Saturday, June 27, 2009

Wealth and its Allocation

If those who keep our national accounts are doing a good job, specifically the Bureau of Economic Analysis, part of the Department of Commerce—the agency that constructs the Gross Domestic Product and its subcomponents—there is no doubt that wealth has increased. I looked at this subject the other day and confirmed it using data from the BEA dealing with per capita disposable personal income expressed in constant dollars.* To look at a reasonable time period, let's take twenty years. In 1988 disposable income per person was $20,740 in the United States. Twenty years later, in 2008, it was $28,741—in dollars of the same purchasing power. Actual purchasing power had therefore increased almost 40 percent in that period. Wealth has definitely grown. And if we go back forty years, real wealth has more than doubled; in 1968 disposable income was $12,892 for every woman, man, and baby in the realm.

But the quality of life does not necessarily mirror increase in real wealth—and that has all manner of interesting implications. The facts bombard us. In getting ready for a move we just discovered some old copies of the Detroit Free Press, Wall Street Journal, and the New York Times from the year 2000. Strange and wonderful: all three papers were physically larger. They were also thicker—because they held more ads. And the Detroit paper, which arrived at our door daily in those days, is now only tossed four times a week. Detroit may be an extreme example, Motown that it is, but it illustrates the subject. We drive its highways. Only those portions leading directly from the airport to the Ford Field football stadium are decently maintained. Why? Super Bowl XL took place here in early 2006. Bridges on many other thoroughfares are literally shedding concrete and bleeding rust. Three of the four domestic auto makers are in bankruptcy. A local malaise? Not really. There are many other signs, not least the well-known economic crisis in banking and housing. Then last Thursday the New York Times ran the article that actually triggered this post; it was headlined: COSTS KEEP RAIL SYSTEM OUTDATED ACROSS U.S. How come? Wealth is increasing; we do have the money.

Once you have wealth—and it is growing—it’s not the wealth that matters any more. It is its allocation. And here the issue boils down to two factors: who gets the money and what is it spent on. Considering the first question, wealth has been shifted to the top fifths of households over time. The following table shows this process over a forty-year period. It is derived from Census data available here.
Share of Aggregate Income by Household Quintiles - in Percent
Lowest2nd3rd4th5thTop 5%
19674.010.817.324.243.617.2
19873.89.616.124.346.218.2
20073.48.714.823.449.721.2


A picture illustrates the change much better. The following bar chart shows change in share for three periods: from 1967 to 1987, from 1987 to 2007, and then for the entire forty-year period. What this tells us is that the rich get richer and the poor get poorer. Hence the quality of life for most declines despite an increase in wealth. Please note here that the last block, the one labeled “Top 5%” is part of the fifth quintile of households. It merely shows that the very top was the greatest winner in this forty-year race to the top.


This shift of wealth from the lower 80 percent of households to the top 20 percent may, all by itself, explain why our rails (and other activities in the public domain) are no longer maintained. This kind of rather dramatic shift signals that “natural phenomena,” thus market forces—over against conscious policy—govern the fortunes of the population. I have little doubt that this outcome is in large part due to the great expense involved in getting elected. Where the money comes from for that is very important—as are the motives of those who provide it. Are those motives selfish or communal? The money must come from the top fifth, by and large: it has been getting very much richer. It’s motives appear to be selfish, else we would see more allocation of wealth to the commons: our transportation systems, including the public transit, environment and parks, education, health care, the infrastructure, and the genuinely needy. I don’t have any data, but I suspect that the salaries of our elected officials, of their staffs, and the costs of their incidental expenses are much less than what these same officials have to expend on getting elected. If that money comes from corporate wealth—and if he who pays the piper calls the tune—I rather doubt that we still have a genuinely functioning democracy.

But there is a deeper current here as well. Our thinking has become simplistic. The notion that free markets are the answer to everything is unworthy of our species. That concept is modeled on nature, an unconscious process. But we are a conscious phenomenon. We are intentional. We can do better than letting nature rage away, destroying values built up very slowly over long periods by conscious effort. Put metaphorically, it’s nature that produces IPods but it’s humanity that builds a highway system for common use. It’s much easier to persuade individuals to buy a discrete product producing instant pleasure than a vast network of rails extending hundreds of miles.

No, indeed, it’s not the wealth but its allocation that counts—and the allocation needs to have a much higher level of intentionality, and a much more extensive time horizon, than our current system, focused on the next quarter or the next election, “naturally” produces.
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*The BEA uses what are called “chained” dollars with a 2000 base, a newer form of calculating constant purchasing power, thus with the distorting effect of inflation (or deflation) removed.

1 comment:

  1. Very well put. And the graphic is striking.

    The growth of wealth is, of course, important too. Spending time living in what is referred to as the Developing World, makes one keenely aware of this.

    It becomes clear that a people who must spend the bulk of their time and energy making sure they are feed and sheltered do not have the "luxury" of investing in education, environmental cleanups, and support of arts, parks and libraries. Nonetheless, it is disheartening to see that a people who are wealthy--very wealthy--and thus have the "luxury" to invest in these things choose to do so only grudgingly...

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