The US Has High Mean Wealth, But Low Median Wealth

Ray Person sent me an article from Money Magazine that compares mean wealth with median wealth which suggests that although the US is one of the wealthiest countries in the world on a per-capita (mean) basis, unfortunately the US is less equal than most rich countries which means that the average American (the median) is poorer than most of the rich nations that we like to compare ourselves with.

“Americans tend to think of their middle class as being the richest in the world, but it turns out, in terms of wealth, they rank fairly low among major industrialized countries,” said Edward Wolff, a New York University economics professor who studies net worth.

Why is there such a big difference between the two measures?

Super rich Americans skew average wealth upwards. The U.S. has 42% of the world’s millionaires, and 49% of those with more than $50 million in assets.

This schism secures us the top rank in one net worth measure — wealth inequality.mean or -median wealth

In the article, Edward Wolff names some interesting theories why the US has the highest wealth inequality.  He points out that high college spending in the US and our unusual home ownership patterns have a big impact on median wealth and America’s weaker safety net means that random events are more likely to wipe out the savings of middle class (and below) Americans.  The median American is likely to go into debt at some point to pay for a health crisis, education, or a period of unemployment.

According to the data, the nation with the highest median wealth in the world is Australia.  Australia does not have a particularly expansive welfare states, but they do have universal healthcare and cheaper university education than the US.  They also have some of the most expensive housing in the world which could hurt median net wealth. Although housing is an important store of wealth for the median, it is also an ongoing living expense so expensive housing hurts living standards, ceteris paribus, and expensive mortgages redistribute net wealth from borrowers to the lenders.

It is odd that Australia has high housing prices when it has very low population density and is a major natural resource exporter.  Australia should have low materials costs for construction.

I’m skeptical of Credit Suisse‘s methodology because they are not open about showing their calculations.  They don’t even clarify if they are showing median individual wealth (which would be most useful in theory) or median household wealth (as the Census typically reports) or median family wealth (which the Fed often uses).  This is an important distinction.  If they are showing median individual wealth, then they should explain how they disentangle household wealth to divide it among individual household members.

As I wrote before, it makes a lot more sense to measure median wealth rather than mean wealth because all financial wealth is a zero-sum game.  All financial wealth, including the financial value of all money, is merely debt and so one person’s financial wealth is merely another person’s debt.  On average, all financial wealth is zero, so there is no point trying to measure mean financial wealth.  But because the distribution of wealth is highly skewed, median financial wealth is always negative.  High financial wealth inequality can only happen by increasing the debt of poorer people and decreasing median financial wealth.

There can only be positive mean wealth in real assets like land, housing, and machines that are expected to generate income, but it is much harder to estimate the value of physical assets than financial assets which is why I am not confident in Credit Suisse’s data.  Physical wealth is the only real net wealth and it can only increase if physical objects become more productive. That can only happen a few different ways:

  1. Population growth increases the marginal utility of physical goods.  Land is an example.  When the population increases, the marginal productivity of land must increase.
  2. Technological improvements increase the productivity of existing bundles of atoms.  For example, the invention of the stone arch made masonry more productive.
  3. Capital formation increases the productivity of existing bundles of atoms.  For example, if we build a lot of stone bridges through much hard work, it will increase wealth by making the existing stone more productive.  The Pons Fabricius bridge in Rome has been in continuous use for over two millennia.  That was a lasting increase in wealth.  The pyramids of Egypt increased wealth for much longer, but they have had a very low payoff relative to the sacrifice they required of the original builders.  They have only increased wealth by increasing the beauty of the view around the Giza plateau which increased the utility of the area due to greater aesthetic value:

4. A tremendous amount of wealth that we all benefit from is commonly owned.  There are the roads, sewers, schools, nonprofits, and infrastructure that does not show up on any household balance sheet but that benefits us all.  There is also the natural capital which sustains life and which is being degraded by pollution and climate change.  That is also neglected by most attempts to measure wealth and it is perhaps the most important form of wealth of all.

Financial innovation rarely increases wealth because it is just ways of shifting around debt and that is a zero-sum game.  Financial innovation only increases real wealth if it has an impact which increases population, technology, or capital formation.

That is all that that I have time to write at the moment, but wealth measurement is a neglected and complicated issue in economics which deserves more work.

Posted in Inequality, Macro, Medianism, Public Finance

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