Tuesday, March 17, 2009

Capitalist redistribution

Every now and then, a short article brings thoughts that have been tugging at the edge of your consciousness into sharp focus In that category is Rob Atkinson's Where did all the wealth go? Eureka #1: devalued assets are still there:
Consider housing. When hurricane Katrina demolished more than 275,000 homes, America was $80 billion poorer. In contrast, after the recent financial hurricane demolished the value of homes, there were 750,000 more homes in America. Current owners will get $2.1 trillion less when they sell and will have to forgo that new car or vacation. But future buyers will save $2.1 trillion and that new car or vacation will go to them, rather than the seller...

Just like housing market, the fall in the stock market represents a shift in wealth from current owners to future buyers. People who buy stocks today get the same asset for $3.6 trillion less than those who purchased stock at the peak of the bubble...
One caveat: the housing boom distorted the housing market, and so created housing stock that may be intrinsically less valuable than it should be, because it's composed of the wrong kinds of houses (3,000-4,000 square feet, anyone?) in the wrong places - sprawled out into new exurbs. That means higher energy costs, m0re time in traffic, and perhaps less economically dynamic communities than more intelligent development might have produced. The detritus of the housing bubble is visible on any road trip -- for example, the long rows of behemoth single-family homes lining I-90 for dozens of miles west of Chicago's O'Hare Airport.

Another caveat: lots of stocks will disappear in a wave of bankruptcies. To say that that's part of the natural order of things begs the question of whether we come out the other end with a more- or less-dynamic set of companies, and whether those companies produce more or less sustainable wealth for more or fewer people. If the US. auto industry disappears, for example (or the U.S.-branded behemoths, in any case), that will create enormous hardship -- though whether that loss would prove to be a long-term good or evil is impossible to know at this point.

Still, no one ever said that creative destruction was efficient. Atkinson's larger point -- -- that this bust will transfer wealth from the old to the young, and from the wealthy to the middle class -- gives new resonance to the term correction:
The real issue is who bought high and who is now able to buy low. Generally, older people who hoped to sell their assets at high prices have been made worse off. But don't go clamoring for an increase in Social Security benefits for the AARP set quite yet. For most older Americans who bought houses before 2000, home values are exactly where they would be had the price increases between 1987 and 2002 continued in a straight line, instead of booming from 2002 to 2005 and subsequently crashing. The same applies to equity values. Even with the recent bear market, the S&P 500 is still higher than it would be had it increased from 1985 to the present at the rate it did from 1950 to 1985. Indeed, from 1980 to the present, the S&P 500 has increased in value 30 percent more than the economy as a whole.

The second set of "losers" are the rich. The fact that the top 10 percent of American households own at least 70 percent of American assets means that the recent decline in asset prices hit the richest the hardest..

The fact that the losses are concentrated among the rich and baby boomers is not a bad thing. The last several decades have seen the wealthiest Americans get wealthier much faster than the average American. If they lose more now, it just helps reverse a longstanding inequitable trend. Likewise, if the collapse in stock prices means that more people now in their 50s and 60s (including me) have to work an extra few years before retiring, it is all to the good.
I'm reminded of the alleged mantra of Rahm Emanuel: a crisis is a terrible thing to waste. The core of Obama's campaign was a commitment to reverse the 30-year trend of rising income inequality, to restore "balance" and "fairness" to our economy. His whole budget is oriented toward that overriding goal This correction, if it doesn't spiral into political instability, authoritarianism and war, may provide a gigantic shove in the right direction.

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