Tuesday, May 19, 2015

Was everybody under socialism a millionaire?

There was a couple of months ago a lively discussion on the measurement of wealth. It started with two results. First, Ed Wolff’s long-standing (but not widely publicized) results that the Gini for wealth inequality in the United States has reached an unprecedented high value of 87, and that some 30% of the population have zero net assets. Second, by a comparison made by Oxfam between the wealth of the top 1% vs. the wealth of the rest. Oxfam argued, using the Credit Suisse report on global wealth, that the top 1% in the world own almost one-half of global wealth. Some of those wealth-poor are people from rich countries who have no assets even if their income is obviously not zero, nor can they be considered globally or otherwise poor. Actually, many of them might lead relatively comfortable lives, even if they are running credit-card debts and living in homes that are almost 100% owned by the banks.

So, those who did not like either Ed Wolff’s results nor Oxfam’s comparisons went ballistic on what they termed “Oxfam misleading statistics”: “Look, these guys might have zero net assets, but they are not poor”, the critics argued. The argument was factually correct, but substantively wrong simply because there is a difference between income, consumption and wealth. You may be wealth-poor even if you live okay; these are two different things. I wrote about that on my blog.

But there was also another strand of attacks on these numbers that wanted to show them incomplete because the wealth definition used in standard wealth studies like the ones quoted here is the sum total of all marketable assets,  that is consumer durables, housing, shares, bonds, checking and savings deposits, patent right etc. that  you can sell right now. It does not include future, more or less secure claims on (say) Social security benefits, occupational pensions, medical help and the like. (Although Ed Wolff  does include the cash surrender value of pension plans.) Now, people who wanted these benefits to be added (in the amount of  their capitalized values) did so in order to argue that the top 1% are not as rich in relative terms as Oxfam and Credit Suisse claimed, and that it is not true that 30% of Americans have zero net assets. Indeed, if you include Medicaid, Social Security and welfare practically nobody in the US will come out as having zero net assets. It is also true that, if you do an international  comparison of the US with other wealthy countries, the inclusion of such future claims will make US wealth levels and distribution look even worse (because other rich countries generally have more developed social welfare systems), but those who argued for the change in the way wealth is defined, did not, at that point, think much about international comparisons.

However, you cannot do things in isolation, and ignore both the general rules about how private wealth is defined and how the definitions can be applied across various societies. Let me illustrate this. In a conversation over lunch, Ed Wolff and I concluded that private marketable wealth in Communist countries was, for most of the population, zero. How come? First, housing was mostly state- or enterprise-owned (in urban areas), and people who lived in these apartments paid low rent, but did not own them nor could they sell them. Second, there were no financial instruments of any kind: there was no stock market and no shares. There were, in some countries state bonds but they were less of an investment and rather a compulsory borrowing by the state. But the state bonds were minimal in any case. Third, the only asset that existed was savings in domestic or (even if it was illegal in many countries) foreign currencies. That was in reality the only financial asset. (And this is incidentally why people in the West did not sufficiently appreciate the pillage which the Yeltsin’s regime engaged in when it destroyed overnight the years of ruble savings by millions of households.)

Most of the private marketable wealth that existed was in the countryside. In countries like Poland and Yugoslavia, land was mostly private. In addition, urban residents owned their own weekend houses (the famous Russian dachas) and they were indeed privately-owned and marketable.  In addition there were owners of small-scale restaurants, bars, repair shops etc. Thus Ed Wolff and I agreed that if you applied the usual marketable wealth approach to Communist countries you would find that perhaps 80% of the population, or even 90% in the Soviet republics, had zero or wholly negligible net wealth, and 20% (or 10%) had some rather minimal wealth, and these 10-20% were not exactly the people you would associate with high incomes and certainly not with political power under socialism. Obviously, this did not mean that 80-90% of people lived on the edge of subsistence: actually most of them had “normal” middle-class urban lives. It is just that they had no private wealth.

But then I thought a bit more on this issue as I read the critics who wanted to include capitalized value of social security among private wealth. So, I said, let me see what their approach would give you for socialist countries. There first, you had guaranteed pensions for all. So, let’s capitalize that. Then, you had guaranteed jobs for almost all. Let’s capitalized that income too. You had guaranteed other social transfers like child benefits, invalidity pensions and of course free medical care. And although pensions and wages were small in dollar amounts, their capitalization produces a rather big total. Let me take the example of Yugoslavia that I know well. In the early 1980s, the average salary was about 250 dollars per month (post-tax). The average pension was about $200 per month (also post tax). That gives you about $3,000 annually for wages and $2,400 for pensions. In today’s dollars, it works out as $9,000 and $7,200 per year. Suppose then, very roughly, that wages are guaranteed for 30 years and pensions for 20 years. When you apply to the wages and pensions a low discount rate of say, 2% you get that total wealth of almost everybody was $300,000 dollars. Throw in additional medical costs that were also borne by the state and guaranteed to more or less all, and you may get to $400,000 or even to half-a-million US dollars.

So, would then those who argue that US wealth data should include capitalized value of not-marketable, but guaranteed, future incomes streams agree that everybody in socialism was a dollar (half-a-)millionaire and that perhaps two-thirds of the population in Yugoslavia, Hungary or Poland had greater private net assets than the corresponding people in the United States? Does this make sense? If it does not, then you are back to the “usual” calculations where only marketable wealth counts and where 30% of US population have zero wealth. So, you can choose:

  1. Either everybody in socialism was a quasi-millionaire,  or
  2. 30% of Americans have zero net wealth today.

Your call.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.