Thursday, January 24, 2013

If I Were a Rich Man . . .


Some estimates say that John D. Rockefeller was the richest American ever putting his wealth at the equivalent of ~$215 billion today*. There are a number of problems, though, with this simple process of taking a historic price and adjusting it forward by the inflation rate. Extrapolating a prior figure for inflation makes the extrapolation sensitive to the quality of the inflation estimate. That sensitivity grows and compounds as the time span grows. Additionally, other factors become very important in long spans while they are non-factors in small spans. Quality is one of these factors, and it matters a lot. This post will have a lot of lessons in how magnitude matters.  

I’ve been thinking about this post for a while since seeing a History Channel show about the wealthiest Americans in history. In yesterday's WSJ Don Boudreaux and Mark Perry have a great article on The Myth of Middle Class Stagnation, which inspired me to finalize this post. This is a must read piece that I can’t recommend enough. In it they give several examples of how problematic it is to simply take a historical price like average income and bring it up to the current through inflation adjustment for comparison to a similar figure today.

I would like to challenge the idea that John D. Rockefeller was the richest American ever. To do so I pose a question: Would I rather live today as I am, an upper-middle class father of three, or as Rockefeller in his day? Let’s think about this because it isn’t as easy as comparing my modest net worth (MUCH less than a small fraction of $1 billion) to his estimated at $215 billion today.

The most costly event in life is death. Let’s start with that. Life expectancy in the United States in the 1920s was about 55. At my birth it was about 72. Today it is about 78.

Perhaps the next most costly event for many of us is the potential of losing a child. Actually losing a child is the horrific realization of that cost. So let’s next look at infant and child mortality. For the U.S. in the 1920s & 30s both rates of death were about 6-8% (infant mortality covers children who die before one year of age; in this case child mortality covers children who die between age one and four inclusively). Today those mortality figures are about .6% for infants and about .1% for children aged 1-4. Those are remarkable reductions that are hard for us in this era to appreciate.

Another very costly event for a husband is maternal mortality (a mother’s death during childbirth). Here again we see stunning improvement. The rate was about .75% in 1920s & 30s. Today it is about .01% -- an improvement factor of 75 times.
Sources: 123.

Simply put when compared to today, living was more difficult and less likely in the early part of the 20th century. All the kings horses and all the kings men could hardly nudge any improvement out of that harsh health reality. We may already have our answer, but let’s go on for good measure.

Let’s think about what I can do today as compared to what the wealthiest man of that era, Rockefeller, could do then including some of the inconveniences and limitations that he faced that I do not. Specifically consider:
  • People I can communicate with. I can reach out to my family and friends virtually any time of day no matter where I am or where they are. I can connect and correspond with people I have never met but with whom I share some common interest. 
  • Places I can go. I can travel at home and abroad generally more easily, more quickly, and in more ways. In fact, I can go places inaccessible even to him in his day. Even going to work, the car I ride in is better from seat warmers to safety.
  • Conveniences I can expect at the places I can go. When I arrive at my destination, be it my office or a foreign tropical beach, I don't have to plan ahead nearly as much or spend nearly the resources to have many comforts and options to make my experience there quite enjoyable. 
  • Food I can eat. My food options dwarf his. I eat in greater confidence about the safety and freshness while I enjoy cheap, abundant, and extremely various food and drink much of which is of a quality he would envy. 
  • Entertainment I can enjoy. Music is incredibly better for me from the quality to the genre variety to accessibility. He could never see a television show or anything reasonably resembling a modern movie. His book options were quite limited relative to mine not to mention periodicals, research papers, blogs, and the like. I can see more theater in a few weeks than he could enjoy in years. Sports are other worldly today compared to what he could take in. 
I could go on and on from how I can engage in financial markets in ways he couldn't dream to how I can know things about the universe confusing and unknown in his day to how I can dress more comfortably than him to how . . . . In summary I can do most of what he could do even with his vast wealth, and my options tend to be deeper and richer. I take back what I said earlier--this is as easy as comparing my wealth to his. Mine is higher.

*To reach this figure I took the NY Times estimate from 2007 and similarly increased it by the recent CPI inflation rate bringing it up to 2013.

PS. I owe Billy Ray $1. He bet me that I couldn't get rich and put Rockefeller in the poor house at the same time.