ICYMI: Milanović on why wealth is not income and income is not consumption

Branko Milanović: – Repeat after me: Wealth is not income and income is not consumption:

Among the advanced economies, wealth-poverty is not limited to the United States. In Germany 27% of households (as of 2013) have negative or zero net wealth (paper by Markus Grabka and Christian Westermeier). So these people would be also included among the wealth-poorest people in the world.

Is this an anomaly? Does it make the study of wealth inequality meaningless? According to the critics of the Oxfam report it does, because the wealth-poor people from the rich countries do not necessarily lead a life of poverty. Thanks to deep financial systems that exist in rich countries they can borrow and keep their consumption relatively high all the while driving their net wealth down to zero. In effect, borrowing is simultaneously a way to keep consumption high (above your income which may be also high by global standards) and driving your net wealth down to zero. Thus, we have people who are absolutely poor by wealth standards while their income or consumption may place them around the 60th, 70th or even higher global percentile.

But the “anomaly” is solely in the minds of the critics. Distribution of net wealth is not the same thing as distribution of consumption or income. Each of these aggregates has its own uses. If one wants to look at people whose real consumption is minimal, who live at the edge of subsistence, one should look at the global distribution of consumption with its famous poverty line of $1 (now $1.25) international dollars per capita per day. This is what the World Bank has been doing since 1990. There are no people from the rich countries among the consumption-poor. Even the poorest people from the advanced economies have a much higher level of consumption (at least around $12-$15 international dollars per day).

It is a wrong belief that there should be one and only one measure that would give us the answer who is poor and who is rich. The three welfare aggregates (wealth, income and consumption) are related but they are not the same. (And I leave out other “details” like the distinction between net income, that is, after-fisc income, and market income or income before any government transfers and taxes.) There are people who are poor or middle class according to one measure but rich according to another. Wealth is not income nor is income consumption.