Wealth isn't what matters
An idea that makes less sense the closer you look at it
Matthew Yglesias
Mar 12, 2021
A bad economy promotes wealth equality
Let’s return to the question of monetary policy and the racial wealth gap.
As you’ll recall, a research paper from Federal Reserve staff economists argued:
- Stimulative monetary policy reduces unemployment.
- Lower unemployment disproportionately benefits Black workers.
- Stimulative monetary policy also raises the value of stocks.
- Higher stock prices disproportionately benefit white people.
- The mechanical impact of higher stock prices on the racial wealth gap is larger than the mechanical impact of lowering the unemployment gap on the racial wealth gap, and therefore stimulative monetary policy increases the racial wealth gap.
The problem with that paper isn’t that it’s wrong — the analysis seems correct — it’s that the conclusion is ridiculous. The stock market crashed when it became clear that the COVID-19 epidemic was not going to be contained. It surged after the Georgia Senate elections made it clear that a Democratic majority would be in place to pass a fiscal stimulus bill.
There’s nothing special about monetary policy and the wealth gap, or even anything special about the racial wealth gap in particular. Any kind of surprise good news lifts stock prices and therefore disproportionately enriches the people who already own lots of stock. That’s mostly white people, but more to the point, it’s the subset of white people who are rich. Nobody thinks that inventing COVID-19 vaccines was a giveaway to the rich. But it definitely improved the economic outlook and gave share prices a boost.
If you focus on wealth equality, you end up making yourself into a straw-egalitarian who thinks recessions are good and recoveries are bad. Note that while you can certainly do hypothetical scenarios about income inequality that are like this, in the real world, recessions widen income inequality and tight labor markets are disproportionately beneficial for low-wage workers. Wealth, by contrast, is full of anomalies.
Wealth and the poor
Wednesday afternoon, I saw some well-dressed women who looked to be early-20s professionals eating lunch outside at the expensive salad place Sweetgreen on P Street. There was also an unkempt-looking fellow begging on the block.
Common sense says the unhoused are poor, and the people eating $12 salad for lunch are not. But it’s very likely that some of the young professionals have negative net worth due to having recently graduated from college with student loans, whereas nobody is lending money to people who don’t have homes. In wealth terms, a 24-year-old liberal arts grad enjoying a Kale Caesar is poorer than the person who makes the Kale Caesar, poorer than the person sleeping in a homeless shelter, and poorer than a subsistence farmer in Haiti. The only person poorer than the liberal arts grad is someone like a newly minted dentist, who will have even more debt.
That’s ridiculous, obviously, and it’s why conversations about the distributional impact of student loan forgiveness get so crazy so quickly.
What’s missing from the balance sheet is the value of the degree. And that messes things up even within the internal analysis of student debt. A person who graduates from the University of Wisconsin is going to have more debt than someone who did two years at an online college and then dropped out. But the Wisconsin grad is much better off, because a bachelor’s degree from a flagship state university campus is valuable, and an incomplete from an online college is worthless.
“Human capital” isn’t really capital — you can’t trade it to someone else. So it doesn’t count as wealth. But lots of things that aren’t wealth are still valuable.
The value of social insurance
I grew up in Manhattan and was born in 1981, when living in Manhattan was not so fashionable or expensive as it became in the 21st century. So I’m acquainted with a lot of people my parents’ age who made real estate investments in the 1980s that paid off really incredibly well for them. Those people are rich, even if they don’t “feel rich” because so much of the value is tied up in their house.
But I also know people who, due to the vagaries of rent control, just have incredibly sweetheart deals on their apartment.
A sweetheart deal on an apartment is not as good of a thing to have as a very expensive condo, because you can sell the condo and move someplace cheaper if you want, while there’s no legal way to monetize possession of a rent-controlled unit.¹ But it’s not nothing! If you compare to families who are otherwise similarly situated but one has a great deal on rent thanks to rent control, the family with the great deal is clearly better-off. But wealth has no way to know that.
By the same token, if we eliminated Social Security then middle-class people would need to save more, and we would have more middle-class wealth.
But would a society with no Social Security actually be more egalitarian? No. It’s just that you would be transmogrifying a valuable form of non-wealth (Social Security) into something worse (brokerage accounts) that happens to qualify as wealth. Now you could change this around if you wanted to. Instead of financing Social Security with taxes, you could endow a Social Security Fund with a huge stash of bonds. Then the Social Security Fund would own a bunch of wealth (bonds) and we the people would collectively own the fund. Taxes would cover the interest on the bonds, and the proceeds would be paid out as Social Security benefits. This doesn’t change anything in terms of how much taxes people pay or benefits they receive. But, through a bit of accounting legerdemain, we’ve conjured up a stash of publicly owned wealth and created a more egalitarian distribution.
The perversity of housing
I often think that on some level, it would be better if we had no homeowners at all, and all the housing stock in the country was owned by, like, a dozen gigantic national landlording franchises. Since these are big companies, all the properties would be very professionally managed. Instead of you desperately seeking a reliable plumber on the basis of no information, the big landlording franchises would employ tradespeople whose job is to make sure the value of their assets doesn’t erode.
And since nobody owns a home in this scenario, the rental market would cater to the needs of grown-### middle-class people who want stability (long-term leases) and single-family homes with yards, etc., etc., etc.
One great thing about this universe is that it would clarify that housing is fundamentally a commodity, and like any commodity, we want it to be cheap and plentiful. Of course, people would still care about the quality of their neighborhood and be bothered by noise and nuisances and so forth. But houses are like cars or boats or tables or laptops — you want to live in a world where there are plenty of new ones being churned out all the time so they are easy to buy.
In the world we have, housing is instead a source of “wealth” for tons of people. The government, in order to help people build wealth, helps you get a subsidized mortgage loan. Then you go buy a house, which itself bundles a depreciating durable good (the house) with a speculative asset (the land the house is built on). Then, you actually need to spend a lot of money fighting the inevitable deterioration of the depreciating durable good, while hoping to recoup your investment through appreciation of the price of land. This creates a perceived incentive to promote housing scarcity in order to boost the value of your leveraged asset. This is how we’re building wealth.
But it’s pretty obvious that the United States of America as a whole cannot become a more prosperous country by making housing scarce. We’re actually impoverishing ourselves with this wealth-building strategy. Instead, you have people in pricey markets inhabiting subpar dwellings that just happen to be valuable.
The two faces of capital
One big issue here is that the “capital” in “capitalism” means two different things.
On the one hand, there’s the variable
k in a mathematical production function. This
k is stuff that you use to make stuff. A house — as in the physical object — produces housing, a service. A car factory is full of all kinds of specialized machinery that can make a car. A white-collar office has desks and power outlets and computers.
But on the other hand, there’s just money. Or financial value. Disney, the corporation, is worth a lot of money.
Some of that is the tangible capital the company owns. But mostly, it’s the value of the Disney brand, the value of sub-brands like Marvel and Star Wars and ESPN, and even more so the concrete value of specific pieces of intellectual property. Even something like Disney World, which obviously involves a lot of tangible capital goods, is mostly intellectual property. You can’t go build a competing park, because no matter how much money you pour into it, you can’t have Mickey Mouse or Elsa or Han Solo.
There was probably a time when it was defensible to treat financial capital and physical capital as so closely related that it made sense to use the same word for them. But today’s economy doesn’t really work like that. Apple doesn’t own the factories where the iPhone is made. The most valuable company in the world is mostly a cluster of brands, patents, trademarks, and human relationships. The companies like Foxconn and TSMC that own the physical capital used to make Apple gear are decent businesses, but the best businesses are very heavily tilted toward the intangible.
To some extent, that’s great. At least the Apple version seems great. But the Disney version is a mixed bag. The Elsa IP is copyright working as intended, providing financial rewards to people who craft beloved works of art. But the Mickey Mouse IP is the disastrous spawn of retroactive copyright extension. And we are impoverished culturally by copyright terms that last so long that they far outlive any useful incentive. But the public domain, like Social Security, is something that has value without counting as wealth. Enclosing more and more of the intellectual commons and making it “property” conjures up wealth out of thin air.
But that’s bad.
Wealth and real resources
Last and by no means least, a point borrowed from Dean Baker.
The point of taxation, on some level, is that if you want to increase certain types of consumption you may need to constrain other types. Sin taxes work this way — less smoking and boozing, more consumption of wholesome pursuits. So do Pigouvian taxes on pollution — less burning of gasoline and less soot in the air, more consumption of things that don’t create problems for others. But so does redistribution — if you tax the rich to give to the poor, then the poor end up with more stuff and the rich presumably with less.
But the wealth of the super-wealthy isn’t really like that. If you’ve got Jeff Bezos money, then your net worth swings billions of dollars hither and yon based on the fluctuations of the stock market. This can’t possibly be making any difference to what Bezos actually does on a day-to-day basis.
And that’s not just because he’s too rich to notice the difference. It’s because even though his net worth takes these crazy swings, the fact of what he owns — a bunch of Amazon stock — doesn’t change at all. We can look at the current marginal price of buying one share of Amazon, then multiply that price by all the shares Bezos owns and generate his wealth. But obviously, Bezos couldn’t just cash in all his stock tomorrow — it would set off a huge panic. The number is a mathematical fiction. And by the same token, if Amazon shares plunge 5% tomorrow, he hasn’t really lost anything. He still owns what he owns; he has whatever concrete power over the enterprise of Amazon that he actually has.
This is fundamentally what makes the “stimulus is bad for equality” view so dumb. Today, Bezos owns a huge chunk of Amazon and you work at Chipotle. Tomorrow, the economy goes into recession, Amazon stock falls 5%, and Chipotle lays you off. Your life has been turned upside and Jeff Bezos still owns Amazon. It is true that Bezos’ wealth plummeted while yours probably stayed the same because you didn’t have any wealth. But again, that just shows that wealth isn’t really what matters here. Having a job versus not having a job versus being the founder/CEO of a vast corporate behemoth — that’s what matters.
