Burgess COMMENTARY
President Eisenhower warned about the military-industrial complex, but the complex of economists, policy makers and owners may well be worse. Peter Drucker famously said 'you manage what you measure' but we measure all the wrong things. This can be changed ... Peter Burgess ... http://truevalumetrics.org

Tim Worstall is touching on an issue about measurement in the field of economics, but does not complete the journey. There needs to be clarity about State and Flow. The idea of discounting future flows to a present value is a useful concept, but it should be used only with an understanding of what it really is. Accountants are quite rigorous about this ... analysts tend to game this to fit their prejudice. Convenient, but dangerously wrong.
Peter Burgess

CBO's Very Bad Report - It's Complete Nonsense That The Top 10% Hold 76% Of All US Wealth

Opinions expressed by Forbes Contributors are their own.

Oh dearie me, we’ve another one of those reports on the wealth of the nation and this one is from the Congressional Budget Office. Written at the behest of Senator Bernie Sanders it tells us that 76% of all family wealth in the US belongs to the top 10% and the bottom 50% have to rub along with only 1% of all such wealth. The problem here is that the larger statement is tosh, complete piffle. It simply is not true in any manner that the top 10% have 76% of all the wealth. It is true that they have 76% of the wealth as it is being counted. But that’s the very problem, the manner in which the wealth is being counted.

The problem here is that they are only counting financial wealth and even then only a subset of it. We should, if wealth is something we are interested in, be counting, you know, wealth. Which means that we’ve got to add in the largest form of wealth in any modern economy – human capital. We also have to make sure that we don’t fall foul of Worstall’s Fallacy – which is to measure something without taking acount of what we already do to change that measurement.

But this is the report we’ve got:

The report was commissioned at the request of Sen. Bernie Sanders of Vermont, who made inequality a central theme of his run for the Democratic presidential nomination this year. In a statement, he said the analysis “makes clear that since the 1980s there has been an enormous transfer of wealth from the middle class and the poor to the wealthiest people in this country.”

Well, yes, Bernie would say that, wouldn’t he?

• U.S. family wealth totaled $67 trillion in 2013.

• But slices of that pie were far from equal, according to a report released Thursday from the Congressional Budget Office.

• The top 10% of families — those who had at least $942,000 — held 76% of total wealth. The average amount of wealth in this group was $4 million.

• Everyone else in the top 50% of the country accounted for 23% of total wealth, with an average of $316,000 per family.

• That leaves just 1% of the total pie for the entire bottom half of the population.

Those are the numbers that everyone’s going to run with and that’s what the problem is. They’re not an accurate representation of our actual problem, if a problem there is:

• There are significant differences in wealth among different age and education groups. In 2013, the median family wealth of families headed by someone who was age 65 or older—$211,000—was more than 3½ times the median wealth of families headed by someone between the ages of 35 and 49.

• Similarly, median wealth of families headed by someone with a college degree—$202,000—was almost four times the median wealth of families headed by someone with a high school diploma.

Our first problem comes with the fact that “family wealth” as defined here simply isn’t the major source of wealth in the nation. Nothing like in fact, it’s not even the majority source, nothing like it. By chance we’ve had a similar report out from the ONS in my native Britain:

• Official calculations show the UK’s net wealth hit £8.8 trillion last year, with each household worth a whopping £378,000.

• …

• The ONS also produced figures for “human capital”, putting a monetary value on a person’s qualifications, age, health, personality and skills.

• The value of the UK’s human capital increased by £890billion to £19.2 trillion last year.

As you can see, human capital is vastly more important as an economic number but this CBO report is taking no account of it. Further, human capital is markedly more equally distributed than other forms of capital.

So that’s our first problem, our second is in the definition of capital (again) that they’re using:

For this analysis, CBO calculated that measure of wealth as a family’s assets minus its debt. CBO measured wealth as marketable wealth, which consists of assets that are easily tradable and that have value even after the death of their owner. Those assets include home equity, other real estate (net of real estate loans), financial securities, bank deposits, defined contribution pension accounts, and business equity. Debt is nonmortgage debt, including credit card debt, auto loans, and student loans, for example.

There’re two huge holes in that.

The first is that it entirely excludes any defined benefit pensions. That fireman retiring at 55 with a $60,000 a year pension we would think is reasonably wealthy really. This CBO method of measurement defines him as having no wealth – that $60 k a year off into the future doesn’t count. Nor do retiree health benefits and so on and on. It’s simply not a good measure of wealth, especially for the average family where home equity and a pension are likely to be the two major sources of whatever household wealth there is.

For example, someone who has saved into a 401 (k) to produce a $60k a year pension would be defined as having more than $1 million in wealth (yes, that’s the sort of amount you need for such a pension). Someone with a government pension which will pay him $60,000 a year, or even a corporate pension in many cases, will be described as having zero wealth. Whut?

It’s just not a good measure of wealth. Bernie’s Senatorial pension counts as $0 here, Bernie’s 401 (k) as wealth. Just not a good measure.

And finally there’s that Worstall’s Fallacy thing. This might actually be one of the few things upon which Jamie Galbraith and I agree – we have discussed it – we must take account of the things that we already do to reduce income and wealth inequality when trying to measure inequality.

Your Social Security payments, when they arrive, will definitely be income to you. An asset that provides you with an income is also known as wealth. Social Security does not count in these calculations. And we can go further.

Unemployment insurance has a value – all insurance policies have a value. That if I get fired I have an income is a source of wealth to me. But that’s not counted.

If I have no other income I’ll get perhaps $300 a month in food stamps. Not a lot, certainly, but that $3,600 a year, assuming I got it every year, would have a capital value of $60k, $70k? And we would want to discount it because it’s insurance, not a payment that we’ll all get. But that welfare state, those Great Society programs, they are wealth to people. And we’ve got to count them as wealth to people. After all, the reason we put them in place was in order to make people richer, right? We move around $800 billion a year in these sorts of programs. They’re going to carry on for decades. They are thus wealth of some $16 to $ 24 trillion being moved around. We must count this too.

I’m perfectly willing to agree that the wealth distribution in the US is more unequal than it is in many other places. Perhaps less so than it is in many poor countries, more so than other rich countries. I’m even willing to listen to arguments about how this might be an error, one that we might want to correct.

But I will still insist that we must measure wealth properly before we reach such conclusions. And this report just doesn’t do that so we’d better not start trying to draw conclusions about what we should do from it.

Tim Worstall , Forbes CONTRIBUTOR ... I have opinions about economics, finance and public policy.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

The author is a Forbes contributor. The opinions expressed are those of the writer.

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