Real Household Net Worth: Look Out Below?

August 26th, 2015 3 comments

In my last post I pointed out that over the last half century, every time the year-over-year change in Real Household Net Worth went negative (real household wealth decreased), a recession had either started, or was about to.  (One bare exception: a tiny decline in Q4 2011, which looks rather like turbulence following The Big Whatever.) Throughout, click for source.

The problem: we don’t see this quarterly number until three+ months after the end of a quarter, when the Fed releases its Z.1 report for the the preceding quarter. The Q2 2015 report is due September 18.

But right now we might be able to roughly predict what we’re going to see four+ months from now, in the report on our current quarter, Q3, which ends September 30. We’re a bit over a month from the end the quarter, and we have some numbers to hand.

The U.S. equity markets are down roughly 7% year-over-year (click for source):

Screen shot 2015-08-26 at 11.42.32 AM

Total U.S. equities market cap one year ago was about $20 trillion:

Screen shot 2015-08-26 at 12.27.32 PM

So a 7% equity decline translates to a $1.4-trillion hit to total market cap, which goes straight to the lefthand (asset) side of household balance sheets, because households ultimately own all corporate equity — firms issue equity, and households own it (at one or more removes); people don’t issue equity in themselves, and firms don’t own people (at least not yet). It’s an asymmetrical, one-way ownership relationship. (Note: yes, the Fed accounts for household net worth on a mark-to-market basis.)

Total household net worth a year ago was $82 trillion. The $1.4 trillion equity decline translates to a 1.7% decline in household net worth.

Meanwhile household liabilities over the last four quarters have been growing at a fairly steady rate just above 0.2% per year. There’s no reason to expect a big difference in Q3.

This suggests a 1.9% decline in household net worth over the last year, based on the equity markets alone. (My gentle readers are encouraged to add numbers for real estate and fixed-income assets.) Add (subtract) 1.5% in inflation over that period, and you’re looking at something like 3.4% decline in real household net worth, year over year.

Unless the stock market rallies by 10% or 15% before the end of September ($2–3 trillion, or 2.5–3.5% of $80 trillion net worth), it’s likely we’ll see a negative print for year-over-year change in real household net worth when the Fed releases its Z.1 in early December of this year. And we know what that means — or at least we know what it’s meant over the last half century.

You heard it here first…

Cross-posted at Angry Bear.

 

 

Predicting Recessions The Easy Way: Monetarists, MMT, And The Money Stock

August 25th, 2015 No comments

I have a new post up that has implications for stock-market investment, so I decided to try posting it over at Seeking Alpha, where they’re paying me a few tens of dollars for the post (plus more based on page views — not much luck so far).

The post argues that year-over-year change in Real Household Net Worth has been a great predictor of NBER-designated recessions over the last half century. (It’s either 7 for 7, or 8 for 7, over 50+ years, depending on the threshold you use.) If you were following this measure, you would have gotten out of the market on March 6, 2008, avoiding a 50% drawdown over the next twelve months.

But the post goes farther, offering a somewhat monetarist economic explanation but using total household net worth as the measure of the “money stock.” Short story: if households have less (more) money, they spend less (more). Not exactly a radical behavioral economic assertion.

If you’re wondering how recent days’ market events have caused billions (trillions?) of dollars to “disappear,” and are pondering how to think about that, you might find it an interesting read.

Cross-posted at Angry Bear.

Which Countries Work Hardest? You Might (Not) Be Surprised

June 30th, 2015 Comments off

Imagine you had to choose, and could choose: you can spend your whole life and raise your family in either of two equally prosperous countries. In one country people work lots of hours to attain that prosperity. In the other country people work far less. You don’t know anything else about these countries.

Which would you choose? The answer seems kind of obvious, right? Equally prosperous, and less work for me and my family? Sign me up!

But that straightforward question is almost never asked, explicitly, in discussions of prosperity, growth, and national well-being. The most obvious measure of that difference — hours worked per capita — is buried, invisible, and unavailable in the various national data sets scattered around the web. (The typical national measure you see out there is hours worked per worker.)

For the curious, here’s how more-prosperous countries (OECD and a handful of others) sort on the “hard-working” scale:

Screen shot 2015-06-28 at 5.35.57 PM

This average includes the whole population — workers, children, students, retirees, etc. — so it’s an index of how much the average person has to work over the course of their life. (More hours during working years, less or none during non-working years; it’s an average.) 

There’s one main generalized takeaway from this that I see: The less-work end of the spectrum is dominated by western European countries. People there work far less hours in the course of their lives. People in “Anglo”-model countries work far more.

Going back to choosing a country: you also want to know how prosperous it is in pure money terms, using something like GDP per capita. Here’s that (I’ve excluded tiny, crazy-high-GDP Luxembourg here — think: banking — to show other countries more clearly):

Screen shot 2015-06-30 at 12.08.53 PM

If you’re a rational shopper, you’ll choose Norway (yeah, they’ve got the advantage of all that oil…), Ireland, the Netherlands, or another country in the upper left. If an extra $5,000 or $10,000 a year is worth sacrificing four or five extra weeks of work, choose the U.S. (Think: “buying” an extra month of time with your family, doing things you like and love, every year. You decide. But do I need to remind you that 1. Life is short, and 2. “Family values” really do have value?)

One perhaps-surprising takeaway from this graph: hard-working countries aren’t richer. QTC. Causation? It seems improbable that working less would cause higher prosperity. Higher prosperity could quite reasonably cause people to work less. (The good old substitution effect, income versus leisure.) But the most likely conclusion is that high productivity (GDP per hour worked) is the 800-pound gorilla when it comes to prosperity. Long hours worked have zero or negative apparent effect on prosperity.

(Interesting parallel: hours worked per household member in the U.S. only “explain” seven percent of the variance between household incomes. Whodathunkit?)

Rather than eyeballing that scatter plot, you might want a handy index of which country to choose. Here’s one approach to what I’ll call Work-Weighted Prosperity: GDP/Capita divided by Hours Worked/Capita. If people in one country have to work lots of hours to get that prosperity, it gets ranked lower.

Screen shot 2015-06-29 at 6.06.17 AM

The takeaway here? Move to Luxembourg and get into banking.

The curious among you are probably wondering about different countries’ working-age populations (doesn’t actually vary that much), and the percentage of working age that are working (varies somewhat more). Here’s the spreadsheet.

Cross-posted at Angry Bear.

Scalia’s Craven Self-Contradiction and Pettifogging Pedantry

June 26th, 2015 Comments off

In his dissent to Edwards v. Aguillard, Supreme Court justice Antonin Scalia made a neat distinction, sidestepping the issue of “legislative intent” that he finds so troubling:

it is possible to discern the objective “purpose” of a statute (i. e., the public good at which its provisions appear to be directed),

(The dissent is obsessed with “purpose”; the word appears 76 times therein.)

But in his dissent on yesterday’s King v. Burwell (Obamacare) decision, he chooses to ignore that statute’s obvious, objective purpose: to provide subsidies for buyers of exchange plans.

Rather than doing as he proposes, trying to “discern the objective ‘purpose’ of a statute'”, he seeks to deny the statute’s obvious purpose by determining the “purpose” of a few words therein — with a statement that can only be perceived as intentionally obtuse:

it is hard to come up with a reason to include the words “by the State” other than the purpose of limiting credits to state Exchanges

This very smart man could easily “come up with a reason.” Since those words contradict the obvious, objective purpose displayed by everything else in the statute, the words were accidentally misphrased. You might even go so far as to say that this is the obvious, “objective” conclusion.

Scalia would agree. In his dissent on the previous Obamacare challenge, he says:

“Without the federal subsidies . . . the exchanges would not operate as Congress intended.”

You may feel free to quibble over “purpose” versus “intention,” but the obvious, objective, intentional purpose of the statue was to give subsidies to purchasers of exchange plans.

Any attempt to deny or obscure that reality is pettifogging pedantry. Nothing more.

Update: Bruce Webb in comments shows just how objectively obvious the “purpose” is. The title of the statute’s opening section (emphasis mine):

Title I. Quality, Affordable Health Care for All Americans

Cross-posted at Angry Bear.

No: Rich People Don’t Work More

May 11th, 2015 Comments off

The meme is ubiquitous, and widely documented: Rich people work longer hours. Obvious implication: they deserve what they get, right? Ditto the poor.

Bunk.

Why? All the research supporting that meme looks at workers, not families. It completely ignores students, the retired, and anyone else who isn’t working. Alert the media: workers work and earn more than non-workers.

And, news flash: rich families are full of non-workers. If you look at families and their hours worked per person, you see a very different picture:

image (2)

Here’s the same 3+ household data for working-age families only: those with a head of household under age 65.

Screen shot 2015-05-11 at 9.48.05 AM

Pretty much the same story.

This is all based on a fast-and-dirty random census pull of about 5,000 U. S. households, from IPUMS. It uses 3+ households as a proxy for families — probably not a bad proxy. A professional economist doing proper due diligence would fine-tune that, or even better turn to the Panel Study of Income Dynamics (PSID), which has better microdata to track families. Careful work would even allow them to track extended, multi-generation families, not just nuclear families living together. (Think: dynasties.) I’d expect the pattern we see here to be more pronounced in that view (though that’s just a surmise).

Here’s some more evidence, from across the pond:

Figure 1: Average hours of work across the distribution of earnings: UK, 2013

Manning-election-fig-1-1024x749

Figure 2: Changes in post-tax real hourly earnings and average hours for the median and top 1 per cent

Manning-election-fig-2-1024x749

Even as rich people’s incentives to work have skyrocketed, their hours worked have plummeted. This even though they’re far more likely to be doing interesting, engaging work in pleasant environments. Curious.

But still: low-income people work less. More of them are unemployed. Is that a surprise to anyone? (I’ll leave the “voluntary” argument to my gentle readers.)

There’s a stylized fact out there, universally repeated by economists and pundits, that seems to misrepresent the state of the world. There are some nice tractable research projects here for those who are paid to do such things.

Cross-posted at Angry Bear.

American Exceptionalism Re-Revisited: OECD Taxes/GDP Since 1965

April 26th, 2015 Comments off

Darwin Wept: Pyramid Schemes, Collusion, and Price-Fixing, the Modern American Way

April 21st, 2015 1 comment

The story hardly bears repeating:

Pricing is the ultimate miracle of Darwinian markets. Competitors who produce goods at lower prices thrive, expand their operations, and produce more. Those who charge higher prices (for equivalent goods) are driven to extinction when sensible purchasers abandon them for their more-efficient competitors. This inexorable mechanism drives innovation, investment, and productivity, and the eternal grinding evolutionary churn of “creative destruction.” Survival of the fittest makes us collectively fitter, and fills our wants and needs at ever-lower prices.

All of that, or course, requires price competition among producers. The ultimate bogeyman, choking that mechanism, is competitors colluding to fix their prices. If they agree not to compete with lower prices — collectively stealing higher profits from their customers — the pricing mechanism doesn’t exist, and its manifest benefits are denied us.

It’s a compelling and convincing story. But: The key word in that second paragraph is “agree.” It’s illegal, of course, for competing firms to explicitly collude to set higher prices. But price collusion occurs constantly at higher, institutional levels, where it is unstated, implicit…and profoundly pernicious.

The Economist highlights this reality in its recent package on family companies. We’re not talking mom-and-pop shops: this is about vast networks of corporations controlled and owned by small groups of families — especially common in Asia (South Korea!), but also in Europe. The small control groups at the top of these pyramids have every incentive to back off on price competition among their subsidiaries, reaping higher profits at the expense of their customers. And they have the wherewithal to do it:

Randall Morck, the academic, finds that in large parts of the world pyramidal business groups allow “mere handfuls of wealthy families” to control entire economies.

A stylized diagram depicts the rather obvious mechanism for this control and collusion:

With all competitors controlled, ultimately, by a handful of actors, price collusion seems inevitable.

Interestingly, The Economist continues:

This problem is particularly marked in developing countries, but is also common in much of the rich world, except in the Anglo-Saxon sphere.

In America, we do things differently. In a recent Slate article,  and  explain our innovative, fiendishly clever, and truly “exceptional” mechanism for pyramid control:

Mutual Funds’ Dark Side: Why airlines and other industries keep prices too high

They cite a paper by José Azar showing that:

United’s top five shareholders—all institutional investors—own 49.5 percent of the firm. Most of United’s largest shareholders also are the largest shareholders of Southwest, Delta, and other airlines. The authors show that airline prices are 3 percent to 11 percent higher than they would be if common ownership did not exist. That is money that goes from the pockets of consumers to the pockets of investors.

We’ve all watched this airline-pricing scenario play out over recent months, with fuel costs plummeting while airfares remain unchanged.

More:

The investment management company BlackRock is the top shareholder of the three largest banks in the United States; BlackRock is also the largest shareholder of Apple and Microsoft. The companies that are the top five shareholders of CVS are also the top five shareholders of Walgreens. (And yes, one of them is BlackRock.) Institutional investors dominate the economy.

If you’re like me, you’re immediately wondering: Really, how does the price-fixing actually happen? The answer isn’t terribly surprising, or far to find (emphasis mine):

How exactly might this work? It may be that managers of institutional investors put pressure on the managers of the companies that they own, demanding that they don’t try to undercut the prices of their competitors. If a mutual fund owns shares of United and Delta, and United and Delta are the only competitors on certain routes, then the mutual fund benefits if United and Delta refrain from price competition. The managers of United and Delta have no reason to resist such demands, as they, too, as shareholders of their own companies, benefit from the higher profits from price-squeezed passengers. Indeed, it is possible that managers of corporations don’t need to be told explicitly to overcharge passengers because they already know that it’s in their bosses’ interest, and hence their own. Institutional investors can also get the outcomes they want by structuring the compensation of managers in subtle ways. For example, they can reward managers based on the stock price of their own firms—rather than benchmarking pay against how well they perform compared with industry rivals—which discourages managers from competing with the rivals.

(This is right out of Chomsky’s Manufacturing Consent: media corporations control news content by hiring people who they know will deliver the content, and message, they want. Those who do so are promoted and rewarded. They don’t need to tell them explicitly what to write.)

In America, you don’t find the explicit, extreme, and obvious family-pyramid control that’s so apparent in some other parts of the world. Control and ownership is more widely distributed across perhaps a hundred or a thousand families at the top. (Before you object: it depends on how you define “family” and “the top.”) How could price collusion happen among this larger group, with the inevitable incentives for some to defect with lower prices and take market share from the others?

Simple: America’s richest families have farmed out their collusion to institutional entities who control markets (and market pricing), with small groups of institutions controlling all the players in each industry.

The Darwinian view that underpins the “free market” belief system reveals a fundamental misunderstanding of a key evolutionary mechanism: groups can thrive and propagate at the expense of other groups, if members of one group are better cooperators. That cooperation can take myriad forms (both beneficial and pernicious to the common weal), and there are myriad evolutionary mechanisms by which that cooperation can arise. However it arises, in the case of price-setting within groups, we call that cooperation “collusion.”

In Posner and Weyl’s telling locution, “Competition among mutual funds cannot substitute for competition among corporations.” Ditto if you replace “mutual funds” with “private equity firms.” And likewise: competition among limited-liability corporations (Can’t pay off that loan? The people walk away scot-free) is based on incentive structures that are utterly orthogonal to those of independent butchers and bakers.

The agents operating those institutions know quite clearly which side their personal bread is buttered on. The families who ultimately own everything, meanwhile, are many stages removed from, largely unconscious of, any particular pricing decisions. But they can be confident that those decisions are being made in their families’ best interests.

Adam Smith, poster-boy for free-market enthusiasts, understood this reality better than most:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

He could not perhaps have conceived, however, how cleverly colluders would construct institutions that would achieve that price collusion, while masking and obscuring it even from their own eyes. He perceived the familiar “principal-agent” problem of joint-stock companies quite clearly:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

But he didn’t perceive these institutions’ potential for price collusion.

America’s founders, on the other hand, displayed and expressed a far deeper distrust of limited-liability, joint-stock companies. Charters for such companies were uncommon and extremely restricted in their scope (building a particular public work, for instance) well into the 19th century. “Any legitimate business purpose” is a very recent innovation.

But there’s another crucial innovation: corporations owning shares in other corporations (the very crux of modern pyramid-control schemes, familial and institutional). This was not even legal under state corporate charters until late in the 1800s. The ill effects of that rule change were not long in coming, and had to be addressed vigorously via the trust-busting and rule changes of the early 1900s. (See: interlocking directorships and The Pujo Committee.)

Proponents of free markets seem unaware that that “peculiar institution” — corporations owning corporations — is in fact very peculiar indeed. It is arguably the most destructive innovation ever to strike at the miraculous wonder of the free market’s pricing mechanism.

Further Reading

Anti-Competitive Effects of Common Ownership. April 15, 2015. José Azar, Martin C. Schmalz, and Isabel Tecu.

Concentrated Corporate Ownership. 2000. Randall K. Morck, ed.

Competitive Effects of Partial Ownership: Financial Interest and Corporate Control. 2000. Daniel P. O’Brien and Steven C. Salop.

Do Publicly Traded Corporations Act in the Public Interest? March 1990. Roger H. Gordon.

Financial transaction costs and industrial performance. April, 1984. Julio J. Rotemberg.

 

Cross-posted at Angry Bear.

National Debt: Since When is the Fed “The Public”?

April 14th, 2015 12 comments

This issue has been driving me crazy for a while, and I never see it written about.

When responsible people talk about the national debt, they point to Debt Held by the Public: what the federal government owes to non-government entities — households, firms, and foreign entities. (Irresponsible people talk about Gross Public Debt — an utterly arbitrary and much larger measure that includes debt the government owes to itself.)

Debt Held by the Public is the almost-universally-accepted measure of “the national debt.” That would be perfectly reasonable, except that…

Federal Reserve banks are counted as part of “the public.” So government bonds held by this government entity — money that the government owes to itself — are counted as part of the debt government owes to others.

The Fed has bought up trillions of dollars in government bonds since 2008, to the point that Debt Held by the Public has become an almost meaningless measure (click for source):

fredgraph (15)

Here it is as a percent of GDP:

fredgraph (16)

Debt actually held by “the public” equals 57% of GDP — and declining — not 73% of GDP.

I don’t know how economists or pundits think they can have any conversation at all about this subject, analyze it in any useful way, if they ignore this basic reality. Reinhart and Rogoff, are you listening?

Cross-posted at Angry Bear.

Why Liberals Keep Losing

March 4th, 2015 2 comments

James Carville was certainly right: “It’s the economy, stupid.”

And under Democrats (compared to Republicans), the economy kicks ass:

Screen shot 2015-02-23 at 8.41.56 AM

This is GDP growth, but that kick-assness is blatant in any economic measure you look at, from job growth to stock-market returns to household income to government deficits. And it’s true over any lengthy period (say, 30+ years) over the last century. I could post fifty graphics here that tell exactly the same story. (Here’s a favorite: even the rich get richer under Democrats.)

But now ask yourself: how many Americans know that Democrats make them richer? (Lots richer.) One in ten? Maybe? Now ask yourself why liberals keep losing.

The Republicans have successfully branded themselves as “the party of growth,” and Democrats have just let them do it, for decades — even though it’s completely contrary to reality.

Democrats have the strongest possible political argument sitting in their rhetorical holsters, but for whatever reasons, they just won’t draw.

There is one and only one story that Democrats need to be telling, and they need to follow the Republican political playbook: repeat it endlessly, for years on end:

We will make you richer. We’ve been doing it for decades, and we’ll keep doing it.

“Equality” is important (especially because it does make people richer). But really: Americans just change the channel.

“Opportunity” is important. But it’s just a proxy for, a chance of, getting richer.

“Getting the rich” (truly progressive taxes, a more-level playing field, reining in finance) is necessary and important. But Americans get only visceral satisfaction from that message — it doesn’t speak to personal, direct, material benefit that they’re going to experience.

Americans want to hear how Democrats are going to make them more prosperous. Full stop.

And Democrats have a loud-and-clear story on that subject. They just need to 1) tell that story constantly, repetitively, ad nauseum, like the Republicans do, and 2) put aside other stories (like, identity politics) that dilute, confuse, and distract from that story.

Start with that lede — “we make America prosperous” — and a whole litany of talking points emerges. And they’re the very talking points that have driven Republicans’ (otherwise inexplicable) political success over the last thirty years.

But there’s one key advantage for Democrats: In their mouths…the story is true.

Democrats could be stealing Republicans’ best Frank Luntz/Grover Norquist talking points and riding them all the way to the ballot box. Here’s a sampling to start with:

Wisdom of the Crowds. Democrats’ widespread government spending — education, health care, infrastructure, social support — puts money (hence power) in the hands of individuals, instead of delivering concentrated streams to big entities like defense and business. Those individuals’ free choices on where to spend the money allocate resources where they’re needed — to truly productive industries that deliver goods people actually want.

Preventing Government “Capture.” Money that goes to millions of individuals is much less subject to “capture” by powerful players, so it is much less likely to be used to then “capture” government via political donations, sweetheart deals, and crony capitalism.

Labor Market Flexibility. When people feel confident that they and their families won’t end up on the streets — they know that their children will have health care, a good education, and a decent safety net if the worst happens — they feel free to move to a different job that better fits their talents — better allocating labor resources. “Labor market flexibility” often suggests the freedom (of employers) to hire and fire, but the freedom of hundreds of millions of employees is far more profound, economically.

Freedom to Innovate. Individuals who are standing on that social springboard that Democratic policies provide — who have that platform beneath them — can do more than just shift jobs. They have the freedom to strike out on their own and develop innovative, entrepreneurial ventures that drive long-term growth and prosperity (and personal freedom and satisfaction) — without worrying that their children will suffer if the risk goes wrong.

Give ten, twenty, or thirty million more Americans a place to stand, and they’ll move the world.

Profitable Investments in Long-Term Growth. From education to infrastructure to scientific research, Democratic priorities deliver money to projects that the free market doesn’t support on its own, and that have been demonstrated to pay off many times over in widespread public prosperity.

Power to the Producers. The dispersal of income and wealth under Democratic policies provides the widespread demand (read: sales) that producers need to succeed, to expand, and to take risks on innovative new endeavors. Rather than assuming that government knows best and giving money directly to businesses, Democratic policies trust the markets to direct that money to the most productive producers.

Fiscal Prudence. True conservatives pay their bills. From the 35 years of declining debt after World War II (until…Reagan) to the years of budget surpluses and declining debt under Bill Clinton, Democratic policies demonstrate which party deserves the name “fiscal conservatives.”

Labor and Trade Efficiencies. The social support programs that Democrats champion — if they truly provide an adequate level of support — give policy makers much more freedom to put in place what are otherwise draconian, but efficient, trade and labor policies. If everyone is guaranteed a decent wage by an excellent program like the Earned Income Tax Credit, we have less need for the admittedly mixed blessings of unions and protectionism.

Take the graph from the top of this post and put it on billboards all over America. It’s time for Americans to understand who makes them richer.

Cross-posted at Angry Bear.

Is GDP Wildly Underestimating GDP?

January 23rd, 2015 31 comments

The markets have been showing a rather particular schizophrenia over the last dozen or so years — but not, perhaps, the one you may be thinking of. This schizo-disconnect is between the goods markets and the asset markets, and their valuations of U.S. production.

In short, the existing-asset markets think we’re producing and saving far more than we see being sold and accumulated in the newly-produced-goods markets. Take a look:

Screen shot 2015-01-23 at 6.17.38 AM

(See here for some ways to think about these measures. The spreadsheet cumulating saving is here. You can find all the data series on Fred here.)

A huge gap has emerged between what we’ve saved and what we’re worth.

Household Net Worth is the asset markets’ best estimate of what all our privately-held real assets are worth. It’s our best or perhaps only proxy for that value. (Household net worth includes all firms’ net worth, since households are firms’ ultimate shareholders. Firms, by contrast, don’t own households. Yet.) This is not just about assets like drill presses and buildings, but also skills, techniques, knowledge, organizational systems, etc. — all the tangible and intangible stuff that allows us to produce more stuff in the future. Household Net Worth at least provides us with an index of the change in that total value, as estimated by the asset markets.

As we increase our stock of real assets (“save,” by producing more than we consume), household net worth (wealth, or claims on those real assets) increases. The valuation jumps up and down as asset markets re-evaluate what all those real assets are worth — how much output and income they’ll produce in the future — but the two measures generally (should) move together.

Except: Since about ’98, and especially since ’02, that hasn’t been true. And no: zooming in on earlier periods doesn’t reveal the kind of anomaly we’ve seen since 2002.

There are two oddities here:

First, the flattening of cumulative savings: this measure was increasing exponentially for decades. Then it slowed significantly starting in the late 90s, and has gone flat to negative since The Great Whatever.

Second, the continued exponential growth of household net worth, and the resulting divergence of the two measures.

But bottom line: Net Worth and the cumulative stock of savings used to move pretty much together. They don’t anymore. What in the heck is going on?

There are three possibilities:

The asset markets are wrong. They’re wildly overestimating the value of our existing stock of real assets, and the output/income they’ll deliver in the future. See: “Irrational exuberance.”

The goods markets are wrong. The market for newly-produced goods and services is setting the prices for newly produced goods below the production’s actual value.

GDP is wrong. We’re producing something that’s not being measured by the BEA methods (tallying up what people spend on produced goods). There’s production the GDP methods can’t see in sales, so it doesn’t show up in saving (production minus consumption). But the asset markets can see it (or…sense it), and they deliver it to households in later periods, through the mechanism of market asset revaluation/capital gains.

Techno-optimists will like this last one. You’ve heard it before: The BEA has no sales-based method for estimating the produced value of free digital goods like Wikipedia, or the utility people derive from using them. They’re not purchased, so the BEA can’t “see” them. They could look at ad dollars spent on Facebook as a proxy for the value of browsing Facebook, but…that’s a pretty shaky estimation method, especially when many of those ad dollars would have been spent anyway, in other media. GDP simply doesn’t, can’t, measure that value, because nobody purchases it.

The timing sure supports this invisible-digital-goods story. The divergence takes off four to eight years after the release of the first mainstream web browser, and the global mainstreaming of the internet in general.

But it’s worth pausing before swallowing that explanation wholesale. You have to ask, for instance:

How does the internet/digital-goods story explain the flatlining of cumulative savings? Shouldn’t that continue to rise, though perhaps not as fast as net worth? Has the internet killed off sales (and accumulation) of traditionally measurable, purchased, goods to the extraordinary extent we see over the last dozen-plus years?

Are the asset markets seeing something else that GDP can’t see? Improved supply-chain management? More-efficient corporate extraction of profits from other other (less-developed?) countries? More-effective suppression of low-end wages? The rising costs of education and health care? (Which the BEA counts as consumption, extracted from saving, even though they’re arguably investment at least in part; they produce very real though intangible and difficult-to-measure long-term value/assets.) Or — here’s a flier — does it have something to do with the Commodities Futures Modernization Act and other financial “liberalizations” passed in the waning days of the Clinton administration? Something else entirely? In particular: would any of these explain the striking trend change in the cumulative savings measure?

Whatever the causes, the divergence of these two measures suggests a rather profound and singular economic shift of late — a shift that is not being widely discussed, even amidst the recent spate of commentary on Piketty’s Capital. (Piketty, by the way, defines wealth and capital synonymously — though his usages are not always consistent.) Prominent exceptions include the economists Joseph Stiglitz and Branko Milanovic, who are actively interrogating the troublesome theoretical intersection of wealth and real capital. The recent divergence of these two national accounting measures suggests that they’re tilling fertile ground for our understanding of how monetary economies work, and how we measure those workings.

Note: Technically one might add (negative) government net worth to the household measure to arrive at national net worth. But: 1. government net-worth estimates are inevitably dicey to meaningless. Government assets (and services) aren’t generally sold in the marketplace, so we have no observable sales information to base our estimates on. Liabilities are also very tricky: estimates vary massively based on your chosen time horizon and (necessarily) arbitrarily chosen discount and economic-growth rates. And 2. It barely changes the picture drawn above. Feel free to add government to the spreadsheet if you want; you’ll find estimates of net worth for the federal, and state/local, government sectors here. Net worth is — as it should be — the bottom line for each sector.

Cross-posted at Angry Bear.