According to Sean O'Grady, writing in The Independent:
The worst economic slowdown in three-quarters of a century has wiped £40,000 from the wealth of every adult in the United Kingdom, a national total of almost £2 trillion; that is £2,000bn, or £2,000,000,000,000.
The total value of shares and homes owned by British households has fallen from £6.8trn in 2007 to £4.9trn now – a decline of £1.9trn, or 28 per cent, the PwC figures show.
This strikes me as bad statistics, and bad economics. The way this is written suggests that the total of £2 trillion comes from the fact that £40,000 has been wiped from the wealth of every adult (and the implicit assumption is that there's 50m adults in the UK). As ever, the article doesn't link to the report but I would be surprised if this was the actual method. It seems more likely that the report calculated a decline in asset value of £2 trillion and then to help us conceptualise that divided by the adult population.
There's many situations where it makes sense to reduce a number to a more intuitive scale. For example, consider the following:
As Blastland & Dilnot point out in their excellent primer, this amounts to just £1.15 per week, which is far from being a "big" investment. However there is a big difference between dividing by the population to give a sense of scale, and actually reporting that "The.. economic slowdown... has wiped £40,000 from the wealth of every adult in the United Kingdom". We are not all uniformly affected by macroeconomic conditions so this statement is simply false.
My other gripe concerns the economics. Imagine that I tell you my Toyota Corolla is worth £6,000. I might even ask what other people value it for, and they could support my opinion. So I put it up for sale and the highest bid is only £3,000. Has my net wealth really fallen? On paper it has, but only because I'd overvalued the asset. Even if I'd used it as a security on a loan, it was an estimate. We cannot know the "value" of an asset unless we sell it. If it's not being exchanged we can merely estimate the market value. If that estimate is incorrect, it is fundamentally different to a genuine fall in wealth such as if a hurricane rips apart your house. Isn't this Econ 101?
I happen to be a saver, so whilst my wealth hasn't declined a great deal, it has flat lined. When the article says that there has been "a colossal destruction that will take many years to recover from and threatens the retirement plans of millions of Britons" it misses the point - the threat to future prosperity isn't coming from us all waking up to realise that there was a house price bubble, but that there is virtually nothing to be gained from saving our wealth, and thus providing the pool of funding that businesses can invest to improve our standard of living.
My household wealth has *not* fallen by £40,000. I do know people who have possibly seen hundreds of thousands of pounds wiped off the "value" of their portfolios. "Average" is supposed to give as an expected value. It's like urinating a foot to the left and then a foot to the right of the toilet - you might think that "on average" you've hit the target but you'll still have to end up mopping up piss.
The article encourages people to think the following:
I think the truth is more like:
Having said this, public debt has exploded, implying that every child born today owes approximately £20,000. This is the real scandal, surely.
Having said this, public debt has exploded, implying that every child born today owes approximately £20,000.
What does that even mean?
Posted by: Quinn | April 01, 2009 at 10:15 AM
I interpret it as the net present value of future tax obligations being very big, and to try to get your head around the figure it works out about £20k a head. I might be wrong though
Posted by: aje | April 01, 2009 at 04:58 PM
But where does that figure come from? And how was it worked out? You have done an admirable job in criticising Sean O'Grady and some common lazy journalistic assumptions, but for me have then undermined it all with a coda that seems like a bit of pure political spin.
Are you saying that public debt divided by the UK population is equivalent to £20,000? If so, then why not say that, rather than puff it up with this emotive guff about newborns owing thousands of pounds?
Posted by: Quinn | April 02, 2009 at 10:03 AM
The sound bite came from Hannan, and I do think it is substantively different to say that the public debt per capita (which future generations will have to pay)is £20k, versus the wholly inaccurate claims by O'Grady.
That said, having read back through my post there was no need for me to add that at the end and I accept that it is "emotive guff". Thanks for the wrist slapping.
Posted by: aje | April 02, 2009 at 06:57 PM