Median Wealth Increases, but U.S. Still Stuck at 27th in World

The new Global Wealth Report and Global Wealth Databook from Credit Suisse were released last week. According to the Report (p. 3),

Global wealth has reached a new all-time high of USD 241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase. Average [mean] wealth per adult reached a new all-time high of USD 51,600, with wealth per adult in Switzerland returning to above USD 500,000.

For the United States, this represents an increase in mean wealth per adult of 11.4% from mid-2012 to mid-2013 (Databook, p. 92). Median wealth per adult increased even faster, from $38,786 to $44,911, or 15.8%, although we should recall that measurement of median wealth is less reliable than that for mean wealth.

Nonetheless, while these data represent improvement for the typical American, there was no change in our ranking relative to the rest of the world. While Kuwait and Cyprus fell below the U.S., Slovenia and, more surprisingly, Greece now have higher median wealth per adult. Thus, the United States remains only 27th in the world.

These data are significant for at least two reasons. First, they highlight the fact that while the United States has a higher gross domestic product per capita than all but four of the 26 countries ahead of it in median wealth per adult (Qatar, Luxembourg, Singapore, and Norway), the long-term trend of economic policies has clearly hurt the middle class. Inequality is a big part of the explanation here: mean wealth per adult in the U.S. is 6.7 times median wealth per adult, the highest ratio in the top 27. By contrast, in #1 Australia the mean-to-median ratio is only 1.8:1. In fact, this ratio is less than 3:1 for 19 of the 26 countries with higher median wealth per adult. In Slovenia, mean wealth per adult is less than 1.5 times median wealth per adult! (All figures calculated from Databook, Table 3-1.)

Second, these low levels of wealth contribute to the coming retirement crisis of the middle class. Americans have low levels of saving, while Social Security still looks vulnerable to the chopping block despite our already high level of elder poverty.

Here are the top 27 countries by median wealth per adult.

Country                                                      Median Wealth
                                                                   Per Adult

1.  Australia                                                    $219,505
2.  Luxembourg                                               $182,768
3.  Belgium                                                     $148,141
4.  France                                                        $141,850
5.  Italy                                                           $138,653
6.  United Kingdom                                         $111,524
7.  Japan                                                         $110,294
8.  Iceland                                                      $104,733
9.  Switzerland                                               $  95,916
10. Finland                                                     $  95,095
11. Norway                                                    $  92,859
12. Singapore                                                 $  90,466
13. Canada                                                     $  90,252
14. Netherlands                                              $  83,631
15. New Zealand                                            $  76,607
16. Ireland                                                      $  75,573
17. Spain                                                        $  63,306
18. Qatar                                                        $  58,237
19. Denmark                                                  $  57,675
20. Austria                                                     $  57,450
21. Greece                                                      $  53,937
22. Taiwan                                                      $  53,336
23. Sweden                                                     $  52,677
24. United Arab Emirates                                 $  51,882
25. Germany                                                   $  49,370
26. Slovenia                                                    $  44,932
27. United States                                            $  44,911

Source: Credit Suisse Global Wealth Databook, Table 3-1

Cross-posted at Angry Bear.

Governing Through Ungovernability

It's 2011 all over again. House Republicans are once more threatening to force the country into default by not raising the government's debt ceiling. Markets are beginning to get nervous with default only a week away. Fidelity, the country's largest manger of money market funds, has sold off all its government debt maturing in late October and early November.

Unlike 2011, the government is shut down, throwing hundreds of thousands of government workers out of work and reducing gross domestic product by billions of dollars. On the good side, President Obama so far has refused to negotiate over the shutdown or the debt ceiling. Of course, he is haunted by his unforced error of negotiating in 2011, giving us the sequester that even a "clean" continuing budget resolution won't fix.

What we see is the Republican usurping governance of the country by making the nation ungovernable if their demands are not met. They lost the Presidency in 2012, they lost Senate seats, they got fewer votes in the House of Representatives than the Democrats did, but with brilliant gerrymandering they still have a House majority.

Amazingly, the Republicans no longer even seem to know what they want for their hostage-taking. At first it was clear, they wanted Obamacare repealed/defunded/delayed. Now, it appears they just want budget cuts, preferably to Social Security and Medicare. Inadequate as those programs are, they are still central to middle class economic security. We can't give them up.

I'm back to where I can't turn on the TV. I live in fear the President will cave as he did in 2011. But what will it take to actually end the crisis? I'm guessing a huge stock market drop will be required. And I think that's exactly what will happen. What do you think?

A $1000/month pension equals $200,000 in savings CORRECTED

On the road today, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) "revolution" was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.

Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the "rule" that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.

The flip side of that rule, which I haven't seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings, as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example. about $200,000 in savings, as it wold take about that amount to buy a $1,000 per month annuity (see Lyle's comment below).

This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.

It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.


* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.

Cross-posted at Angry Bear.

Nauseating Health Care Idiocy from Forbes

A non-blogging friend points me to this new article at Forbes by Chris Conover purporting to show that the "typical family of 4" will see its health care spending rise by $7450. He quotes the Center for Medicare and Medicaid Services (CMS), saying "in its first ten years, Obamacare will boost health spending by 'roughly $621 billion' [that's the CMS quote]  above the amounts Americans would have spent without this misguided law." How stupid is this? Let us count the ways.

First of all, this is not $7450 per year, but over the entire 10-year (or more likely 9-year; he usually refers to 2014-22) period. So he's hyping shock value that isn't there. As he explains, he divides the $621 billion by total population over the period to give a per capita cost, which he then multiplies by 4 to get the cost to his "typical family of 4." So what we're actually looking at, before we start tearing up his calculation, is ($7450/9)/4 = $207 per capita higher spending per year on average. Recall that in 2011 the United States spent $8174.90 per person on health care (see link on how to navigate to the ultimate source for this data, stats.oecd.org).

Second, Conover doesn't understand present value. He writes, "Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily." Of course, it is just the opposite. A dollar in 2022 is worth less than a dollar today. In 2013 dollars, the amount is less than $207 per person per year (how much less depends on what you consider an appropriate discount rate). How does an editor not catch this? I have a screen shot to memorialize the error after it eventually gets fixed.

Third, Think Progress's Igor Volsky is completely right when he quotes Paul van der Water of the Center on Budget and Policy Priorities that none of this will apply to the "typical American family" because that family gets its insurance at work. More money will obviously be spent over time, but it won't be spent at the center of the health insurance distribution, if you want to look at it that way. But Conover can't see this point. Instead, he points the finger at President Obama for promising that the ACA would reduce premiums for the typical family by $2500 per year. Not only do two wrongs not make a right, but...

Point four is that what he says is impossible just isn't: "It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction." I don't know if it will happen, but it certainly isn't impossible. Conover is overlooking the fact that the increase in health spending is being funded in ways that don't come out of individual health care spending. High-income taxpayers ($200,000 single, $250,000 filing jointly) are paying 0.9% points more in Medicare tax and an extra 3.8% on investment income. According to Robert Pear of the New York Times, "The new taxes on wages and investment income are expected to raise $318 billion over 10 years, or about half of all the new revenue collected under the health care law." The medical device tax will raise $29 billion over 10 years, over $100 billion will come from insurance companies, $34 billion from drug companies, and $150 billion from the "Cadillac" tax, according to the Obama administration. (We can debate the wisdom of this tax, but it doesn't fall on the "typical" family.) We're already at $631 billion over 10 years. If we increased these taxes more, yes, we could use the money to fund premium reductions, most plausibly by increasing the income levels eligible for subsidies.

Then, there's the little matter of the newly insured. By 2022, according to the CMS report Conover cites, 30 million more people will have insurance than would be the case without Obamacare. While many of those people will be receiving subsidies, a lot of them will be paying something for their insurance, adding even further to the sources of income that don't come out of what the "typical family" will pay.

Finally, the new 30 million people will be covered very efficiently. $621 billion divided by 9 years is $69 billion per year, divided by 30 million people is $2300 per person per year. While that figure is too low because we won't be insuring all 30 million immediately, remember that 2011 U.S. health spending per capita was $8174.90. Any way you look at it, the newly insured will be costing far less per person than those currently in the insurance system.

There you have it. Forbes' most-read story of the day (with over 26,000 Facebook shares and 3400 tweets as I write this) is simply false. Between all the new taxes and the premiums from the newly insured, you can cover the total increase in health care spending. The typical, already insured family isn't going to see increases due to the rise in overall health care spending. You add 30 million new insured at a far lower cost than what we currently spend per person. And the editors didn't catch a blatant error on present value.

Cross-posted at Angry Bear.

New Jersey Subsidies Get Even Worse

As if New Jersey's subsidies weren't bad enough already, Leigh McIlvaine at Good Jobs First reports that the state has just passed new legislation that expands the state's investment incentives even further. On Thursday (September 18), Governor Chris Christie signed the New Jersey Economic Opportunity Act of 2013, which reduces the number of state subsidy programs but unleashes the two remaining ones to give even more money than ever. Not only that, the new law reduces job quality provisions and guts geographic targeting of subsidies to the poorest areas of the state. The bill easily passed the Democratic-majority state legislature, making this a bipartisan fiasco.

As Governing magazine reported and I covered in my last post, from the beginning of 2011 through early 2013, New Jersey gave an astonishing $1.9 billion in investment subsidies, "more than the previous 15 years combined," as the magazine noted. The new law removes annual spending caps for Grow New Jersey and the Economic Redevelopment and Growth (ERG) grant while reducing the minimum job creation and investment requirements, thus paving the way for even more applicants to qualify. There is, however, a maximum subsidy per firm of $350 million, a level not reached -- yet.

New Jersey Policy Perspectives (see link above; h/t Leigh McIlvaine) details the decline in job quality standards. For the first time, retail facilities are eligible "if they are 150,000 square feet or larger, at least half-filled with a full-service supermarket or grocery store and located in one of New Jersey’s four poorest cities," which sounds like a description of a Wal-Mart Super Center. "Tourism destination projects" (read: Bass Pro Shop or Cabela's, most likely) are also eligible in Atlantic City. Worse still, tourism projects are not subject to the state's normally high wage and benefit standards. Additionally, Christie vetoed long-standing prevailing wage requirements for workers at recipient firms.

Finally, as Newark's Star-Ledger points out, virtually every location in New Jersey is now eligible to use state subsidies.  This has the effect of diluting the incentive effect these programs could provide to the poorest areas of the state. This is yet another example of a phenomenon I have written about extensively: It is extremely hard to maintain the targeting of subsidy programs to the poorest areas of a jurisdiction as there are always political pressures from richer areas to be included as well. This is true even in the European Union (though far less so than in the United States), where EU state aid law and Commission negotiation over Member States' regional aid maps provide strong support for targeting.

To sum up, it looks like New Jersey will spend over $1 billion a year on incentives -- just at the state level -- while reducing job quality standards, subsidizing low-end retail jobs, and greatly weakening the geographic targeting of its subsidies to the poorest parts of the state. This is a prescription for failure at the state level and an inducement to other states to increase their subsidies as well, exactly the opposite of what needs to be happening.

New Jersey Subsidies More Out of Control than Ever Under Christie

I have written before how state and local subsidies are more out of control than ever, and more recently how the number and size of megadeals has increased substantially since the Great Recession.

Now a new study from Governing magazine (h/t to Al at LinkedIn group Economic Development 2.0) exhaustively analyzes New Jersey's five largest incentive programs and their growth since 2011. Governor Chris Christie has made aggressive use of incentives a centerpiece of his economic development strategy, but the magazine's comparison of New Jersey's job performance with than of surrounding states shows that it simply isn't working. Not only that, according to the report, "at least 20 companies receiving incentives filed layoff notices" before fulfilling their job requirements.

But it is the sheer dollar value of incentives that makes the head spin. According to the magazine's estimates, the state awarded $904 million in 2011 and $872 million in 2012. Adding in this year's awards brings the total to $1,950 million which is, Governing notes, "more than the previous 15 years combined." (Note: 15 years is the entire life of these programs.)

Moreover, some of the biggest incentive awards have been some of the most outrageous. The Urban Transit Hub Tax Credit awarded Panasonic $102.4 million to move nine miles, within the state, from Secaucus to Newark. As I have reported before, giving subsidies to move existing facilities is the most obviously wrong form of incentive use, because no new jobs are being created, but tax revenue is cut. Interstate job piracy is bad, but for the state to fund intra-state piracy is lunacy.

Meanwhile, New Jersey's July unemployment rate came in at 8.6%, #43 of the 50 states.

Kudos to Governing and reporter Mike Maciag for a great piece of reporting, providing a well-documented case study of what out-of-control subsidies look like as the country tries to recover from its ongoing jobs depression.

Cross-posted at Angry Bear.

We're #194!

I recently learned that a company called Onalytica calculates the influence of economics blogs, using the model of impact factors for academic journals. Basically, it is a question of how often you are cited and the importance of who cites you.

I was tickled to find out that Middle Class Political Economist is now ranked in its top 200 economics blogs, a new entry at #194. At the relatively tender age of 25 months, this was a nice pat on the back.

Of course, this is a testament to both my readers and those who cite me, and I'd like to thank you all. Also, congratulations to my friends at #34 Angry Bear, where I often re-post my articles.