The Wealth of Stein

# The Wealth of Stein

March 26 1999 3:30 AM

# 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.