers exploited by the property owners; instead a large percentage of voters think they are mostly property owners like the CEOs, only in a different degree, and vote for lower wages for laborers (for everybody else) and higher profits on property (for themselves).

The American Dream is "F*ck YOU! I got mine!" and a lot of people, especially women, who started accruing (or inherited) old-style pensions in the 70s and 80s and bought (or more often inherited or got from divorce settlements) their houses in the 70s and 80s think of themselves as property owners living the American Dream, and of laborers as exploitative and lazy losers.

Many voters think of the top 50% of property owners as being oppressed and exploited by the bottom 50% of losers, Romney-style.

The voters are probably deluded (in part) that they belong with the property-owning elite, that they have got their place in the sun in the plantation economy. They are slowly realizing that at least some of them have got it coming, as here one of the would-be eager lackeys in the journalism trade in 'Merica:

www.eschatonblog.com/2015/04/why-didnt-i-get-rich.html
«journalists/columnists of a certain age (meaning ones not much older than me and younger) are coming around to the realization that the economy is screwing them, too. There was a moment when a lot of them (we're talking ones at elite outlets, not your random small town paper) thought they'd done everything right, would become celebrities, and get Tom Friedman's speaking fees. The economy sure was working for them, and screw everybody else.»

Random said...

Does not get clearer than that. Actually it does :-), quote from A Haldane, Chief Economist of the Bank of England:

«Haldane believes that property is a better bet for retirement planning than a pension. “It ought to be pension but it’s almost certainly property,” he said. “As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north»

Amazing how bonds and stocks are being thrown away to get ppl to buy southern property.

That is an actual quote.

Matt Franko said...

Wait until they have to renovate... time erodes the material... all of a sudden they need a new 10k roof and 30k of windows ...

Noah Way said...

Trickle-up in every respect.

Matt Franko said...

""If the government absolutely said interest rates are going to be zero for 50 years, the Dow would be at 100,000," Buffett told "Squawk Box,"

No mention from Roth here about rates just accumulating stock of retained earnings...

Oh, I forgot the MMT elites rote teach that "positive rates are just welfare for the rich!" .... never mind the function relationships....

Neil Wilson said...

Steve Roth has taken this one and run with it. But got himself in a terrible mess.

But as usual forgets that you can't spend your house. You have to liquidate it before you can. And if everybody liquidates at the same time you find that the 'wealth' number isn't anywhere as big as first advertised.

The assumption here is again infinite liquidity. Exactly the same as the 'trade deficit' argument.

The elephant in the room is power, not wealth or income in financial terms.

Matt Franko said...

Iirc the one criticism of Pickettys book was he included house price appreciation as income.... so maybe he went back and separated it out....

Tom Hickey said...

Agree with Neil with this proviso.

Capitalization is based on marginalism, so marginal changes affect property value and net worth on the balance sheet that an investor presents to a lender. Credit is judged largely on net worth and when the marginal value of RE rises, banks are willing to lend against at the market price, both for home equity loans and property investment. In other words, banks provide the liquidity without the need to actually take the gain by selling. This is how some people I know have parlayed a single investment in RE to finance an array as prices appreciated.

For the ordinary bloke, this is the best way to "get rich," although to get rich quick its usually necessary to flip.

Minsky's financial instability hypothesis predicts that this will result in property bubbles in the case of Ponzi finance as the third and last stage of financial cycles.