The Agenda

Guest Post by Arpit Gupta: Household Wealth Comparisons

Earlier, Reihan has discussed the growing Canada-US gap in household wealth, and the implications of that in thinking about economic policy.

My stance is that measured household wealth isn’t necessarily the best window into thinking about this. Though Reihan and others mention median household wealth, it’s important to note that average and median wealth diverges enormously because accumulated wealth, in most countries, has an extremely unequal distribution. There is a Gini coefficient of something like 0.80 for net worth, and 0.90 for financial wealth. The top 10% in the wealth distribution account for three-fourths of productive wealth, but consume only 17% of total consumption. Household wealth is really, really concentrated. 

It’s a matter of some debate why financial wealth is so unequal. Economists tend to emphasize differences in luck, patience, or access to investments. Whatever the reason, it’s clear that looking at financial wealth is a window into the savings of a fraction of the population, not the income or consumption power of most of the people. 

Nor is financial wealth the whole story. One study here suggests that measured wealth only accounts for a fourth of the total wealth in the economy — the rest is wealth accumulated in human capital. This makes sense when thinking that human capital, not housing or stock market investments, really corresponds to the fundamental source of production, consumption, and the power to accumulate wealth. Think for instance how quickly Germany and Japan recovered after WWII despite enormous destruction of capital stock. To be sure, Canada may end up better the US taking human capital into account. The point again is just that a full picture of household well being needs to take variables other than financial wealth into account. 

To take another angle — the net worth of the median household in either Canada or the US is something like $300,000; while the median household pre-tax consumption power for a household of four is close to $100,000. Over a lifetime, the typical household commands a permanent income or consumption power that goes well into the millions. That figure — the amount a household can expect to consume or use over a lifetime — is a far better indicator of household welfare than the much smaller fraction they happen to have in financial savings in any given time period. Would you rather earn and spend like a millionaire, with no savings, or have substantial savings while earning and spending below the poverty line? My sense is that the US tends to come out ahead of Canada looking at household consumption. I could be wrong, but those are the sorts of things to focus on in intercountry comparisons. 

Finally, comparing countries raises concerns about counterfactuals and the possibility that we’re not comparing apples with apples. Reihan argues as much:

 

The really interesting question is this: given the massive housing bust in the U.S. and the continuing appreciation of home values in Canada, Canada’s importation of large numbers of college-educated immigrants and its draconian policies towards unauthorized immigrants, and its markedly different family structure, why isn’t the gap in average net worth between Canada and the United States much larger? 

Something like this is my sense as well. America is host to numerous legacies — the long-run effects of slavery and segregation, large-scale immigration, attitudes towards incarceration, family structure — that would otherwise be expected to worsen economic performance. Even pulling even with some countries is a substantial achievement.

 

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