The standard definition of income makes much of rich people’s income invisible.
If your home or stock-portfolio value goes up over a decade or three, have you received “income”? It sure as heck feels like income. It increases your asset holdings and net worth. It’s new money in your pocket that you can spend now and in your retirement.
Maybe you have to sell things or borrow against them. Whatever.) How is that not income?
But in economics — actually right down to the core of national accounting methods — capital gains aren’t counted as income. And they don’t contribute to “saving.” Those gains are completely invisible to a huge bulk of the economics work (both empirical and theoretical) that is built on income and saving concepts and measures.
Even Piketty and company, who importantly include capital gains income in their income data, don’t include it in their theorizing about income and saving. Ditto most Modern Monetary Theory (MMT) work, despite (or because of?) that group’s rigorous accounting-based approach.…Evonomics
Why Economists Ignore Much of Rich People’s Income
Steve Roth
I thought that the 1% always commits control fraud and makes continuous fraudulent mis-representations about the values of their assets?
ReplyDeleteNow we believe them? I'm confused are they lying or not????
Oopsie:
ReplyDeletehttp://www.forbes.com/sites/katevinton/2016/01/28/jeff-bezos-loses-6-billion-as-amazon-shares-drop-after-hours/#56b29bf77fdb
Looks like Bezos will have to file an amended return and Picketty will have to give him his tax munnie back..
Where's the link to the story?
ReplyDeleteHis arguments are misleading. Economists are aware of "comprehensive income"; typically called Haig-Simons income. It's just that it is hard to measure, and cannot easily be brought into alignment with quarterly data. Stock-Flow Consistent models, which MMT "inherits", can be built around this income measure, but they are a real pain to work with, and have problems for a lot of uses. If your model depends upon stock prices, you need to model stock prices. There's a whole industry based on that, and the consensus is that it cannot be done.
ReplyDeletePeople attempt this with "wealth effect" concepts, but they are dubious empirically.
And it's not just the 1%; home ownership is a major source of gains, furthermore, capital gains benefit pension plans, which ultimately improves the income of the middle class, but possibly with a lag of decades.
Maybe that’s why Marx called it "fictitious capital."
ReplyDeleteLink fixed.
There's a whole industry based on that, and the consensus is that it cannot be done.
ReplyDeletePeople attempt this with "wealth effect" concepts, but they are dubious empirically.
And it's not just the 1%; home ownership is a major source of gains, furthermore, capital gains benefit pension plans, which ultimately improves the income of the middle class, but possibly with a lag of decades.
Right, because the whole system is mark-to-expectations. Then CB's come with voodoo economics, "forward guidance" and all the monetarist babble. And we come with metaphors like "the animal spirits" etc.
However, because we need markets at a matching mechanism we have no way around it and are stuck with it. 'Wealth' is always relative and in flow, there is no such thing as equilibrium in an economy, because systems, because universal laws, never an in equilibrium (page 2nd law of thermodynamics).
If we could solve the conundrum, we wouldn't need markets at all, because we would have PERFECT INFORMATION TRANSFER. This is physically impossible, and that's why we have the current set up (for the lack of a better system or lack of alternatives).
The question is, if there is a justification to maintain the current institutional structure, with the facts at hand. What's the point of central banks, for example? It's all a big "extend and pretend" game, were we pretend we have control over information to micromanage the economy from a central planning authority. Instead we should be relying on homoeostatic mechanisms that maintain the equilibrium between our information transfer system (based on a mixed economy with markets) and the shocks created by the frictions created (manufactured or not) by the lack of perfect information.
To the best of our avails, because those mechanism depend on what we exactly are trying to optimize (material goods production? well being? future sustainability?) and our current imperfect knowledge.
"furthermore, capital gains benefit pension plans, which ultimately improves the income of the middle class,"
ReplyDeleteNot really. Pension plans are ultimately funded by the sops currently paying their dues. So private pensions are largely a privatised taxation and redistribution system amongst the middle classes. And it works until the sops stop contributing - at which point 'compulsory' retirement contributions are instigated - aka taxation.
Moving tokens around at every greater values is just a distribution mechanism. Nothing real happens.