Stop adding up the wealth of the poor

http://blogs.reuters.com/felix-salmon/2014/04/04/stop-adding-up-the-wealth-of-the-poor/

by hacknat • 12 years ago

17 4 12 years ago

blogs.reuters.com

I wonder if there is a good way to measure what these various sound byte facts are trying to get at?

hacknat• 12 years ago

I wonder if there is a metric that could better reflect the sound byte fact that these organizations are trying to get at?

analog31• 12 years ago

Quite possibly, just don't count debt. Or give wealth as two numbers: The positive part and the negative part. My rationale is that debt is primarily handed out to people who are expected to pay it off someday.

001sky• 12 years ago

The result is that if you take the bottom 30% of the world’s population — the poorest 2 billion people in the world — their total aggregate net worth is not low, it’s not zero, it’s negative.

This is the main point of contention.

The author takes the view that "poor" people being insolvent don't "control assets". This is arguably misguided; when we look at a company's value we don't look at the company "less the debt", we look at the company's equity + its debt. Because this is the total of capital the company has under its control.

The general context here is in comparisons of the assets controlled by the wealth and those by the poor. I believe the same argument applies: if the wealth control a million dollar house, they should not be valued at the $200K of net equity in the house. While that is the net worth of the household, the household controls $1M+ in assets (thanks t the magic of liabilities).

This simple change seems to solve some problems. But maybe I'm wrong or the data isn't avail to do this /. readily.

guan• 12 years ago

There are multiple ways of looking at a company’s value. What you describe is usually called “enterprise value”. Other measures of value are the market value of equity and the book value of equity. All are valid and useful for different things.

I do think the market value of equity is used a lot more often than enterprise value, because market value of equity measures the value owned by those (the shareholders) who control the company.

Similarly, assets and equity are both legitimate measures of the wealth of a household. If you are looking at wealth as a way to generate income, equity is very relevant: if you own a house worth $1 million with no debt, and the rental equivalent is $50,000 per year, then you’ve saved $50,000 a year in rent compared to a counterfactual where you don’t own a house. But if you have $50,000 per year in mortgage payments, you are, in many ways (not counting capital gains/losses and the benefits/costs of owning vs renting), not much better off than a non-homeowner who simply rents.

The point the original article makes is that if you want to add up the wealth of the poor, equity is a bad measure.

Stop adding up the wealth of the poor

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