Tuesday, November 8, 2011

The 99%ers: Part 3


Is the data grass greener within the 99%? The problems that arise with mark-to-market assumptions don’t end with just the evil 1%. What happens when one tries to look at the data in terms that relate to real world people, rather than as potential political posturing points? One should still be very careful about deciding what it shows. But, at least within the realm of imaginable wealth ranges, we are equipped to make reasonable intuitive adjustments for data deficiencies.

Think about this from the perspective of the retiring baby boomers. Within age cohorts, the data are more meaningful than in aggregate. A millionaire at 25 isn’t the same as a millionaire at 65. We can all make a reasonable adjustment for our age, but often don’t. Data on a single cohort forces the adjustment.

We can also intuitively understand why differences between age cohorts (65 year olds verses 25 year olds) influence the aggregate distribution more than changes in distributions within individual cohorts (25 year olds verses other 25 year olds). After all, most of us start life naked and broke. With time, we dress differently and accumulate different amounts of wealth. Wealth distributions overall (i.e., without reference to age) doesn’t say much.

What also becomes apparent is that wealth held in different forms isn’t directly comparable. We know a house isn’t money in the bank and a CD isn’t equivalent to a stock. Mark-to-market only hides that fact. What market-to-market has going for it is that it seems to allow comparisons that we intuitively know don’t apply.

Even ignoring mark-to-market measurement problems, there are instances where mark-to-market just can’t be applied. Not every asset trades. Using an example of assets that can’t be traded illustrates the shortcoming. The 1% is indicative of nothing without reference to pensions, Medicare, and Social Security. Pensions, Medicare and Social Security are big assets left out of the 99%ers thinking and the data.

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