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THE MEASUREMENT 
OF WEALTH: 
RECESSIONS, SUSTAINABILITY 
AND MISSING CAPITAL 
Joseph E. Stiglitz 
HLEG 
Rome 
2014
WEALTH AS ESSENTIAL TO SUSTAINABILITY 
 The Commission on the Measurement of Economic 
Performance and Social Progress emphasized the 
central role of wealth in the assessment of 
sustainability 
 While noting that there might be significant problems in 
the valuation of assets 
 Bubble prices
MEASUREMENT OF WEALTH 
 But standard measures of “wealth” may not adequately 
reflect sustainability 
 Some increases in wealth (as conventionally measured) 
may reflect increased economic rents, unrelated to the 
productive capacity of the economy 
 Some decreases in wealth—associated with human, 
social, and natural capital—may not be captured in our 
wealth metrics 
 Overall, recent changes in measured wealth overstate 
true “capital” accumulation
HELPS EXPLAIN ANOMALY 
 Wealth/income ratio seems to have increased 
dramatically (Piketty) 
 But average wages have stagnated 
 And labor share of income has declined 
 Standard neoclassical theory would predict a substantial 
increase in wages 
 And, if the elasticity of substitution is less than unity, an 
increase in the share of labor 
 But this makes sense if “W,” wealth, is not “K,” capital
MISSING REAL CAPITAL 
 Recessions destroy capital (or impede its 
accumulation) 
 We trace out the consequences for plant and 
equipment 
 Revealed by investment data 
 May not do so fully: don’t adequately monitor 
maintenance expenditures 
 But we don’t adequately trace out the 
consequences for other forms of capital
QUANTIFYING MISSING CAPITAL 
 Top down approach 
 GDP in US is some 15% below what it would have been in the absence of 
crisis—in Europe some 17% lower 
 We can measure the delta in “normal” K (what K would have been but for 
the recession) and actual K (i.e., the consequences of reduced 
investment), and normal human capital (“education”) and actual human 
capital. We can estimate the predicted effect of this on output. 
 The difference between this and the actual (PDV) of output is the result of 
missing “dark matter”—analogous to Solow’s residual 
 Even if we can’t precisely parse out the components of this dark matter— 
destruction of organizational capital, other components of human capital 
(experience)—it’s real and needs to be taken into account 
 Back of the envelope calculations suggest that the magnitude is 
enormous—probably in excess of $30 trillion (depending on discount rate)
BOTTOM UP APPROACH 
 We know that those who enter the labor force in a 
bad (recession) year have a significantly lower 
lifetime PDV of income 
 Some of these effects may be distributional (changed 
bargaining power of workers) 
 And this is especially true of those who remain 
unemployed for extended periods 
 We also know that those who get displaced face a 
significant loss in PDV of income
PARSING OUT THE EFFECTS ON HUMAN CAPITAL 
 Education: Ambiguous effect 
 Some stay in school longer when no jobs are available 
 With a prolonged downturn, many can’t afford to stay in 
school 
 Especially in countries where children/parents have to pay bulk 
of costs 
 And in places where tuition is linked to state support 
 Does increased competition for jobs lead to greater 
incentives for learning? Or do reduced employment 
opportunities reduce incentives?
HIDDEN LOSSES 
 Reductions in quality of education as governments 
cut back on funding 
 Reduced access to health care and nutrition can 
have life-long effects
JOB EXPERIENCE 
 Most adverse effects are related to decrease in job 
experience (learning on the job)—major part of human 
capital 
 Those in their 50’s and early 60’s forced to retire early 
 Partially offset by supply side effects on those who lose 
retirement assets who are forced to work 
 They still face a welfare loss, which we should try to capture 
in our metrics 
 Especially adverse effects on young people who can’t 
get jobs
MISSING CAPITAL 
 Consistent with hysteresis effects associated with 
extended periods of unemployment 
 And helps explain why effects of downturns persist 
 With strong policy implications 
 Long-term consequences of not taking strong counter-cyclical 
policies 
 Focus on government debt was short-sighted (besides 
being counterproductive) 
 Far more important adverse effects on asset side
ANOTHER EXAMPLE OF 
WHY METRICS MATTER 
 What you measure affects what you do 
 If you focus on the liability side of the government, 
one may take actions that result in the liability side 
of private sector increasing, and asset side of the 
entire economy decreasing—undermining 
sustainability
AND AN IMPORTANT CAUTIONARY NOTE 
 In the interpretation of wealth-income ratios 
 And the implication of these increases

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HLEG thematic workshop on "Intra-generational and Inter-generational Sustainability", Joseph E. Stiglitz

  • 1. THE MEASUREMENT OF WEALTH: RECESSIONS, SUSTAINABILITY AND MISSING CAPITAL Joseph E. Stiglitz HLEG Rome 2014
  • 2. WEALTH AS ESSENTIAL TO SUSTAINABILITY  The Commission on the Measurement of Economic Performance and Social Progress emphasized the central role of wealth in the assessment of sustainability  While noting that there might be significant problems in the valuation of assets  Bubble prices
  • 3. MEASUREMENT OF WEALTH  But standard measures of “wealth” may not adequately reflect sustainability  Some increases in wealth (as conventionally measured) may reflect increased economic rents, unrelated to the productive capacity of the economy  Some decreases in wealth—associated with human, social, and natural capital—may not be captured in our wealth metrics  Overall, recent changes in measured wealth overstate true “capital” accumulation
  • 4. HELPS EXPLAIN ANOMALY  Wealth/income ratio seems to have increased dramatically (Piketty)  But average wages have stagnated  And labor share of income has declined  Standard neoclassical theory would predict a substantial increase in wages  And, if the elasticity of substitution is less than unity, an increase in the share of labor  But this makes sense if “W,” wealth, is not “K,” capital
  • 5. MISSING REAL CAPITAL  Recessions destroy capital (or impede its accumulation)  We trace out the consequences for plant and equipment  Revealed by investment data  May not do so fully: don’t adequately monitor maintenance expenditures  But we don’t adequately trace out the consequences for other forms of capital
  • 6. QUANTIFYING MISSING CAPITAL  Top down approach  GDP in US is some 15% below what it would have been in the absence of crisis—in Europe some 17% lower  We can measure the delta in “normal” K (what K would have been but for the recession) and actual K (i.e., the consequences of reduced investment), and normal human capital (“education”) and actual human capital. We can estimate the predicted effect of this on output.  The difference between this and the actual (PDV) of output is the result of missing “dark matter”—analogous to Solow’s residual  Even if we can’t precisely parse out the components of this dark matter— destruction of organizational capital, other components of human capital (experience)—it’s real and needs to be taken into account  Back of the envelope calculations suggest that the magnitude is enormous—probably in excess of $30 trillion (depending on discount rate)
  • 7. BOTTOM UP APPROACH  We know that those who enter the labor force in a bad (recession) year have a significantly lower lifetime PDV of income  Some of these effects may be distributional (changed bargaining power of workers)  And this is especially true of those who remain unemployed for extended periods  We also know that those who get displaced face a significant loss in PDV of income
  • 8. PARSING OUT THE EFFECTS ON HUMAN CAPITAL  Education: Ambiguous effect  Some stay in school longer when no jobs are available  With a prolonged downturn, many can’t afford to stay in school  Especially in countries where children/parents have to pay bulk of costs  And in places where tuition is linked to state support  Does increased competition for jobs lead to greater incentives for learning? Or do reduced employment opportunities reduce incentives?
  • 9. HIDDEN LOSSES  Reductions in quality of education as governments cut back on funding  Reduced access to health care and nutrition can have life-long effects
  • 10. JOB EXPERIENCE  Most adverse effects are related to decrease in job experience (learning on the job)—major part of human capital  Those in their 50’s and early 60’s forced to retire early  Partially offset by supply side effects on those who lose retirement assets who are forced to work  They still face a welfare loss, which we should try to capture in our metrics  Especially adverse effects on young people who can’t get jobs
  • 11. MISSING CAPITAL  Consistent with hysteresis effects associated with extended periods of unemployment  And helps explain why effects of downturns persist  With strong policy implications  Long-term consequences of not taking strong counter-cyclical policies  Focus on government debt was short-sighted (besides being counterproductive)  Far more important adverse effects on asset side
  • 12. ANOTHER EXAMPLE OF WHY METRICS MATTER  What you measure affects what you do  If you focus on the liability side of the government, one may take actions that result in the liability side of private sector increasing, and asset side of the entire economy decreasing—undermining sustainability
  • 13. AND AN IMPORTANT CAUTIONARY NOTE  In the interpretation of wealth-income ratios  And the implication of these increases