[personal profile] galadrion
http://finance.yahoo.com/news/rising-riches-1-5-us-080438335.html

And just what, you might ask, is the mistake the writer is making? A mistake, incidentally, which Yahoo! writers have been making for years.

It's quite simple. They are assuming (do you remember the cliche about that word?) that income is the same thing as wealth.

Not so. Income is, as should be plain, what comes into your possession over a given amount of time. It can be complicated in various ways, such as gross (the simple total of what you are paid, regardless of your expenses), net (what you are paid less certain expenses, such as withheld taxes and employer-provided benefits), wage income (which you are paid by an employer under contract), residual (which is paid on an ongoing basis as ideas or other intellectual property with which you are credited earns out), or investment (which can be considered the rental paid to you in return for the use of your resources). In all cases, income is a stream.

Wealth, by contrast, consists of the resources you own. This, too, can be complicated in different ways: Net worth is (in theory) the sum total of your assets (investments which either act as a storehouse of value or produce income, or both) minus your liabilities (debts you owe - not to put too fine a point on it: investments that other people have made in you). (Important digression here: one of the most frequent mistakes people make regarding net worth is to include their house as an asset. Until you have more equity in the house than is owed on the mortgage, the house is a liability, not an asset! And that equity is determined by the market, not by an adjuster, and not by your own wishful thinking!) There are several other ways of figuring wealth, but net worth is probably the most honest of them, and it's certainly more useful than most. In any case, if income is a stream, then wealth is a pool that stream flows into... or out of.

So, getting back to the original subject, what mistake is Hope Yen making, and why is it a mistake?

Quite simply, Yen is assuming (there's that word again) that someone is wealthy if they make above a certain amount - $250,000 per year, in the article. Note that this is a flow of money - income. (Also note that there is no mention of whether this is gross or net income.) The problem with this assumption is that income does not guarantee an increase in wealth. No, not even at the level of a quarter-million or more per year. If you're taking money out of your savings and investments (your wealth "pool") faster than your income puts it in, then your wealth is decreasing, no matter how much you are earning, and even if you can be considered wealthy now, you won't be in the long term.

I'm not even going to start on the errors in the "income equality" thesis in the rest of the article just yet. I'll just leave it for now with the observation that the writer's views on social justice are about as well-formed as his (her?) economic concepts.

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Galadrion

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