10 February 2010

Income != Wealth

EconLog | David Henderson | Problems with Means Testing

2. What are means?
Without exception, every time I've seen someone advocate means testing, he uses income as his measure of means. This completely ignores wealth. Although income and wealth are highly positively correlated, the correlation is not close to 1.0. Therefore means testing would discriminate in favor of wealthy people with low income. Because the most expensive programs for which means testing is advocated tend to be for the elderly, this is an even bigger problem. Among the retired population, the correlation between income and wealth is even weaker, I believe, than among the population in general.
I just wanted to reproduce that since I am so tired of making the same point. I'd add that it is certainly most true for old people, as Henderson says, but it is also true of young workers, like yours truly, because things like student loans and post-graduate school and internships comes into play.

On a related point, it is highly fallacious to take the top x% of annual income earners and refer to them as "The Rich."  First of all, when people say "rich" they really mean wealth, not income.  Second of all, where you fall on the income distribution for any given year is as impacted by your age as is is your socio-economic class.  Take, for example, any of my friends finishing up professional schools now.  They currently have both low income and low wealth.  They'll be graduated and get good jobs, but have high loans debt, leaving them with high income and low wealth.  They'll get older, pay off some loans, accrue some savings, and have high income and high wealth.  Then they'll retire and drop down to low income and high wealth.  They'll have been in all four quadrants of an income-wealth distribution, but remain with roughly the same SES the entire time.  For only a relatively short time in their lives will they fall into "The Rich," according to IRS income tables, and for a significant chunk of that debt will put their wealth at negative or near-zero levels.  I'm not saying we should feel sorry for them (sorry guys), only that annual income distributions are a poor way of deciding who is economically privileged.

No comments:

Post a Comment