Declines in Wealth and Declines in IncomePosted: June 26, 2012 Filed under: Economic Growth and Productivity, Income and Wealth, Shorts 1 Comment »
The press recently had a field day reporting the decline in wealth from 2007 to 2010, as measured by a recently released Survey of Consumer Finances. Be careful interpreting those results. A decline in the valuation of wealth does not necessarily mean any decline in collective well-being or consumption in a society.
Think of a decline in the price of gold. Society doesn’t necessarily consume any less of anything, and the loss for the gold seller is a gain for the gold buyer. More relevant to the current crisis, take the value of a house. It doesn’t produce any fewer services just because it sells for less. And the buyer gains what the seller loses. A retiree’s hope for selling and then spending down those assets in retirement may be reduced, but his children’s earnings go a lot further if they decide to buy a house.
There are, of course, real and agonizing losses from a recession. They largely come from the decline in output of society and of the corresponding income of its citizens. There are too many unemployed and underemployed resources, both people and capital. When a decline in society’s aggregate wealth reflects a reduction in the collective value of all the future things it can produce or buy—for instance, because factories produce less—then there are total net losses that are never recovered. Even here, however, one must distinguish between when the decline in wealth valuation occurs and when the losses to society really take place. Greece’s economy, for example, was long on a downhill curve, which the markets finally realized. In fact, if the reform effort succeeds, Greek citizens may end up with a more, not less, wealthy economy than they had when stocks and bonds started tumbling downward.
Yes, but the point was, who lost the most wealth, proportionately to their means and income? Those who could least afford it. If you lost your house to foreclosure, society isn’t poorer–the house is still there–but you sure are.