An Income-net worth Approach to Measuring Economic Welfare

The objective of this paper is to present an empirical measure of economic welfare, hereafter called "economic position," which integrates, current money income and current net worth. We apply the resulting measure illustratively, comparing some of its results with those of the income measure. Subsequently, some of the implications of our measure are explored. The proposed measure rests on the assumption that current income and current net worth are both important determinants-although not the sole determinants--of the economic position of a consumer unit. It is well known that the distribution of income and the distribution of net worth differ.. significantly. Were it not for these differences--if the relative position of the various consumer units were more nearly identical in the two distributions--then it would be less important to attempt to integrate these two distributions. Such an integration would still be useful, however, if we wished to apply an absolute standard for determining the level of economic position, e.g., "affluence" or "poverty." Merging income and net worth gives rise to difficulties, for income is a flow while net worth is a stock. The procedure proposed involves converting net worth into a flow by translating it into an annuity. For any given consumer unit--individual, family, or household--we propose measuring its Ileconomic position" at a given time as the sum of (1) its current annual adjusted income and (2) the annual lifetime annuity value of its current net worth. The most striking result of using the new measure is its impact on the economic position of the aged, who, by this measure, appear to be considerably "better off" than is shown by the current income measure. This results from the interaction of income, net worth holdings, and life expectancy. An Income-Net Worth Approach To Measuring Economic Welfare Burton A. Weisbrod and W. Lee Hansen* University of Wisconsin