There’s been some discussion recently of the new estimates from Emmanuel Saez and Gabriel Zucman of the distribution of household wealth in the US. Using the capital income reported in the tax data, and applying appropriate rates of return to different kinds of assets, they are able to estimate the distribution of household wealth holdings going back to the beginning of the income tax in 1913. They find that wealth inequality is back to the levels of the 1920s, with 40% of net worth accounted for the richest one percent of households. The bottom 50% of households have a net worth of zero.
There’s a natural reaction to see this as posing the same kind of problem as the distribution of income — only more extreme — and respond with proposals to redistribute wealth. This case is argued by the very smart Steve Roth in comments here and on his own blog. But I’m not convinced. It’s worth recalling that proposals for broadening the ranks of property-owners are more likely to come from the right. What else was Bush’s “ownership society”? Social Security privatization, if he’d been able to pull it off, would have dramatically broadened the distribution of wealth. In general, I think the distribution of wealth has a more ambiguous relationship than the distribution of income to broader social inequality.
Case in point: Last summer, the ECB released a survey of European household wealth. And unexpectedly, the Germans turned out to be among the poorest people in Europe. The median German household reported net worth of just €50,000, compared with €100,000 in Greece, €110,000 in France, and €180,000 in Spain. The pattern is essentially the same if you look at assets rather than net worth — median household assets are lower in Germany than almost anywhere else in Europe, including the crisis countries of the Mediterranean.
At the time, this finding was mostly received in terms the familiar North-South morality tale, as one more argument for forcing austerity on the shiftless South. Not only are the thrifty Germans being asked to bail out the wastrel Mediterraneans, now it turns out the Southerners are actually richer? Why can’t they take responsibility for their own debts? No more bailouts!
No surprise there. But how do we make sense of the results themselves, given what we know about the economies of Germany and the rest of Europe? I think that understood correctly, they speak directly to the political implications of wealth distribution.
First, though: Did the survey really find what it claimed to find? The answer seems to be more or less yes, but with caveats.
Paul de Grauwe points out some distortions in the headline numbers reported by the ECB. First, this is a survey of household wealth, but, de Grauwe says, households are larger in the South than in the North. This is true, but it turns out not to make much of a difference — converting from household wealth to wealth per capita leaves the basic pattern unchanged.
|Per capita wealth in selected European countries. From de Grauwe.
Second, the survey focuses on median wealth, which ignores distribution. If we look at the mean household instead of the median one, we find Germany closer to the middle of the pack — ahead of Greece, though still behind France, Italy and Spain. The difference between the two measures results from the highly unequal distribution of wealth in Germany — the most unequal in Europe, according to the ECB survey. For the poorest quintile, median net worth is ten times higher in Greece and in Italy than in Germany, and 30 times higher in Spain.
This helps answer the question of apparent low German wealth — part of the reason the median German household is wealth-poor is because household wealth is concentrated at the top. But that just raises a new puzzle. Income distribution Germany is among the most equal in Europe. Why is the distribution of wealth so much more unequal? The puzzle deepens when we see that the other European countries with high levels of wealth inequality are France, Austria, and Finland, all of which also have relatively equal income distribution.
Another distortion pointed to by De Grauwe is that the housing bubble in southern Europe had not fully deflated in 2009, when the survey was taken — home prices were still significantly higher than a decade earlier. Since Germany never had a housing boom, this tends to depress measured wealth there. This explains some of the discrepancy, but not all of it. Using current home prices, the median Spanish household has more than triple the net wealth of the median German household; with 2002 home prices, only double. But this only moves Germany up from the lowest median household wealth in Europe, to the second lowest.
The puzzle posed by the wealth survey seems to be genuine. Even correcting for home prices and household size, the median Spanish or Italian household reports substantially more net wealth than the median German one, and the median Greek household about an equal amount. Yet Germany is, by most measures, a much richer country, with median household income of €33,000, compared with €22,000, €25,000 and €26,000 in Greece, Spain and Italy respectively. Use mean wealth instead of median, and German wealth is well above Greek and about equal to Spanish, but still below Italian — even though, again, average household income is much higher in Germany than in Italy. And the discrepancy between the median and mean raises the puzzle of why German wealth distribution is so much more uneven than German income distribution.
De Grauwe suggests one more correction: look at the total stock of fixed capital in each country, rather than household wealth. Measuring capital consistently across countries is notoriously dicey, but on his estimate, Germany and the Netherlands have as much as three times the capital per head as the southern countries. So Germany is richer in real terms than the South, as we all know; the difference is just that “a large part of German wealth is not held by households and therefore must be held by the corporate sector.” Problem solved!
Except… you know, Mitt Romney was right: corporations are people, in the sense that they are owned by people. The wealth of German corporations should also show up as the wealth of the owners of German stocks, bonds, or other claims on those corporations — which means, overwhelmingly, German households. Indeed, in mainstream economic theory, the “wealth” of the corporate sector just is the wealth of the households that own it. According to de Grauwe, the per capita value of the capital stock is more than twice as large in Germany as in Spain. Yet the average financial wealth held by a German household is only 25% higher than in Spain. So as in the case of distribution, this solution to the net-wealth puzzle just creates a new puzzle: Why is a dollar of capital in a German firm worth so much less to its ultimate owners than a dollar of capital in a Spanish or Italian firm?
And this, I think, points us toward the answer, or at least toward the right question.
The question is, what is the relationship between the level of market production in an economy, and the claims on future production represented by wealth? It’s a truism — tho often forgotten — that the market production counted in GDP is only a part of all the productive activity that takes place in society. In the same way, not all market production is capitalized into assets. Wealth in an economic sense represents only those claims on future income that are exercised by virtue of a legal title that is freely transferable, and hence has a market value.
For example, imagine two otherwise similar countries, one of which makes provision for retirement income through a pay-as-you-go public pension system, and the other of which uses some form of funded pension. The two countries may have identical levels of output and income, and retirees may receive exactly the same payments in both. But because the assets held by the pension funds show up on balance sheets while the right to future public pension payments does not, the first country will have less wealth than the second one. Again, this does not imply any difference in production, or income, or who ultimately bears the cost of supporting retirees; it is simply a question of how much of those future payments are capitalized into assets.
This is just an analogy; I don’t think retirement savings are the story here. The story is about home ownership and the value of corporate stock.
First, home ownership. Only 44 percent of German households own their own homes, compared with 70-80 percent in Greece, Italy and Spain. Among both homeowners and non-homeowners considered separately, median household wealth is comparable in Germany and in the southern countries. It’s only the much higher proportion of home ownership that produces higher median wealth in the South. And this is especially true at the bottom end of the distribution — almost all the bottom quintile (by income) of German households are renters, whereas in Greece, Spain and Italy there is a large fraction of homeowners even at the lowest incomes. Furthermore, German renters have far more protections than elsewhere. As I understand it, German renters are sufficiently protected against both rent increases and loss of their lease that their occupancy of their home is not much less secure than that of home owners. These protections are, in a sense, a form of property right — they are a claim on the future flow of housing services in the same way that a title to a house would be. But with a critical difference: the protections from rent regulation can’t be sold, don’t show up on the household’s balance sheet, and do not get counted as wealth.
In short: The biggest reason that German household wealth is lower than than elsewhere is that less claims on the future output of the housing sector take the form of assets. Housing is just as commodified in Germany as elsewhere (I don’t think public housing is unusually important there). But it is less capitalized.
Home ownership is the biggest and clearest part of the story here, but it’s not the whole story. Correct for home ownership rates, use mean rather than median, and you find that German household wealth is comparable to household wealth in Italy or Spain. But given that GDP per capita is much higher in Germany, and the capital stock seems to be so much larger, why isn’t household wealth higher in Germany too?
One possible answer is that income produced in the corporate sector is also less capitalized in Germany.
In a recent paper with Zucman, Thomas Piketty suggests that the relationship between equity values and the real value of corporate assets depends on who exercises power over the corporation. Piketty and Zucman:
Investors who wish to take control of a corporation typically have to pay a large premium to obtain majority ownership. This mechanism might explain why Tobin’s Q tends to be structurally below 1. It can also provide an explanation for some of the cross-country variation… : the higher Tobin’s Q in Anglo-Saxon countries might be related to the fact that shareholders have more control over corporations than in Germany, France, and Japan. This would be consistent with the results of Gompers, Ishii and Metrick (2003), who find that firms with stronger shareholders rights have higher Tobin’s Q. Relatedly, the control rights valuation story may explain part of the rising trend in Tobin’s Q in rich countries. … the ”control right” or ”stakeholder” view of the firm can in principle explain why the market value of corporations is particularly low in Germany (where worker representatives have voting rights in corporate boards without any equity stake in the company). According to this ”stakeholder” view of the firm, the market value of corporations can be interpreted as the value for the owner, while the book value can be interpreted as the value for all stakeholders.
In other words, one reason household wealth is low in Germany is because German households exercise their claims on the business sector not via financial assets, but as workers.
The corporate sector is also relatively larger in Germany than in the southern countries, where small business remains widespread. 14 percent of Spanish households and 18 percent of Italian households report ownership of a business, compared with only 9 percent of German households. Again, this is a way in which lower wealth reflects a shift in claims on the social product from property ownership to labor.
It’s not a coincidence that Europe’s dominant economy has the least market wealth. The truth is, success in the world market has depended for a long time now on limiting dependence on asset markets, just as the most successful competitors within national economies are the giant corporations that suppress the market mechanism internally. Germany, as with late industrializers like Japan, Korea, and now China, has succeeded largely by ensuring that investment is not guided by market signals, but through active planning by banks and/or the state. There’s nothing new in the fact that greater real wealth in the sense of productive capacity goes hand hand with less wealth in the sense of claims on the social product capitalized into assets. Only in the poorest and most backward countries does a significant fraction of the claims of working people on the product take the form of asset ownership.
The world of small farmers and self-employed artisans isn’t one we can, or should, return to. Perhaps the world of homeowners managing their own retirement savings isn’t one we can, or should, preserve.