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