The Wealth of Stein
In which the economist asks: Am I richer than I was a year ago?
A year ago I was living in a $150,000 apartment, which I owned. It was a small, two-room apartment. Now I am living in a $175,000 apartment, which I own. It is also a small two-room apartment. In fact, it is the same apartment, although a little shabbier. A year ago I could have sold the apartment for $150,000. Now I can sell it for $175,000.
Am I richer? I would have $25,000 more in cash if I sold today vs. a year ago. But money is a sterile thing, good only for what it will buy. Today's $175,000 will buy 62,724 packages of Product 19, whereas last year's $150,000 would have bought only 53,763 packages, so I am richer in Product 19. I do not, however, live on Product 19 alone.
We are accustomed to the idea that we should convert all dollar amounts to "real" values by adjusting with the consumer price index. Because the CPI rose by 1.7 percent in the past year (January to January), the value of my apartment rose by only 14.7 percent in terms of the goods and services included in the CPI, rather than the 16.6 percent by which it rose in terms of dollars.
But if I sell my apartment, I probably won't use the proceeds to buy that month's assortment of stuff that's in the CPI. I will probably want to buy some other asset that will yield a stream of income into the future. I could, for example, buy 30-year Treasury bonds. In March 1998 the $150,000 from my apartment sale would have bought bonds with a total yield of $8,925 a year. In March 1999 with $175,000 I can buy such bonds with a yield of $9,730 a year. In those terms I have got richer.
B ut Treasury bonds are not what make everyone feel richer every day. I might want to be more venturesome in the hope of getting a larger--though riskier--income stream. Suppose I buy shares in the S&P 500 Index. The price of that index rose 21.3 percent in the past year (to March 11). Since the price of my apartment rose by only 16.6 percent, I can buy only 96.1 percent as much of the S&P 500 as I could have bought a year ago. But what I care about is how much future income I will get. If the future income from the stocks in the S&P 500 has risen by 4 percent per share, I would be getting as much future income from buying in 1999 as I would have got from buying in 1998. But I really don't know whether it has risen that much. So, I don't know whether the shares of the S&P 500 I can buy for $175,000 in March 1999 are worth more than the shares I could have bought in March 1998.
In March 1998 I could have bought 1,859 shares of Microsoft for the $150,000 price of my apartment. In March 1999 I can buy 1,084 shares. Am I richer or poorer in terms of the opportunity to earn income from Microsoft? Possibly the probable income from the 1,084 shares is greater than the probable income from the 1,859 shares was. But I don't know.
So am I richer than I was? The rise in the price tag of my apartment, combined with the changes in prices of other things, changes the opportunities I face. I have an opportunity to get more cash, more Product 19, and more annual income from Treasury bonds. In those terms I have become richer. In terms of opportunity to enjoy living in my apartment, I am neither richer nor poorer. I have become poorer in terms of my opportunity to buy the S&P 500 and even poorer in terms of my opportunity to buy Microsoft. Whether I have become richer or poorer in opportunity to earn income from the S&P 500 or from Microsoft I don't know, and neither does anyone else.
I suppose we do know something about who has got richer or poorer relative to others in the past two years. The person who owned shares in Microsoft has got richer relative to the person who owned the S&P 500, and that person has got richer relative to me, and I have got richer relative to the people who produced the stuff that went into the CPI, and they have got richer relative to the people who had cash. I guess I am richer relative to the poor fellow who wants to earn the cost of my apartment by writing essays for $1 a word.
The wealth of the nation is its future stream of national income. That stream is almost certainly a rising one. Year by year, and little by little, we are as a nation--taking us all together--getting richer. But that has little to do with, and is much less than, the surge in asset prices in the past two years. Wealth is not wealth that alters when Greenspan speaks.
And yet, and yet, despite these uncertainties I feel richer when the price tag on the apartment I live in goes up. That may be an illusion, but illusions are facts of life.
Herbert Stein, a senior fellow at the American Enterprise Institute, was chairman of the Council of Economic Advisers under Presidents Nixon and Ford. He died in September 1999.