Measuring wealth – and poverty: the controversy on disposable income continues
Wales is a relatively poor country getting relatively poorer. For some reason, economists working for the Welsh Government and their allies seem to want to obscure this fact by arguing that GDP comparisons showing this fact are not as accurate a barometer as measures of disposable income. On the latter front, Wales has been doing better apparently.
I’ve argued that whether or not this is true, a high disposable income can be found in areas with low housing costs and asset values which is indeed the case in Wales. On the other hand, Londoners can have lower disposable incomes than South Walians because their housing costs and asset values are so high, the latter being a proxy for the relative dynamism of the economy and the attractions of living there. The question which arises from this is: which is wealthier – the cash poor /asset rich Londoner or the ‘cashed-up’ Pontypriddian whose home is worth perhaps 15% of the Londoner’s?
As the gap in asset wealth between the two grew wider during the housing boom of the first decade of this century so too did the capacity of the asset rich to leverage their increased housing wealth to add to their consumption or their assets. While the prices of homes rose in both Caerffili and Chelsea, they rose faster in the latter and their owners ‘ share of national wealth increased. In 1990 a home in Chelsea might have bought 15 homes in a south Wales town. Now it would buy 25 or more. Daniel Dorling has written about this increasing asset based terries which orial inequity in the UK. All the evidence is that rising house prices between 1997 and 2007 disproportionately benefited wealthier cohorts and indeed areas in terms of both growth in asset values and leverage to support consumption.
I’m simple. I think that for the Welsh Government and Friends to wish to downplay this asset question and GDP in favour of an emphasis on disposable income is fundamentally to confuse income with wealth. Income is merely a flow of money during a given year. Wealth is the accumulation of money – and assets valued in money – over a number of years.
Confusing the two is also to miss the contribution that wealth and not just income makes to consumption. Consumption levels rely on both wealth and disposable income. How can this not be important given the era which we have just been through where borrowing on the back of housing assets became a key means to support consumption and indeed investment in the UK? Disposable income plus leverage equals consumption – which GDP captures better than disposable income alone.
I recall that Adam Smith’s classic text was called ‘The Wealth of Nations’ not ‘The Disposable Income of Nations’. Wales needs to be wealthier whether or not its people have more or less disposable income.
I add: much of what enables Wales’s disposable income is pan UK public sector wage rates now under threat from the Conservative government seeking to promote more regionalised wage rates. If and when that happens I assume that this will reduce the disposable income available to Welsh households. Unless of course lower wages rates will drive down asset values and housing costs in Wales so as to restore Welsh levels of disposable income while the country’s wealth spirals downward. That’s my point really.
Two other issues people have raised. One is that there are wealthy parts of Wales and that the bit of Wales whose GDP is going down in relation to the UK average is an artificial construct chosen to highlight its poverty for the purposes of eliciting EU structural funds. True but that construct is getting poorer despite receiving massive public subsidy and EU funds. And the wealth gap with the rest of Wales is growing, let alone with the rest of the UK and indeed the EU. Let not phoney uplift on disposable income hide this fact of declining share of wealth in the former industrial boom towns of the Valleys.
The other issue raised is more interesting. Wales can never bridge the GDP gap because so much of UK GDP is generated from London and the southeast which are never going to lose their locational and sectoral advantages. GDP comparisons are in this sense a game Wales cannot win and thus shouldn’t be part of. I understand this but reject it. Wales has 3 million and England 50 million but we still manage to beat them at Rugby and win the Gram Slam. We compete and haven’t asked anyone to move the goal-posts. We can win the battle for GDP .