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Middle class wealth fell – but you shouldn’t worry.

Vox reports (but makes no editorial comment on) a Census Bureau chart showing a steep decline in middle class wealth between 2005 and 2011. This is a sensitive topic, and on the heels of Piketty, who advocates a global wealth tax, one that may fuel progressive criticism of increasing wealth inequality. While the economic malaise of the poor is something we need to address, thinking through the lens of wealth is the wrong way to go about it.

For one, median household wealth tells us less than a lot about living standards, inequality, or economic power. 

wealth

At least among OECD countries, non-income factors account for a majority of the variation in median wealth. (The relationship is stronger for the per capita counterpart, but that is skewed by a long, right tail.) Income does clearly determine a good bit of wealth, but no one would walk away convinced that the median Slovenian or Spaniard is actually richer than the American. That isn’t to say income per se is an effective measure of living standards either: wealth provides a sense of security and certainty for bad times, but that is surely of second order importance. 

But the more important point is, if there’s a measure in which a country like Israel is almost as rich as America, it’s a bad measure. At least to measure median economic prosperity. And the problem comes in measuring wealth. While we may think of it in its accounting reality, assets less liabilities, its better to think of trends through a more fundamental definition: that is a claim on future output. Wealth, after all, is the discounted present value of the future cash flows from your net position.

That makes a big difference. Not all wealth is created equal. A good amount of the returns from wealth sitting in the hands of the one percent will be taxed between 15 and 55%. A good amount of the returns from wealth sitting in the hands of everyone else will be taxed more or less at 0%. 

There’s a bigger angle to this as well. Healthcare is going to be a large part of future output, and that’s something we kinda sorta socialized between 2005 and 2011, supposedly the time period over which middle class wealth plummeted. And yet, as we each have a more equal claim on what will be a growing component of future output, implicit wealth inequality falls. Nor does this include social security and disability, which surely represent a big chunk of middle class wealth. 

Wealth, unlike income, is intertemporal. Measures of wealth inequality, unfortunately, are not as nuanced. I would venture to say, however, that anyone who thinks the utility of middle class consumption over the discountable future actually fell by 35% in absolute terms better prepare for armed revolution. 

Rather, implicit claims of more progressive taxes and even more progressive expenditures will probably keep the Bolsheviks at bay. For now. 

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1 comment
  1. Oxbird said:

    I almost expected your conclusion to be that a further fall in middle class income would on the whole be a plus! You are of course correct that there is a difference between wealth and income but just as there is a wealth affact there is an income effect. Lowering of income has a significant impact of peoples’ self assessment of where they are in society and their happiness and future. ANd, while it is true that some of the 1%s income will be taxed at various percentages, much will be taxed nominally. And, virtually no income will have zero tax even if the taxes paid are sales taxes or other government assessments.

    You amy be correct that healthcare has been “sorta socialized” — an interesting way of putting it — but who knows whether that will amount to much, or be permanent. Moreover, the health care system in the US can be fairly viewed as a major mechanism of shifting income in the direction of the 1%. Never (or rarely), has a health care system delivered what it does at such a high cost with so little measurable additional benefits, if any, compared to lower cost systems.

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