Martin Weitzman, Professor of Economics at Harvard University, discusses the fundamental four-fold relationship among wealth, income, sustainability, and accounting.
Wealth is a stock, not a flow. The country with the highest flow of GDP in a particular year is not necessarily the richest country. The richest country has the highest capital stock, whether endowed or accumulated. While this should in theory be obvious, it is often ignored. A focus on wealth, and changes in wealth, would lead to attention to investment in important assets – whether natural, produced, human, institutional or financial – and sharper attention to sustainability. In this discussion, the panelists consider wealth accounts and policy implications.
The state is often seen as facilitating the process of wealth creation, rather than being a key driver of the process itself. A better understanding of the role that the state has and can play in the wealth creation process is the starting point for policy solutions that can increase the rate of wealth creation, while reducing rent-seeking and ensuring a fairer distribution of that co-created wealth.
In recent decades, governments have largely focused on public debt. Public wealth, however, is largely overlooked and larger than many think. In this discussion, the panelists present on the value of public wealth – theory, balance sheets, financial statements.
Although it is heartening to see wealth inequality being taken seriously, key concepts are often muddled, including the distinction between income and wealth, what is included in “wealth”, and facts about wealth distributions. Philippe Van Kerm discusses research (conducted with Frank Cowell, Brian Nolan, and Javier Olivera) that highlights the issues arising in making ideas and facts about wealth inequality precise, and presents newly-available data taking a fresh look at wealth and wealth inequality in a comparative perspective.
Many countries have set up sovereign wealth funds (SWFs) as vehicles for public saving and wealth management. The majority of SWFs are in resource-exporting countries; frequent objectives are macroeconomic and fiscal stabilisation, inter-temporal transfer of wealth, and national development. Some resource funds hold assets equivalent to several multiples of GDP, but many funds are relatively small. The evidence shows that the design and operation of a SWF can help or encumber economic management and wealth preservation.
Eoin McLaughlin presents research (conducted with Matthias Blum and Cristián Ducoing) on the long-run development of Genuine Savings (GS) using a panel of eleven countries during the twentieth century.
Infrastructure services in energy, transport, water and telecommunications services underpin the wealth of modern nations. Yet, inefficiencies abound. In developing nations hundreds of millions of people lack access to modern infrastructure services. Globally as much as 40% of expenditures on infrastructure may constitute waste, equivalent to some 1 to 2 % of global GDP. Michael Klein discusses infrastructure development, links between infrastructure, wealth and economic growth, and more.
Recognizing environmental constraints, and in particular recognizing that many natural assets are close to falling below their thresholds for sustainability does not imply that economic growth must stop or even slow down. Dieter Helm discusses how it is possible to have economic growth while protecting aggregate natural capital.
What is intangible wealth and what is its relation to TFP and future consumption? The panel discusses how to calculate residual capital, and what its relationship to tangible capital and economic growth is.
Over the next fifty years, most new wealth will be accumulated in cities; this includes physical infrastructure (road, rail, electricity, telecommunications and sanitation), productive capital (houses, offices and factories) and knowledge capital (skills, knowhow and ideas). The development of cities will also determine humanity’s ability to preserve natural capital. Consequently, urbanisation deserves urgent attention from policymakers, academics and businesses worldwide. Dimitri Zenghelis discusses how well-governed, connected, clean cities are likely to attract productive capital, talent, and creativity; while bad governance and inaction over planning can erode progress for decades to centuries.
There is a large body of evidence on the relationship between financial systems and wealth creation. Colin Mayer discusses how the technological revolution is transforming finance and how regulation is responding to it. He argues that there are fundamental defects in regulation that are giving rise to regulatory arbitrage and the emergence of a parallel, unregulated financial system.Full paper
The welfare returns to investing in trust could be substantial. Michael Woolcock discusses research (conducted together with Kirk Hamilton and John Helliwell) that uses social trust data from 132 nations covered by the Gallup World Poll, presenting a range of estimates of social trust’s wealth-equivalent values.
What are the key research questions around Wealth? Who are the key institutional actors in a coalition that might give rise to acceptance of Wealth as an indicator? The panelists discuss the way forward for Wealth Accounting.
Angela Cummine, political theorist at Oxford University and Director of the Wealth Project, discusses the history and thought behind modern day sovereign wealth funds, asking the question: What measures are needed to ensure that the management of sovereign funds truly reflects, promotes and protects the interests and values of their citizen-owners? For the full podcast, click here.
Diane Coyle explains why GDP is an increasingly inappropriate indicator for the twenty-first-century economy
Mariana Mazzucato speaks about the importance of the public sector in wealth creation
The Natural Capital Committee is an independent advisory body, set up in 2012. It provides advice to the government on the state of England’s natural capital – that is, our natural assets includes forests, rivers, land, minerals and oceans.Read report
Wealth is a stock, not a flow. The country with the highest flow of GDP in a particular year is not necessarily the richest country. The richest country has the highest capital stock, whether endowed or accumulated, implying a higher potential for future income and consumption. This should be obvious, yet concepts of wealth are often poorly understood or ignored. Many countries do not maintain adequate wealth accounts; those that do would admit that a great deal of work on national accounts remains to be completed. This is remarkable: investors would not accept corporate balance sheets of a quality akin to those of many countries. However, with progress on wealth accounting, including the accounting of natural wealth, this situation may be set to change, enabling the rate at which nations are becoming richer or poorer per capita to undergo popular examination. A focus on wealth, and changes in wealth, would lead to attention on investment in important assets and to sharper attention on sustainability. This paper, and this issue of the Review as a whole, provides an examination of wealth, its definition, constituent parts, geographical distribution, and change over time, and provides policy guidance on accounting and management. We also explore the degree to which successful wealth management may even make us happier.Full paper
This study investigates wealth trends from 1983 to 2010. The most telling finding is that median wealth plummeted over the years 2007–10 by 47 per cent. The inequality of net worth, after almost two decades of little movement, was up sharply between 2007 and 2010. Relative indebtedness continued to expand during the late 2000s for the middle class, though the proximate causes were declining net worth and income, rather than an increase in absolute indebtedness. The sharp fall in median net worth and the rise in its inequality from 2007 to 2010 are traceable to the high leverage of middle-class families and the high share of homes in their portfolio. The racial and ethnic disparity in wealth holdings, after remaining more or less stable from 1983 to 2007, widened considerably between 2007 and 2010. Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummelled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.Full paper
Estimates of Britain’s comprehensive wealth are reported for the period 1760–2000. They include measures of produced, natural, and human capital, and illustrate the changing composition of Britain’s assets over this time period. We show how genuine savings, GS (a year-on-year measure of the change in total capital and a claimed indicator of sustainable development) has evolved over time. Changes in total wealth are compared to alternative, investment-based measures of GS, including variants augmented with the value of exogenous technology. Additionally, the possible effects of population change on wealth, and the implications of including carbon-dioxide emissions in natural capital are considered.Full paper
Since income is the return on wealth, the total wealth of any given country should be in the order of 20 times its gross domestic product. Instead, the average observed ratio from the bal- ance sheet accounts of the System of National Accounts is a factor of 2.6–6.6, depending on whether natural resource stocks are included in the balance sheet. The clear implication is that the System of National Accounts wealth accounts are incomplete, with the most obvious omission being human capital. Estimating the value of human capital using the lifetime income approach for a sample of 13 (mostly high-income) countries yields a mean share of human capital in total wealth of 62 per cent— four times the value of produced capital and 15 times the value of natural capital. But for selected high-income countries in the sample there is still an average of 25 per cent of total wealth that is unac- counted for—it is neither produced, nor natural, nor human capital. This residual intangible wealth is arguably the ‘stock equivalent’ of total factor productivity—the value of assets such as institutional quality and social capital that augment the capacity of produced, natural, and human capital to support a stream of consumption into the future.Full paper
Does wealth accumulation impact subjective well-being? Within a country, household wealth has been shown to improve individual well-being by providing a safety net of protection against negative income shocks, by allowing current and expected consumption flows, and by its potential use as a collateral. At the aggregate level, direct evidence about the relationship between national wealth and happiness is almost non-existent, owing to data limitations and statistical identification problems. However, aggregate wealth impacts well-being indirectly, via positive channels, such as institutional quality and improvement in health, life expectancy, and education. Wealth also brings about nega- tive environmental degradations and other damages. The stock of accumulated wealth is also likely to affect happiness indirectly, via its influence on the rate of GDP growth, because both the level of income flows and the rate of income growth have been shown to be factors of higher well-being.Full paper
The paper sets out a pragmatic case for preserving the aggregate level of natural capital, in the face of the declines in biodiversity and the rising population, and major increases in consumption that economic growth will bring in this century. The accounting framework to achieving this objective is considered, focused on the role of asset registers. Particular attention is paid to renewable assets at risk of falling below critical thresholds. These assets are key components of the balance sheet. Capital maintenance expenditures are required to maintain the value of assets intact, since renewable natural assets should not be depreciated, but rather treated as assets in perpetuity. Within the aggregate, substitutions with other forms of capital are permitted, but only if there is compensation for any detriment to natural capital. Offsetting is one mechanism for achieving this compensation. The case for enhancing the aggregate is considered, and the paper shows how a broader national plan over a generation could contribute to the policy objective of leaving the next generation with a richer endowment of natural capital. The policy instruments for embedding natural capital into public policy are reviewed.Full paper
Accounting information is a core element of economic decision-making at both national and corporate levels. It is widely accepted that much economic activity is dependent upon natural capital and natural resources—generically termed environmental assets in an accounting context. Environmental assets are under threat of depletion and degradation from economic activity. Consequently, the incor- poration of information on environmental assets into standard accounting frameworks is an essential element in mainstreaming environmental information and broadening the evidence base for economic decisions and the assessment of sustainability. This paper describes the treatment of environmen- tal assets within the national economic accounts and summarizes recent developments that extend the accounting approaches as described in the United Nations’ System of Environmental-Economic Accounting (SEEA). The potential for implementation of accounting standards for environmental assets is shown through a description of work in Australia on environmental-economic accounting.Full paper
The principles of how best to manage the various components of national wealth are outlined, where the permanent income hypothesis, the Hotelling rule, and the Hartwick rule play a prominent role. As far as managing natural resource wealth is concerned, a case is made to use an intergenerational sovereign wealth fund to smooth consumption across generations, a liquidity fund for the precautionary buffers to deal with commodity price volatility, and an investment fund to park part of the windfall until the country is ready to absorb extra spending on domestic investment. Capital scarcity implies that a positive part of the windfall should be spent on domestic investment. The conclusions highlight the political economy problems that will have to be tackled with these normative proposals for managing wealth.Full paper
For economists in 1974, it was a live question whether the exhaustion of natural resources, such as oil, would necessarily lead to the decline of economic activity. Solow showed that constant levels of consumption could be sustained in the face of exhaustibility if there is sufficient substitutability between produced and natural factors of production. Hartwick then proved that underpinning this result is a saving rule—set investment in produced capital equal to the value of resource depletion at each point in time. A large literature has shown that a comprehensive measure of the change in real wealth—net saving—plays a central role in determining whether current well-being can be sustained. In particular, current declines in real wealth signal that future well-being will also decline, a result that has been confirmed empirically using data for developing countries. Changes in wealth and sustain- ability are therefore joined at the hip. The current composition of wealth serves to define the policy challenges that countries face in achieving sustainable development. If substitution possibilities are limited between natural and other factors of production, as one might expect, then technical progress is a necessary complement to policies for sustainability.Full paper
Cities are central to knowledge growth but also resource efficiency, with infrastructural lock-in playing a key role in determining resource use
Governments around the world have an estimated $75 trillion of dollars of public assets, ranging from corporations to forests, which are often badly managed and frequently not even accounted for on their balance sheets. Over recent decades, policy makers have focused almost solely on managing debt while largely ignoring the question of public wealth. Given that in most countries public wealth is larger than public debt, just managing it better could help to solve the debt problem while also providing the material for future economic growth. A higher return of just 1% on global public assets would add some $750 billion to public revenues. Poor management not only throws money down the drain, but also forecloses opportunities.Read report