Wealth is Poorly Represented By a Number

So apparently the right has been slinging some stones over Hillary Clinton’s comments that she and Bill were “dead broke” when they left the White House.  But not only is it true, it’s almost unbelievably true: the Clintons had a net worth of negative ten million dollars, mainly in unpaid legal fees.  As Yglesias rightly points out, the mere fact that they could have that much debt indicates that they were in fact quite wealthy.  A normal person could never rack up that amount of debt.  And when you are wealthy, there are different rules – for example, you can take out a loan to buy up your own bad debts for pennies on the dollar.  The reason that the law firms extended this sort of service on credit was pretty simple – that they knew that Bill Clinton had extremely high earning potential and could easily pay them back.  In this light, it’s obvious that the Clintons’ negative net worth didn’t really mean they were poor, simply that they were running a negative current account balance and had a fairly high debt-to-assets ratio,

So there are at least two things that we might mean when we say “wealthy” – the net worth you report on your taxes, and the present value of your expected future income.  Of course, there is more than just that.  Even someone who scores relatively low (by elite standards) on both – for example, a Congressman with no plans to lobby, might still be quite wealthy in the favors he can bring in and the standard of living he can ensure his family.  Connections, even when not monetized, are a pretty important form of wealth.  The truly wealthy – for example, Bill Gates, are richly endowed in all of these areas.  Interestingly, the net worth score does a much better job of capturing the wealth of the poor than it does the rich – because their future earnings tend to resemble their present earnings, and their connections are generally not very useful.  Wealth becomes increasingly multidimensional and hard to measure the wealthier one is, and flatter and more unidimensional the poorer one is.

This is, to my mind, an argument for the progressive income tax – if not stronger or downright punitive income taxes.  A flat income tax actually captures less of the income of the wealthy, since their cash compensation forms a smaller portion of the economic and uneconomic capital to their name.  Accordingly, a greater portion of their cash income can be taxed away without doing more harm to their utility.


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