Enterprise

The whole wealth measurement business is broken

Do you believe this title? I do not know.

The many problems with measuring a country’s wealth are fully exposed in this Credit Suisse report.

But let’s start a little closer to home.

When I married my wife, I promised to take care of her financial and material needs. This promise has a market value. I could have issued a “marriage bond” and sold it in the market to capture that capital value.

Marriages have actually worked that way for a long time. Dows are still common in many places. This reflects the market value of the pledge. Like any other asset.

The Capital as Power (CasP) economics approach calls how we work out the values ​​of future promises capitalization ritual. Our rituals, or conventions, mean that the value of certain promises is capitalized and exchanged, and others are not.

JW Mason argues that this helps solve the puzzle of low German wealth that is consistently found in wealth surveys like the Credit Suisse report.

For example, imagine two otherwise similar countries, one of which provides retirement income through a pay-as-you-go public pension system, and the other of which uses a form of funded pension. The two countries may have identical production and income levels, and retirees may receive exactly the same payments in both countries. But because the assets held by pension funds appear on balance sheets while the right to future public pension payments do not, the first country will have less wealth than the second. Again, this does not imply any difference in production or income, or who ultimately bears the cost of maintaining retirees; it’s just a question of how much of those future payments are capitalized into assets.

The Credit Suisse report explicitly says (p19) that

Assets of private pension funds are included, but not rights to public pensions.

They also note why countries with similar income levels can have widely varying wealth estimates.

This is partly because more generous social benefits, including pensions and health care, make personal saving less pressing than elsewhere.

But we could estimate the market value of future public pensions by issuing a financial instrument called a “pension bond” that entitles the beneficiary to a country’s public pension. A market price can be found by selling some of these bonds on world markets. We can then multiply that price by the number of people in the country and get a capitalized value.

Alternatively, we can capitalize current streams of payments into the pension system. Take my country, Australia. Our public pension system pays $55 billion a year in income to retirees. At a 4% cap rate, we get a market value of these pledges of about $1.4 trillion, or $140,000 per household. The value would be much higher if we factored in some future growth.

I suspect that capitalizing the value of public pensions would suddenly give the impression that Europeans are very rich. Trillions of dollars of wealth would appear out of nowhere. But instead, we ritually ignore this and in doing so devalue unfunded promises in our political debates.

Another issue of wealth measurement concerns the value of real estate assets. A regulatory regime that keeps rents low will also reduce house prices. This will result in lower measured wealth in terms of the capital value of things that are ritually capitalized, in this case residential property.

A fall in the value of real estate assets due to a fall in rents does reduce the wealth of the owners. But it also increases the value of the future surpluses of tenant households. Because the increased value to tenants of a promise to keep rents low is not capitalized on, it is ignored.

But we know that keeping rents low has value for tenants that can be capitalized on. The case where Herbert Sukenik was paid $17 million to vacate his New York rent-controlled apartment so it could be redeveloped makes this clear. To have him moved, a price was negotiated that reflected the market value of his current discounted rent.

This is a case where our rituals required the market value of a low rent to be capitalized in order to prepay the full future value and make an exchange of pledges. Now imagine how important the capitalized value of low rents would be in a country like Germany where more than half of households rent and where strict regulations keep rents low.

The flip side of both of these wealth measurement problems occurs in Australia. We have $3 trillion in assets in private superannuation funds and a fairly deregulated private rental market and a tiny public housing sector. At the same time, real estate assets are being capitalized at declining cap rates, which has driven market values ​​up by trillions in recent years.

The Credit Suisse report notes that price gains of 25% for homes in New Zealand and gains of 31% in Australia have been a major determinant of recent growth in their measured wealth.

But does that make us richer? I’m not so sure. Nor am I sure of the value for our economic and political debates of measuring wealth by the value of only the things we ritually capitalize on.

I talked about this on a recent FET podcast episode. Enjoy.

Dr. Cameron Murray is co-author of the book Game of Mates. Subscribe to his written work at Fresheconomicthinking.substack.com.

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