Saturday, March 16, 2013

Why You Don't Have Any Wealth

The NYTimes has a story about how my generation has less wealth than my parents with the subtext that this is a serious problem.

The "problem" is that my generation is investing more in education so we have more student debt and we take longer to get into the workforce.

We make more money, especially when you take into account the life-saving health care we of get as a fringe benefit,* but it takes longer before we start earning. The result is that in our 20s we received far fewer paychecks than our parents did and as a result we've earned less in wages.

No one really doubts that by the time we reach our 40s and 50s everything will have flipped. We will catch up with our parents, pass them, and soar to new high, and probably accumulate more wealth along the way, but while we're young we have more debt (from higher investment) and less savings (from lower income).

Another less misleading way to think about it is that we DO have a lot of wealth but it isn't in real estate, stocks, or bonds, it is in what economists call human capital (i.e. education and experience). Our "lack of wealth" is misleading because it doesn't count our primary asset.

If that sounds abstract a simple example shows what I mean. Would you rather be a newly minted M.D. earning $150,000 a year with $100,000 in debt our a department manager at Wal-Mart earning $35,000 a year with $30,000 in equity in his house? The department manager has $130,000 more wealth but if you take into account human capital the doctor has over $1,000,000 more wealth.

* - An example: when I was born there was an experimental procedure to eliminate a congenital heart defect I was born with. By the time I was 8 my mom felt it was safe enough to try and now I no longer have a 1 in 200 chance of sudden death. If I were born in the 60s that wouldn't be true.

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