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NBER WORKING PAPER SERIES

THE MEASUREMENT OF WEALTH:


RECESSIONS, SUSTAINABILITY AND INEQUALITY
Joseph E. Stiglitz
Working Paper 21327
http://www.nber.org/papers/w21327

NATIONAL BUREAU OF ECONOMIC RESEARCH


1050 Massachusetts Avenue
Cambridge, MA 02138
July 2015

Paper presented at a special session of the International Economic Association World Congress, Dead
Sea, Jordan, June, 2014 sponsored by the OECD. I am deeply indebted to the other members of the
panelGonzalo Hernandez Licona, Francois Bourguignon, and Martine Durandand to Martin Guzman
for their insightful comments, and also to Ruoke Yang and Feiran Zhang for research assistance. Financial
assistance from INET and the Roosevelt Institute Inequality Project, and support by the Ford, McArthur,
and Bernard and Irene Schwartz foundations are gratefully acknowledged. The views expressed herein
are those of the author and do not necessarily reflect the views of the National Bureau of Economic
Research.
NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.
2015 by Joseph E. Stiglitz. All rights reserved. Short sections of text, not to exceed two paragraphs,
may be quoted without explicit permission provided that full credit, including notice, is given to
the source.

The Measurement of Wealth: Recessions, Sustainability and Inequality


Joseph E. Stiglitz
NBER Working Paper No. 21327
July 2015
JEL No. D31,E21,E22
ABSTRACT
This paper considers two central problems in our statistical frameworks which impair the ability to
use wealth to assess economic sustainability or the impacts of economic downturns. Some increases
in wealth may reflect increased economic rentsin particular, land and exploitation rentsand their
capitalized value, unrelated to an increase in the productive capacity of the economy. Another major
problem in our wealth accounts is the missing capital required to explain the marked decrease in
economic output, at the time of the recession and in the years following, that cannot be fully accounted
for by a decrease in measured inputs. When account is taken of this missing capital, the adverse effects
of austerity appear much greater than suggested by the standard national income accounts.

Joseph E. Stiglitz
Uris Hall, Columbia University
3022 Broadway, Room 212
New York, NY 10027
and NBER
jes322@columbia.edu


Introduction
Thispaperconsiderstwocentralproblemsinthemeasurementofwealthwithintheexisting
statisticalframeworks,whichimpairboththeabilitytoassesseconomicsustainabilityandthe
impactsofaneconomicdownturn.Thesemeasurementproblemshave,inturn,ledto
confusionconcerningtheinterpretationtobegiventothedramaticincreaseinthewealth
outputratioinrecentdecades.
TheCommissionontheMeasurementofEconomicPerformanceandSocialProgress
emphasizedthecentralroleofwealthintheassessmentofsustainability.Thepropositionwas
simple:ifwealth(withagrowingpopulation,wealthpercapita),appropriatelymeasured,was
nondecreasing,thenthegivenpathofconsumptioncouldbesustainedinthefuture.1The
Commissionnoted,however,thattheremightbesignificantproblemsinthevaluationof
assetsexemplifiedbyrealestatebubbles(whichmightgivetheimpressionthatwealthwas
largerthanitwasandthat,therefore,theeconomywasonasustainablepathwheninfactit
wasnot,asoccurredinthe2008financialcrisis).Italsonotedthedifficultiesofassessing
natural/environmentalassets,particularlybecausetherewerenomarketsforsuchassets.
Butstandardmeasuresofwealthmaynotadequatelyreflectsustainabilityforotherreasons,
ormorebroadlyanincreaseinmeasuredwealthmaynotreflecttheabilityoftheeconomyto
sustainhigherratesofconsumption.Here,wefocusonthreekeyinstances,intwoofwhichan
increaseinwealthdoesnotmeasureanincreaseinfutureproductivecapacitiesandinoneof
whichourwealthmetricsdonotcaptureadiminutionintheeconomysproductivepotential.
Twoanomalies2
Thepossibilitythattheremightnotbeaclosecorrespondencebetweenmeasuredwealthanda
variable("K"forcapital)thatassessesthefutureproductivepotentialoftheeconomyhelps
explainadisquietingaspectofPikettysrecentbook3:Heshowedthatthewealthoutputratio
increasedenormouslyinrecentdecades.Inspiteofthis,averagewagesdidnotincrease,and
interestratesdidnotfall.Itishardtoobtainsuchresultsinanystandardproductionfunctionif
weinterpretwealthascapital.

Arrowetal.(2012).
TheideasinthissectionareelaborateduponinStiglitz(2015a,b).
3
Piketty(2014).
2

Thereisasecondpuzzle.Ithasbeenobservedthatthelaborsshareofincomeisdecreasing.
Thereisawealthofevidencearguingthattheelasticityofsubstitutionislessthanunity.4If
wealthisincreasing,relativetothelaborsupply,thentheshareoflaborshouldbeincreasing.
Butthesepuzzlesareimmediatelyresolvedifthemeasuredwealthisnotwhatismeantby
productivecapital.Wealthandcapitalarebothaggregates,buttheyrepresentdifferent
aggregates.Itispossiblethatwealthhasgoneup,butproductivecapitalhasnotgoneup
commensurately,ormayevenhavegonedown.Thatappearstohavebeenwhathashappened
inseveralcountries.5
Aquicklookatsomeofthekeysourcesofincreasesofwealthshowsthatsomemaynotleadto
anincreaseintheeconomy'sproductivepotentialandsomemayevenleadtoadecreasein
itspotential.
I.Land
Themostimportantsourceofthedisparitybetweenthegrowthofwealthandthegrowthof
productivecapitalisland:muchoftheincreaseinwealthisanincreaseinthevalueofland
notassociatedwithanyincreaseintheamountofland(and,therefore,oftheproductivityof
theeconomy).AnincreaseinthevalueoflandintheRivieraorinSouthamptondoesnot
increasetheproductivecapacitiesoftheland.Evenifmeasuredwealthhasincreased,ifthe
valueofKhasdecreased,theeconomysfutureproductivepotentialhasdecreased:the
amountoflandisnogreaternowthanitwasfiftyyearsago.
Whythevalueoflandmightincrease(andinparticular,whyitmighthaveincreasedso
dramaticallyinrecentdecades)isaquestionIdiscussmoreextensivelyelsewhere.(SeeStiglitz,
2015a,b,c.)Note,forinstance,thatiftherentsassociatedwithlandarefixedandlastin
perpetuity,thenaslightdecreaseinthe(longtermreal)interestratecanleadtoalarge
increaseinthevalueofland.6Aswenotedearlier,theCommission,deliberatingasahousing
bubblewasformingintheUnitedStates,Spain,andmanyothercountries,couldnothelp
observethatmarketpricesoflandandotherassetsmaynotrepresentequilibriumprices,i.e.

See:Arrowetal(1961),Young(2013).Itshouldbenotedthatsomeauthorshaverecentlyarguedotherwise.See
Mallick(2007).Buttheassumptionofanelasticityofsubstitutiongreaterthanunityhasoneverydisturbing
consequence:inmodelswherethefactorbias(i.e.whethertechnologicalchangeiscapitalorlaboraugmenting)is
endogenous,thesteadystateequilibriumisasaddlepoint.Theeconomyisunstable.Stiglitz(2014).
5
Thereisathirdimportantpuzzle:onecanonlyexplainafractionoftheincreaseinwealth(inthecaseoftheUS,
betweenonehalfandthreequarters)onthebasisofsavings,fromnationalincomedata.Insomecases,they
suggestadeclineinthewealthincomeratio(assumingwealthwerecapital),whenthereappearstobean
increase.Stiglitz(2015a,2015b)referstothisasthewealthresidualtheunexplainedincreaseinwealth.Butthis
isatleastlessofapuzzleonceitisrecognizedthatwealthandcapitalaredifferentconcepts.Thediscussionin
sectionsIandIIbelowexplainwhywealthcangoupevenwhencapitalisdeclining.
6
IfRistherentfromtheland,andristherealinterestrate,thenthevalueoflandVT=R/r,sothatthereisan
equiproportionateincreaseinthevalueoflandfromapermanentdecreaseintherealinterestrate.

maynotevenprovideanaccurateassessmentofthepresentdiscountedvalueoffuturerents
tobederivedfromtheasset.(ThatiswhytheCommissiontooktheeclecticapproachof
suggestingadashboardthatwouldincludealongwithvaluemeasuresphysicalmetrics,e.g.of
theatmosphericconcentrationofgreenhousegasesandchangesinthosenumbers.)
Bubblesareapervasiveandrecurrentaspectofmarketeconomies.Whilerecessionsmay
representcorrections,theeconomymaynotfullycorrectthepricesofrealestate,sothe
economysimplymovesfromonebubblepathtoanother.7
Thecentralpointofthissectionissimple:anincreaseinwealthreflectinganincreaseinthe
valueofrealestatedoesnot,inanyway,measureanincreaseintheproductivecapacityofthe
economy.
II.Increasedrentscapitalizedinfinancialassets8
Someincreasesinwealth(asconventionallymeasured)mayreflectincreasedeconomicrents,
unrelatedtoanincreaseintheproductivecapacityoftheeconomy.Rather,theyreflectan
increaseintheabilityofthoseinthefinancialsector,ormorebroadly,capitalists,toexploit
othersworkers,consumers,andordinarycitizens.Theresultisthatoverall,changesin
measuredwealthinrecentdecadesprobablyoverstatetruecapitalaccumulation.(Inthe
thirdpartofthispaper,wewillarguethat,inthecontextoftheGreatRecession,ourmetrics
understatedtheadverseeffectsofthedownturn,byunderstatingtheadverseimpactson
wealthandwealthaccumulation.)
Suchwouldbethecaseiftheaveragedegreeofmonopolyintheeconomyincreasesif,for
instance,networkeconomiesbecamemoreimportant,sothatthefractionoftheeconomyin
whichmonopoliesoroligopoliesdominateisincreased.Whilehardtoquantify,andvarying
fromcountrytocountry,inalmostallcountriestheseexploitiverentsaresignificant,andin
manycountriestheyseemtohavegoneupsignificantly.
Theeffectivedegreeofmonopolycouldincreaseaswelliffirmsgetbetteratexploiting
whatevermarketpowertheyhaveif,forinstance,firmsgetbetterindiscriminatingamong
differentcategoriesofcustomers.

TherecurrenceofbubbleshasbeennotedbyKindleberger(1978)andmayreflectthefundamentalinstabilityof
economieswithheterogeneouscapitalgoodsintheabsenceofafullsetoffuturesmarketsextendinginfinitelyfar
intothefuture(orwithoutperfectforesightextendinginfinitelyfarintothefuture),analyzedbyHahn(1966)and
ShellandStiglitz(1967).Stiglitz(2014)showsthesamedynamicinstabilityarisesinmodelswithproductivecapital
(K)andland:unlessthepriceoflandissetinitiallycorrectly,thedynamicsdonotleadtheeconomytothesteady
stateequilibrium.
8
SomeoftheideasinthissectionareelaboratedoningreaterlengthinStiglitz2015a.

Typically,thevalueoftheserentsgetscapitalizedintothevalueoffinancialassetsinthe
valueofthosewhocanlayclaimtothemonopolyrents.Suchexploitationrepresentsa
redistributionfromworkerstocapitalists,notanincreaseintheproductivecapacityofthe
economy.Indeed,becausetherearedistortionsassociatedwiththeexerciseofmonopoly
power,thetrueproductivepotentialoftheeconomyhas,inthissense,beenreduced.Ifwe
includedinouraccountingframeworkthepresentdiscountedvalueofrealwages(human
capital),wewouldnotethattheincreaseinfinancialcapitalasaresultofanincreasein
monopolypowerislessthanthediminutioninhumancapital.But,ofcourse,wealth,or
capital,asconventionallymeasureddoesnotincludehumancapital.
Buttherearemoresubtleformsof"exploitation."Governmentallowstoobigtofailbanks.
Thevalueofthosebanksishigherthantheyotherwisewouldbe,becauseofgovernmentrisk
absorption.Butthecontingentliabilityofthegovernmentisnotcapitalized;itdoesntshowup
inthenationalbalancesheet,andsoitappearsasifthewealthoftheeconomyhasincreased.
Butwithappropriatemetrics(wherethedecreasedaftertaxwealthofwageearningcitizens,as
aresultoftheincreaseintheexpectedpresentdiscountedvalueofthehighertaxesthatthey
willhavetopaytobailoutthebanks),justtheoppositewouldhavehappened:wewouldhave
recognizedthatbecauseofthedistortionsassociatedwithtoobigtofailbanks,theproductive
capacityoftheeconomyhasbeendiminished,withthedecreasedwealthoftaxpayersbeing
largerthantheincreasedvalueofbanks;thesemetricswouldhavetoldusthatthebailoutsare
Paretoinefficient,andthatthewealthoftheeconomyhasbeendiminished.9
Althoughthecapitalizationofexploitiverentsmayperhapsrepresentthelargestpartofthe
increaseinfinancialwealthassociatedwithanincreaseinrents,changesintaxesand
regulatoryregimescanhavesimilareffects.
Whatsmissing?
Ineachofthesesituations,achangeintheflowofresourcesthataccruestocapitalgets
capitalizedinwealth,andthepresentdiscountedvalueofthedecreasedflowtotherestofthe
economyisnotreflectedinourwealthmetrics.Wedont,forinstance,valuethestreamoftax
revenuestothegovernmentorthereducedwagesaccruingtoworkersasaresultofincreased
marketexploitation.
Thereisafurtherpotentialproblem,whichwecanonlyhintathere:Marketintertemporal
pricingisingeneralnotcorrect.Wealth(intheconventionalaccounts)usestheprivatesectors
aftertaxreturns.Whetherashiftintaxationfromcapitaltolaborincreasesordecreases
societalwelfaredependsonlaborandsavingselasticities,andsocietalevaluationsofthe

ThisdiscussionraisessimilarissuesasthosethattheCommissiondiscussedinmovingeconomicactivitiesfrom
thepublictotheprivatesector.

resultingredistribution;changesinwealthmaynotonlyinadequatelyreflectthesechangesin
societalwelfarethetwomaymoveindifferentdirections.Forinstance,measuredwealth
wontreflectthediminutionofthepresentdiscountedvalueofwhatworkersreceive,whilethe
effectsoncapitalareambiguousthemeasuredwealthoftheeconomywillincreaseasaresult
oftheincreasedflowofprofits;butwilldecreaseasaresultofthehigheraftertaxreturn.Tax
changeswhichlowertheaveragetaxoncapitalbutincreasethemarginaltaxcan,onthis
account,haveafargreaterimpactonwealthevenifbecauseoftheincreaseinthemarginal
taxrate,thetaxstructureismoredistortionary.
Consider,forinstance,aneoclassicalproductionfunctionwhereoutputisafunctionofcapital,
K,labor,L,andland,T.AssumeLandTarefixed.Intheabsenceoftaxation,wealth,W,isjust
thesumofthevalueofKandland:
W=K+pT,
wherepisthepriceofland,whichinsteadystateisjustequaltothereturnonlanddividedby
thereturnoncapital:p=FT/FK.
ItiseasytoseethatdW/dK=1+pT(FTK/FTFKK/FK)>1providedonlythatcapitalandlandare
complements,i.e.wealthgoesupmorethantheincreaseincapitalstock.
Butnowassumethatthegovernmentimposesataxonthereturntolandattheratet,butthat
thereturntocapitalandthereforethelevelofKremainsunchanged.Thenp=FT(1t)/FK.
Wealthdecreases,buttheproductivecapacityoftheeconomyisunaffected.Inlifecycle
models,thelowervalueoflandtypicallyleadstoahighervalueofK.Ifso,WandKcanactually
moveinoppositedirections;thelowervalueofwealthisassociatedwithanincreasein
aggregateoutput.10
Therearemanysimilarexamples.Manyofthechangesinwealth,associatedwithhuman,
social,andnaturalcapital,maynotbecapturedinourwealthmetrics.Thenextsectionlooksat
oneparticularlyimportantexample.

10

Forinstance,inthestandardoverlappinggenerationsmodel,whereindividualslivefortwoperiods,working
onlyinthefirst,thesteadystatevalueofKisgivenbys(K)w(K)(1t)TFT/FK=K,wheresisthesavingsrateof
workersandwistheirwage.Ifdsw/dK<0,thenanincreaseinthetaxratetleadstoanincreaseinKanda
loweringofwealth.

III.Missingrealcapital:Thedestructionofhumanandotherformsofcapitalinrecessions
Recessionsdestroycapitalandimpedeitsaccumulation.Wecantraceouttheconsequences
forplantandequipment,asrevealedbyinvestmentdata.11(Eventhen,wemaynotdosofully:
wedontadequatelymonitormaintenanceexpenditures.12)
Butwedontadequatelytraceouttheotherformsofcapital,andinparticular,humancapital.
Thereareseveralimportanteffects.
Thefirsthastodowitheducation,andtheeffectswouldappeartobeambiguous:Somestayin
schoollongerwhennojobsareavailable.Itshouldbeclearthatapriori,theeffectsonstudent
enrollmentareambiguous:Doesincreasedcompetitionforjobsleadtogreaterincentivesfor
formaleducation?Ordoreducedemploymentopportunitiesreduceincentives?Doesthe
effectofaloweropportunitycostoutweightheseincentiveeffects?
Ontheotherhand,withaprolongeddownturn,manycantaffordtostayinschool.Many
worrythatiftheyhavetoborrowtogotoschool,iftheycantgetajob,thedebtburdenwillbe
enormous.(TheseeffectsareobviouslystrongerincountriesliketheUSwherechildrenand
theirparentshavetopaythebulkofcosts,wheretuitionishighandthereisgreaterrelianceon
loanprogramswhererepaymentsarenotcontingentontheborrowersincome.Inthecaseof
theUS,furtherdiscouragementresultsfromabankruptcylawthatsaysthatstudentdebt
cannotbedischargedeveninbankruptcy.13Stillafurtheradverseeffectarisesfromthe
particularwaythatgovernmentsupportisprovided:bystates,whohavebalancedbudget
frameworks,andwho,accordingly,typicallycutbacksupportforhighereducationina
recession,forcingmuchhighertuitions.14
Inpractice,itappearsthatinnormaldownturns,thefirsteffect(increaseddemandfor
educationasaresultofaloweredopportunitycost)dominates,butthereisincreasingevidence

11

Wecouldalsomeasuretheincreasedmarketvalueofcapital(includingtheincreasedvalueofequities)butfor
reasonsthatshouldbeclearfromthediscussionofPartIIofthispaper,thatwouldnotbeagoodmeasureofthe
changeinwealth.Theeconomicdownturnworsensthebargainingpositionofworkers,loweringtheirrealwage
(increasingtheabilityoffirmstoexploitworkers).Theresultingincreaseinthevalueofmeasuredcapitalis
offsetbyacorrespondingdecreaseinthepresentdiscountedvalueofwages(humancapital),butthelatteris
typicallynotrecorded.(ShapiroStiglitz(1984)providesaformalmodelshowinghowhigherunemployment
lowerstherealwage.)
12
Thus,traditionalanalysesdescribingthedeclineinproductivityinrecessionsasaresultoflaborhoardingmay
notbequitecorrect:someofthelaborwasspentinmaintainingplantandequipmentdoingmaintenancethat
hadbeendeferredduringtheprecedingboom.Bythesametoken,themarkedlydifferentpatternsofproductivity
inrecentdownturnsreflectingruthlessmanagementthatquicklytrimsanyunneededlabormaynotbeas
positiveasthenumbersontheirfacesuggest:theydonotcapturetheimpactsonthemaintenanceofeither
humanorphysicalcapitalstocks.
13
SeethediscussioninStiglitz(2012).
14
Thishasbeenespeciallytrueinthe2008recession,becauseofitsseverityandduration.Foradiscussionofthe
impactsontuitionandstudentindebtedness,seeStiglitz(2013).

thatinthecurrentmoreextendeddownturn,atleastintheUS,overtimethesecondeffecthas
becomemoreimportant,especiallyforadvanced(graduate)education.15
OtherHiddenLosses
Inadditiontotheunmeasuredchangeinsocietalwealthfromthesechangesininvestmentsin
formaleducation,thereareseveralothereffects.
First,thereisareductioninthequalityofeducationasgovernmentcutsbackonfunding,not
onlyfortertiaryeducation,butalsoforprimaryandsecondary.
Secondly,othergovernmentcutbacksaffectbothlearningandfutureproductivity:Reduced
accesstohealthcareandnutritiononthepartofthepoorcanhavelifelongeffects,including
intheabilityofchildrentolearn;andtheseeffectsbecomeespeciallyimportantasthenumber
ofchildrenlivinginpovertyincreasewithaneconomicdownturn.
Perhapsthemostadverseeffectsarerelatedtoadecreaseinjobexperience(learningonthe
job)longrecognizedasamajorpartofhumancapital.Thereareespeciallyadverseeffectson
youngpeoplewhocantgetjobs:inaperiodinwhichtheyshouldbeaccumulatingskillsand
workexperience,theirskillsatrophy.Severalstudies16havedocumentedthatthoseentering
thelabormarketatatimewhenunemploymentishighexperiencesignificantlydiminishedlife
timeincomes.Suchadverseeffectsareparticularlysignificant,ofcourse,amongthosewhodo
notgetjobs.Andwhentheseadverseeffectsareaggregatedoverthelargefractionsofyoung
peoplewhofaceextendedunemployment(youthunemploymentinEuropeasawholehas
beenpersistentlyalmost25%,andinthemostcountriesmostafflictedbytheeurocrisis,over
50%)oneobtainssignificantlossesinhumancapital.
Butthisisnottheonlyloss:Thoseintheir50sandearly60sareforcedtoretireearly.They
hadproductiveskills(humancapital)which,inmorenormaltimes,wouldhaveyieldedreturns
foryearstocome.Asaresultofthecrisis,allofthishumancapitaliswrittendowntozeroor
wouldbeifwehadagoodsetofaccounts.
Thereisanothereffectinthosecountrieswheretherehasbeenacutbackinpensionsand/or
whereindividualsrelyontheirownsavings:manywhowouldhaveretiredareforcedtokeep
working(oftenatlowskilledjobs),astheirretirementincomebecomesgreatlydiminished
(especiallywithQE,quantitativeeasing,thosewhohadputtheirmoneyintosafeassets
governmentbondssawtheirincomeseviscerated).

15

Notethatinanycase,themarketforeducationisdistorted:theremayeitherbetoomuchortoolittle
investmentineducation.Becauseofsignaling/screeningeffectsaswellassocietalbenefitsarisingfromamore
educationpopulace,socialreturnstoeducationmaybegreaterorlessthantheprivatereturns.
16
Khan(2010),BrunnerandKuhn(2010),Taylor(2013).

Whileasaresult,laborforceparticipationoftheelderlymightnothavedeclinedasmuchasit
wouldotherwise,itisworthnotingthatthereareadversewelfareeffectsbothfromthe
destructionofhumancapitalfromtheprematureretirementandfromtheforcedlaborforce
participation.Ourstandardmetricscaptureneitheroftheseeffects.17
Whenthereisadeepandprolongeddownturn,theseeffectsonhumancapitalcanbevery
significant;anditwouldseemthattheadverseeffectsfaroutweighthepositiveeffectsthat
mightarisefrommoreextendedenrollmentinschool.Thisiscertainlyconsistentwith
hysteresiseffectsassociatedwithextendedperiodsofunemployment,andwitheconometric
studiessuggestingthatprolongeddownturnsleadtoadecreaseinpotentialgrowth.18These
unobservedwealtheffectshelpexplainwhyeffectsofdownturnspersist.19
Estimatingthesizeofthemissingcapitalthemagnitudeofcapitaldestructioninarecession
Wecangetaroughorderofmagnitudeestimateofthemagnitudeofthecapitaldestructionin
arecessionbyestimatingthedifferencebetweenwheretheeconomywouldhavebeen,inthe
absenceoftherecession,andwhereitistodayandislikelytobeinthefuture.SeeFigures1
and2,whichshowthattodayGDPintheUSissome15%belowwhatitwouldhavebeeninthe
absenceofcrisisinEuropesome17%lowerandthatthesedifferences,eveniftheydont
becomebigger,arelikelytoextendintotheforeseeablefuture.Thetotalcostofthecrisisin
termsoflostoutputistrulyenormousdependingonthediscountrate,possiblywellinexcess
of$100trillion.(A15%lossina$15trillioneconomyamountstoalossof$2.25trillion.Evenif
theeconomywereimmediatelytoreturntoagrowthpathof2%growth,witha3%real
interestrate,thepresentdiscountedvaluePDVofthelossisover$200trillion.)20
WecaninprinciplemeasurethedeltainnormalcapitalK(thedifferencebetweenwhatK,as
conventionallymeasured,wouldhavebeenbutfortherecessionandactualK),thatis,wecan
estimate,theconsequencesofreducedinvestmenttothecapitalstock.Similarly,wecan
estimatethedeltainnormalhumancapital(education)asconventionallymeasured,thatis
again,thedifferencebetweenwhatthelevelofhumancapital,asconventionallymeasured,

17

Thereareafurthersetofcomplexadversewelfareeffects,withpotentiallyimportantimplicationsforthestock
ofhumancapital.Astheelderly,whootherwisewouldhaveretired,seekjobs,therearesearchexternalitieson
otherjobseekers.(SeeGreenwaldandStiglitz1988.)Iftheeconomyisinademandconstrainedequilibrium,
firmsthatarecapitalconstrainedmaydecidetohiretheseolderworkers,ratherthanyoungerworkers,adversely
affectingtheaccumulationofhumancapitalbytheformer.
18
Reifschneider,Wascher,andWilcox(2013).
19
Indeed,thereisaliteraturesuggestingthattheeconomysdynamicsexhibitnearunitroots.SeeCampbelland
Mankiw(1987).
20
AsStiglitz,SenandFitoussi(2010)pointout,GDPdoesnotprovideagoodmeasureofthelossofwellbeing:it
doesnot,forinstance,includeanyvaluationoftheincreasedinsecuritythatthedownturnhasbrought.Cutbacks
inpublicprogramsarevaluedatthereductioninthevalueoftheinputs,notthevaluetocitizensoftheservices
provided.

wouldhavebeen,intheabsenceoftherecession,anditsactuallevel.21Wecanthenestimate
thepredictedeffectofthesechangesonoutput.(Forinstance,iflowerinvestmenthas
decreasedthecapitalstockfromwhatwouldnormallyhavebeenthecase,intheabsenceof
therecession,bysome5%,theniftheshareofcapitalis.25,standardanalyseswouldsuggest
thatoutputwouldbesome1.25%lowerthanitwouldhavebeenonthenormalpath.)
ThedifferencebetweenthedeclineinGDP(relativetothenormalpath)thatcanthusbe
accountedforandtheactualdeclineinoutput(relativetothenormalpath)istheresultof
missingdarkmatteranalogoustoSolowsresidual.Thepresentdiscountedvalueofthe
differenceisthevalueofthemissingcapital.
Backoftheenvelopecalculationssuggestthatthemagnitudeofthismissingcapitalis
enormous.TrueGDPisthesumofconsumptionplustrueinvestment.Trueinvestmentisthe
differenceintruewealth.Wehavebeenignoringtheeffectofthedownturnonhiddenwealth,
andthusontrueinvestment.ThedeclineinGDPintherecessionwas,accordingly,much
greaterthanthestandardnumberssuggest.
Thereisanimportantagendagoingforwardoftryingtoparseoutthismissingcapital.The
problemisanalogoustothatposedbySolowinhisclassic1957paper.22Heshowedthatone
couldexplainonlyabout12.5percentageofthegrowthofoutputpercapitabyanincreasein
thecapitallaborratio.Therestwascalledtheresidual,andconsiderableeffortsweremade
insubsequentyearstoexplaintheresidual,e.g.themovementoflaborfromlessproductive
sectors(agriculture)tomoreproductivesectors,theshorteningofhoursofwork,and,most
importantly,technologicalchange.
Ourearlierdiscussionhelpsidentifysomeofthismissingcapital.Weknowthatthosewho
enterthelaborforceinabad(recession)yearhaveasignificantlylowerlifetimePDVincome.
Andthisisespeciallytrueofthosewhoremainunemployedforextendedperiodsthe
decreasedexperienceshowsupinlowerincomesthroughouttheirlifetimes.Wealsoknow
thatthosewhogetdisplacedfromajobfaceasignificantlossinPDVofincome.Wecanuse
thesenumberstoprovideanestimateofthevalueofthelossinhumancapitalonthisaccount.
Thereareothercapitallossesthatarehardertomeasure.Bankruptcyresultsinalossof
organizationalcapital,includingthetacitknowledgethatresideswithintheboundsofafirm.
Inrecentyears,therehasbeenincreasingrecognitionoftheroleofsocialcapitalforthewell
functioningoftheeconomy,andtheresomedirectevidenceoftheerosionofsocialcapitalasa
resultoflonglastingdeepdownturns.Trustistooimportant,andthebehaviorofthebanksin

21

Aswehavenotedabove,theremaybesignificantmeasurementerrorsinbothvariables,e.g.becauseofhard
toobservechangesinmaintenance.
22
Solow(1957).

theyearsbeforethecrisisundoubtedlyledtoanerosionoftrust.Quantifyingtheseeffectsis
anambitioustaskforthefuture.
Evenifwecantpreciselyparseoutthecomponentsofthisdarkmatter,thismissingcapital
partlyduetothedestructionoforganizationalandsocialcapital,andpartlyduetothe
destructionofkeycomponentsofhumancapital(experience)isrealandneedstobetaken
intoaccount.
V.Concludingcomments
Theideathattherecanbeanincreaseinthevalueofwealth,withoutanychangeinthe
amountofproductivecapitalis,ofcourse,anoldone:indevelopingcountries,therehaslong
beenaconcernthatsavingsgettransmittedonlyintoanincreaseinthevalueoflandor
holdingsofgold.Indeed,akeyissueinthetheoreticalliteratureofthe1960sand1970swas
whethertherewasanymeaningfulmeasureofaggregatecapital.Thereswitchingliterature
(focusingonmodelsinwhichtherewasproductionofcommoditiesbymeansofcommodities
(Sraffa1963),sothatcapitalrepresentedworkingcapital)notedthataneconomyatalow
interestrateandahighinterestratecouldlookidentical,thoughthevalueofcapitalmightbe
markedlydifferent.23
Anotherexampleofwhymetricsmatter
OneofthekeymessagesoftheInternationalCommissionontheMeasurementofEconomic
PerformanceandSocialProgress(Stiglitz,Sen,andFitoussi2010)wasthatWhatyoumeasure
affectswhatyoudo.Thispaperhasarguedthatourstandardmetricshavenotcaptured
adequatelytheadverseeffectsofrecessions.
Ifwedontmeasuretheadverseeffectsonhumancapital,wewontdoanythingtoameliorate
theseeffects,andwemayevenundertakepolicieswhichlookgoodintheabsenceofthese
effects,butwhichwouldlookdisastrousintheirpresence.
Thisanalysisemphasizesthattherearelongtermconsequencesofnottakingstrongcounter
cyclicalpolicies;andbecauseofdeficienciesinourwealthmeasures,wedontcorrectlyassess
theselongtermeffect.Ifyoufocusontheliabilitysideofthegovernmentasthosewhohave
urgedausterityinEuropeandelsewherehavedoneonemaytakeactionsthatresultinthe
netassetsideoftheentireeconomydecreasing,underminingsustainability.Austerityandthe
singlemindedfocusongovernmentdebthasbeenshortsighted,besidesbeing
counterproductive.Bettermetricsmighthavenotedthatausterityreducescorrectlycalculated

23

Forabriefreview,seeStiglitz1974.

10

GDPbyfarmorethaniswidelyrecognized,andworsensnationalbalancesheets,becauseof
theresultinglargeamountsofmissingcapital,includinghiddendecreaseinhumancapital.24
Toputthisanotherway:GDPissupposedtobemeasuredasconsumptionplusthechangein
wealth.Butifwedontmeasurethedecreaseinhumancapitalandtheotherformsofcapital
(whichtogetherconstitutethemissingcapital),weareunderestimatingthedeclineinthe
recessioninGDP,andweareunderestimatingtheadverseeffectsoftheausteritymeasures
thathavebeenadoptedinEurope,especiallyforEuropesfuturegrowthpotential.
Ontheothersideoftheledger,thisshortpaperalsoprovidesanimportantcautionarynotein
theinterpretationofwealthincomeratios,andtheimplicationoftheseincreases:theydonot
necessarilymeanthattheeconomyhasbecomemoreproductive,andthatcurrentlevelsof
consumptionaresustainable.Anaturalresourceeconomywhichusestherevenuesgleaned
fromtheextractionofitsresourcestofuelarealestatebubblemightevenshowanincreasein
wealthbutitsfutureproductivecapacitiesmaywellbesignificantlydiminished.The
increaseinfinancialwealththathasmarkedmanyadvancedcountriesinrecentdecadesmay
similarlybeachimera,withtheincreaseinrealestatepricesmaskingthefarmoreimportant
reductioninrealproductivecapital.

24

Theseareeffectsthatgobeyondtheoftenmadeobservationthattheimprovementintheliabilitysideofthe
balancesheetisoftendisappointing:becausemarketGDPdecreases(morethanexpected),taxreturnsarelower
(thanexpected)andsocialexpenditureshigher.

11

Figure1:USAgrowthbelowtrend

12

Figure2:Europegrowthbelowtrend

13

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