NPR and the Phantom Wealth Fallacy

On the march 15, 2009 edition of NPR's Weekend Edition, NPR's Senior Business Editor Marilyn Geewax ends her commentary on the latest consumer confidence number with an observation on the loss of "household wealth" that illustrates a classic phantom wealth fallacy repeated constantly in media financial reporting. Geewax equates the inflation of housing prices with wealth creation, thus confusing a housing bubble, a form of inflation, with the creation of real wealth. This is thefundamental fallacy that justified letting Wall Street excesses run their course---until the bubble collapsed.

By the prevailing misconception, Wall Street was creating wealth, when in fact it was creating only phantom wealth unconnected to the production of anything of real value.

The inflation in housing prices that Ms. Geewax celebrates as wealth creation involves nothing more than inflation of the market price of houses. It does not involve any improvement in space, state of repair, livability, energy efficiency, artistic value, location or anything else that might be consider an increase in real value or utility—just an increase in price.

Housing price inflation benefits speculators who buy houses to flip them and it benefits those who own houses by giving them a financial advantage over non-owners when they sell. It contributes nothing, however, to the overall health and well-being of the society. In fact, by growing the gap between home-owners and non-owners the inflation of housing prices arguably reduces overall well-being.

Listen closely to the commentary and you will hear an implicit assumption in the comments of Ms Geewax that all Americans own their homes and have a stock porfolio, ignoring the reality that financial bubbles simply increase the financial claims of the owning class over the real wealth of the rest of the society. It is a legal form of theft.