David R. Henderson  

Arnold Kling on Well-Being Over Time

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When I was a young assistant professor at the University of Rochester business school in the late 1970s, I had a picture on my desk of a cute dog saying, "I've been rich and I've been poor. Rich is better." At the time, it didn't apply to me because, by the standard measures of income or tangible wealth, I had never been rich.

I thought of that picture when reading Arnold Kling's recent Econlib Feature Article, "The Longitude of Well-Being," June 2, 2014. Were I to do an update of the picture I had on my desk, an update that communicated Arnold's message, it would have someone in his sixties saying, "I've been rich and I've been poor. So have most of us."

At any given time, about 65+ percent of Americans own their own home. But, as Arnold points out, drawing on data from sociologists Mark Robert Rank, Thomas A. Hirschl, and Kirk A. Foster in their recent book, Chasing the American Dream, by age 55, 90 percent of Americans have owned a home. What this finding highlights, as Arnold is quick to note, is how big a difference there can be between situations over time and situations at a point in time.

Rank et al also discuss the various income categories people are in over their lifetime and Arnold adds his own thoughts. Arnold writes:

The time-series, cross-section fallacy has a similar distorting effect on discussions of the distribution of income. That is, economists look at "inequality over time" by examining time-series, cross-sections of data, rather than by looking at longitudinal data. As a result, many of the statistical findings in Chasing the American Dream will prove surprising.

Drawing on their data, Arnold reports that over half of Americans experience poverty or near-poverty (income less than 150 percent of the poverty line) for at least one year between age 25 and age 60. Had I been in graduate school one year longer--I left for the University of Rochester at age 24, without my dissertation done, because I was tired of living on a near-poverty income--I would have been one of these.

Thus my "I've been poor" statement.

What about being rich? Rank et al define affluence as having at least 9 times the poverty level of income. By that standard, I've never been rich although I've been close. Arnold was rich for just one year, a year when he made a big capital gain. We both think that their standard for affluence is too high. I'm clearly affluent by any reasonable standard. But even by this stringent standard, note Rank et al, by age 60, 56.4 percent of whites have been affluent at some point and even 23.6 percent of non-whites. Reduce the threshold for affluence from 9 times the poverty level to 7 times, and I would bet that a majority of non-whites have been affluent also.

So what's the point of all this? You don't know much about someone by looking at whether he owns a house or at his income at a point in time. You must look over time.

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COMMENTS (6 to date)
Floccina writes:

By your definition I have been poor (even as a non-student adult) and I have been rich and I say rich is better but not a lot better. Also I lived in Honduras for about 8 months and we USAers are almost all rich.

Bostonian writes:

I think a definition of poverty should incorporate not just current assets and income relative to necessary expenses but also future income. A college senior with zero net worth and current income but a good job offer is not "poor" in my opinion, and a married couple of 70-year-olds with home equity of $200K and no other assets is not "rich".

We are well off, and if our children really need help after college we probably will assist them. I knew my parents would always backstop me, although fortunately I did not need to use the backstop.

So lots of children from upper middle class families will never be "poor", although there may years of their adult lives where they have little income and few assets to their name.

Handle writes:

We do a pretty bad job at estimating wealth too. The Federal Reserve SCF data doesn't include in assets something that is the equivalent of 'present value of an expected stream of benefit payments', which includes pensions and transfers.

So, I know an enlistedman in the Air Force who will be retiring at age 41. By typical net worth measures, he is broke. But he will be receiving $2,500 a month and subsidized health insurance for life that will be upward adjusted for inflation and is as risk-free as any government promise.

There are different ways to calculate what that's worth, discount rates, longevity estimates, etc. but it's not unreasonable to say the present value could be around a million dollars. So is he 'rich' or not?

By normal measures, he is not, he looks 'broke'. But if you were to measure his expected lifetime consumption, then he's very rich compared to the average of his age-and-education cohort.

Pajser writes:

Diminishing returns from wealth are so huge that rich is ugly.

zc writes:

"90 percent of Americans have owned a home"

Based on the numbers, it looks like they're using mortgages as a proxy for home ownership. In such cases, home ownership may be true by legal definition, but isn't necessarily so from a financial perspective. Take, for example, the 13% of 'homeowners' in the US who were underwater recently (CoreLogic Q32013); are they 'homeowners', or people making payments to a bank on a asset worth less than they owe?

Sure, lots of people with mortgages build up equity, have payments they can afford, etc. But, for many, a mortgage just means renting from a bank. It's nice politics/talking points to talk about the home 'ownership' rate rising over time because of some policy or program, but it doesn't mean what many people think it means in such a context.

ThomasH writes:

Some of the discussion of inequality is distorted by definitions of income. Capital gains are problematic because a) they are not adjusted for inflation and b) taxed at the marginal rate of the year in which they are realized rather than as they accrue. A better measure of inequality over time would be consumption since it is consumption that one wishes to tax progressively, not income.

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