Noah Smith at Noahpinion: Most economic debates are about income, not wealth. When we talk about income taxes, or welfare benefits, or labor’s share of national income, we’re talking about the amount of goods and services that get created every year, and how those goods and services get allocated among the various people in a society. But in the 2010s, we saw a lot of debate about wealth instead — wealth taxes, wealth inequality, and so on.
I always felt that these debates were a bit of a distraction. That’s partly because — for reasons I’ll explain in a bit — I think income is a lot more important than wealth. It’s also because from a policy perspective, dealing with income is a lot easier than dealing with wealth. But the biggest reason is that I think that wealth is a lot harder for regular people to understand than income.
In general, regular people’s intuitive “folk” understanding of income is pretty close to the way economists think about it. Every month you get a certain number of dollars, and you can spend those dollars on stuff you want — pizza, haircuts, medical care, rent, treats for your pet rabbit, etc. The number of dollars you get represents the value of the stuff you can buy.
That’s pretty much exactly how GDP works at the level of the whole economy — GDP is the total value of the stuff that gets produced in the economy, and it’s theoretically exactly equal to the total income that everyone earns for producing that stuff. So income for a whole economy works pretty much the same as it works for an individual.
Wealth is different, for a number of reasons. For one thing, unlike income, wealth can be negative. This means that a lot of personal wealth isn’t actually the world’s wealth.
The world’s net wealth is pretty small
Suppose you own $10 million dollars in bonds. Congrats, you’re rich! But bonds are money that one person owes to another person. Which means some other people owe you $10 million. The same bonds that add $10 million to your wealth also subtract $10 million from someone else’s wealth. In other words, many assets are also other people’s liabilities.
Now, that doesn’t mean society as a whole has zero total wealth. Assets like stocks and real estate don’t have any associated liability — if you have a house, no one owes you that house. And that house is real wealth. So the total amount of assets in the world is bigger than the total amount of liabilities. The difference between assets and liabilities is called “net worth”, “net wealth”, or just “wealth”.1
The world’s total net wealth was estimated at around $454 trillion in 2023. That sounds like a really huge number. It’s almost five times as big as world income (GDP) in that same year, which was around $105 trillion. For the U.S. alone, wealth was $140 trillion and income was $27.4 trillion, which again is about a 5 to 1 ratio.
Is that a lot? If this were your family, having savings worth 5 times as much as your annual income would be pretty good. The median American family has a net worth only about 2 times as large as the median family income. If you could live off of your savings for 5 whole years without working, that would be pretty good! But on the other hand, it isn’t anywhere close to being able to retire.
This is why despite what some silly people say on social media, confiscating rich people’s wealth wouldn’t be nearly enough to fund the government. Here’s a useful tweet:
More here.
