Measures of economic status

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Measures of economic status

• Berkeley Hill

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Why study wealth?

• Contributes to welfare in many ways (security,
  freedom of manoeuvre, economic and political
  power etc.)
• Capital gains (and losses) are part of personal
  income, but not covered in conventional current
  measures of income
• Wealth is a major determinant of economic status
  the potential to spend

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Capital gains

• Real CG form part of personal income in Hicksian
  definition
• Agricultural support capitalised in asset values
  (distribution of benefit?)
• Are usually taxed preferentially
• Impact on consumption and saving
• Affect attitude to risk and investment
• Affect rate of structural change

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Interest in capital gains?

• Calculation not part of EU level monitoring
• Only US seems to make regular calculations
  (Canada, DAN, SWE?)
• Statistical and academic activity follows size of
  gains (industry and business-level calculations)
• Agric policy revisions likely to impact on asset
  values
• Timely now to show new interest?

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Capital gains farm real estate and debt in the US
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Unit for capital gains

• Calculation for agricultural assets would be only
  a partial view.
• Argument for taking the assets (and liabilities)
  owned by agricultural households as the basis for
  calculation

7
Economic status

• High wealth (net worth) often combined with low
  income among agric households
• Wealth of agric households relatively high (US
  1986 main-income farmers in poverty x 3 national
  average)
• Attention drawn to how this wealth might be drawn
  on to provide support

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Calculation of economic status

• Potential spending power that combines current
  income (all sources) and annuitised net worth
• Annuity value NW x r/(1 (1-r)-n)
• r required rate of interest
• n life expectancy of recipient (farmer? Or
  spouse?)
• NW net worth (includes land)
• Assumes NW is exhausted at termination

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Some issues

• Capital and income must be independent before
  simple summation is acceptable
• Calculation should permit occupancy to be
  retained (value of forward contract on sale, or
  valued as tenanted land etc.)
• Can privately owned land be NOT regarded as
  personal wealth (held in stewardship)?
• Which rate of interest to use?

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Implications of calculations

• Substantial reductions of numbers of agricultural
  households deemed to be in poverty (those that
  owned land)
• US (1977) added 57 to current income
• Australia (1974) reduction of dairy families
  headed by 60 farmer in poverty from 30 to 1
• Political acceptability of concept and results?

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Implications ctd

• At least, heightens interest in whether low
  incomes are appropriate for measuring need for
  support
• Increases concern with alternative instruments
• Reveals a need for more data on the assets and
  liabilities of agricultural households

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Questions

• What is the opinion of the need to regularly
  measure capital gains and losses, to stand
  alongside current income measures?
• If the calculation is to be done, should this be
  (a) at aggregate sector or microeconomic levels
  (b) relate to agricultural assets only or to the
  households entire holding of assets and
  liabilities, and (c) over what period should it
  be measured (such as a rolling 10-years)?
• Is economic status a useful concept to apply in
  the context of policy towards the agricultural
  community?
• If the calculation is to be done, whose assumed
  life should be adopted for the purpose?
• Are there grounds for excluding land or other
  assets from the calculation?