Income-Net Worth Measures of Economic Welfare

STUDIES OF THE economic position of consumers have long recognized t,hat families with the same current income may differ widely with respect, to the amount of wealth they own. It is common pract,ice to speak of the wealthier family as “better off” than the less wealthy. Moreover, welfare programs reflect, the philosophy that assets should be taken into account in evaluating eligibility for assistance because it would not be acceptable public policy to aid families who have substantial amounts of assets. In this tradition, various efforts have been made to develop a summary measure of economic welfare that would incorporate bot,h income and assets. One measure that has been proposed involves adding current income, other than yield from net worth, to the life annuity a family or individual could purchase if it, used all its wealth in t’hat manner. Such a measure of economic welfare has most, recently been advocated by B. A. 7Veisbrod and IV. I,. Hansen, who describe it as operationally feasible and broader in scope t,han t,he traditional money-income measure.l This proposal raises two important questions : Is a measure of economic welfare that incorporates net wort,h necessarily better than an income measure! Is a measure of economic welfare that spreads net worth evenly over the remaining life span better than a measure that incorporates net worth in some other fashion? It is argued here that a measure of economic welfare cannot be evaluated unless t)he purpose the measure is to serve is enunciated. To put the matter another way, it is doubted that an all-purpose measure of economic welfare is useful or desirable. This article first presents a brief evaluation of the income-net worth concept, with respect to two of the important, purposes for which a measure