What is Wealth, part II

Yesterday’s NYT had an article about wealth that fell into several of the usual traps of this discussion. To his credit, David Leonhardt looked at a few aspects of the question. He did not manage to avoid two of the major traps when it comes to this discussion — the two sided nature of any temporal argument, and relative aspect of wealth as a concept.

Long time readers will recall we looked at the question What is wealth? back in 2004.

The Times uses Snow Blowers as an example, but any modern device or service would suffice:

"Yet the benefits of the snow blower, namely more free time
and less health risk, are largely missing from the government’s
attempts to determine Americans’ economic well-being. The same goes for
dozens of other inventions, be they air-conditioners, cellphones or
medical devices. The reasons are a little technical — they involve the
measurement of inflation — but they’re important to understand, because
the implications are so large."

As we noted last time out, all temporal arguments are two-sided. The lowest economic strata — with their indoor plumbing and their color TVs — are "wealthier" today than long
dead royalty of long ago. Thanks to Human ingenuity and the relentless progress of technology, the wealthy amongst us are inevitably poorer than people from the lower economic rungs 100 years
from now.

Sure, we may have Snowblowers, but we don’t go to Mars for vacations, or have nano-tech cholesterol bots keep our arteries clean, or the ability to carry the entire library of congress, every film, book or musical recording ever made in a device the size of a quarter. Hey, we don’t even have robotic servants to operate those snowblowers! Why, we are practically impoverished compred with people born merely 100 years from now.

Of course, that’s just as absurd an argument. Nobody today thinks to themselves: "Huzzah! I am wealthier than King Henry!", nor do they lament "Alas! I have less wealth than the poorest schlump to be born in the year 2200. . . woe is me.".

It is the nature of mankind is to
relentlessly raise his standard of living, generation after generation.
This has been especially true throughout history, with progress accellerating at an ever quickening pace. The overall trend has been upwards for a long, long time, and there’s no reason to think this will end anytime soon. This is a given of the human condition. Claiming this as proof of wealth merely reveals a fundamental lack of understanding as to the very nature of human existence.

Other than that minor shortcoming . . .

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Regardless of the 2 sided nature of the historical/future argument, many observers have a fundamental misunderstanding about the conception of financial well being: Wealth is a relative concept.

Some people define wealth as having $100 more than what their
brother-in-law has. We try to "keep up with the Jones" because they are our contemporaneous, geographical peers. We Americans neither try to keep up with the Sultan of Brunei nor with a Chinese factory worker. 

We instead compare ourselves vis a vis local contemporaries.

This is why the price of Real Estate in Manhattan or La Jolla, CA. does not impact the price of Real Estate in Chicago or Nebraska. Its why Larry Ellison and Steve Jobs compare themselves with Bill Gates and the Google boys.

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Tainting the overall discussion is the old economic saw, courtesy of the Boskin Commission, that claims the government’s measure of inflation overstates the case. This is one economic’s greatest absurdity, about on par with cold fusion and OJ’s trial. (The chart below pursues this absurd line of thought).
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click for larger graphic

Graphic courtesy of the NYT

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In the past, we have beaten the inflation issue to death. If you believe the CPI — the core CPI, seasonally adjusted, hedonically altered, substituting chop meat for steak and removing energy and food — accurately reflects the cost of living, well, then you simply have not been paying attention. We are not the first to mention this;  John Williams created the Shadow Government Statistics to track actual inflation and GDP (See also this discussion by Martin Weiss);

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Let’s all agree on two things: First, Human progress is inevitable, with each generation benefitting from improvements in medical care, technology, etc.; Second, there is a systemic bias built into the government reporting machinary that understates the declining purchasing power of the US dollar.

The more the Fed prints, the less its worth — that’s basic law of supply and demand at work. That’s something I would hope "one of the country’s leading macroeconomists" would understand.

Apparently not . . .

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Sources:
Life Is Better; It Isn’t Better. Which Is It?
DAVID LEONHARDT
Economix
NYT, September 20, 2006
http://www.nytimes.com/2006/09/20/business/20leonhardt.html

What is wealth?
Saturday, May 22, 2004
http://bigpicture.typepad.com/comments/2004/05/what_is_wealth.html

The Boskin Commission Report and its Aftermath
Robert J. Gordon
Northwestern University and NBER, September 1, 1999
http://faculty-web.at.northwestern.edu/economics/gordon/346.html

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