Asset-based Reallocations

General Principles

The distinguishing feature of an asset-based reallocation is that it involves inter-temporal "exchange". Assets acquired in one period yield income or can be disposed of in future periods allowing individuals to shift resources from one age to a different age. Assets take the form either of capital or of credit. From the point of view of the macro economy, these have fundamentally different characteristics, but from the point of the view of the individual, they may be close substitutes as stores of wealth. For the macro economy, the collection of all the capital assets is the aggregate capital stock. Capital is productive, and it is generally a complement to labor, raising its marginal productivity. In aggregate, however, credit largely cancels out between creditors and debtors. The exception arises from credit or debt held by the foreign sector. For the individual, capital and credit may differ mainly in the certainty and level of the rate of return that they yield. However, it is also important that credit may be positive or negative (debt), and consequently credit can be used to reallocate resources backward in time - from the future to the present - and from older ages to younger ages. Through credit one can consume before producing. Negative capital does not exist, so capital can be used only to postpone the consumption of resources to a later date.

The creation of capital takes the form of an exchange with nature, as when I build a productive asset today, for example a house, converting current labor into a flow of services in the future. Capital also serves as a store of value. It can be acquired in one period and disposed of in a subsequent period. This form of investment and dis-investment allows an individual to shift resources from the present to the future.

Credit can take the form of a loan to one's child who is expected to repay it when older; this would be familial credit. It can take the form of credit card debt or a home mortgage, when young adults finance their consumption by borrowing from older, more financially established adults. It can take the form of a government bond when taxpayers borrow from investors to finance public programs.

A cohort acquires an asset by saving. This generates an outflow at the age at which the asset is acquired. By holding the asset a cohort receives, in future periods, at older ages, inflows in the form of asset income. Or, the cohort may the sell the asset, thereby, dis-saving and generating an inflow.

A cohort may receive an asset directly as a transfer. For example, an elderly parent may transfer her home to a daughter. This is treated as a transfer (an inflow equal to the value of the asset) and as saving (an outflow equal to the value of the asset).

A cohort acquires capital by investing. The accumulation of credit is equal to saving less investment.

Aggregate saving is equal to the change in aggregate wealth; aggregate investment is equal to the change in aggregate capital. Likewise, for any cohort or age group, saving is equal to the change in wealth of that cohort and investment is equal to the change in capital. (Saving and investment are assumed to be net of depreciation unless otherwise indicated.) Saving and investment by one age group does not lead to aggregate investment if it is matched by dis-investment by another age group.

Asset-based reallocations consist of two flows: asset income and saving. Asset income is an inflow. Saving is an outflow. The NTA budget identity is:

where LCD(a) is the lifecycle deficit at age a, R(a) is reallocations at age a, YA(a) is asset income at age a, S(a) is saving at age a, and T(a) is net transfers at age a.

Asset-based reallocations are given by:

Note that S(a) is net saving, i.e., saving net of depreciation.

National Transfer Accounts distinguish public and private asset-based reallocations and two forms of assets: capital and credit (Table RA1).

Table RA1. NTA Classification of Asset Reallocations

Sector	Capital	Credit
Public	Roads, ports, parks, other public infrastructure	National debt, student loans, World Bank loans
Private	Residential and non-residential buildings, businesses, vehicles, factories, land, subsoil assets	Consumer credit, foreign debt

The distinction between public and private is discussed in the overview and will not be repeated here.

The current NT Flow Account methodology does not distinguish between capital and other non-financial assets, such as, land. Thus, the accumulation of any non-financial asset is included in investment and all non-financial asset income is included in capital income.

Non-financial assets as defined by the 1993 UN SNA consists of produced assets and non-produced assets. "There are three main types of produced assets: fixed assets, inventories, and valuables. Fixed assets are defined as produced assets that are themselves used repeatedly, or continuously, in processes of production for more than one year." (1993 UNSNA Para 10.7). Inventories are stocks of outputs held by the units that produced them or stocks of intermediate inputs that will be used in future production processes. Valuables are stores of value that are not used primarily in production processes.

Non-produced assets "consist of assets that are needed for production but have not themselves been produced. They include naturally occurring assets such as land and certain uncultivated forests and deposits of minerals." (1993 UNSNA Para 10.8). The current version of NTA follows NIPA by including only natural resources that are owned or effectively controlled by an economic unit - primarily land and sub-soil assets, e.g., coal, oil, and minerals. An important extension to the NTA methodology would be to include non-owned natural resources, e.g., environmental resources.

Credit is a financial resource that can be exchanged to generate age reallocations. Some ages groups have a positive credit balance and other age groups have a negative credit balance, but positive and negative balances must be equal in total. Aggregate net credit, in a closed economy, is always zero.

That aggregate net credit must equal zero is true of both public and private credit in the NTA system. When the public sector incurs debt, it creates positive balances for investors who, for example, buy government bonds and negative credit balances for taxpayers who are responsible for paying interest and possibly repaying national debt. A distinguishing feature of public debt is that, over time, it can be transferred to future generations. Public asset reallocations are discussed much more extensively in the public sector flow account methods section.

In modern economies many private assets are owned indirectly through financial intermediaries. In part this reflects the extensive reliance on credit to finance investment. This adds complexity to defining and to estimating which age groups are investing, which are accumulating credit and debt, and which are accumulating and dis-accumulating land. When a thirty-year-old man builds a new home, for example, is he creating capital? Or is it the fifty-year-old woman who lent him the money probably through a financial intermediary?

The practice in the NT Flow Account is, in principle, to classify net saving by individuals by the ultimate use of the funds. Thus, when debt is used to finance consumption this is classified as a credit transaction. Credit transactions refer exclusively to loans that are used to finance consumption, not to finance the acquisition of new or existing capital or the acquisition of existing land.

When debt is used to finance investment this is classified as a capital transaction, i.e., the lender is accumulating capital. The interest income subsequently received is counted as a return to capital, i.e., as capital income. To answer the question posed above - the fifty-year-old woman who lends the money required to build the new home is investing in capital; the thirty-year-old "owner" of the house is investing in capital only as he pays off the loan and builds equity in his residence.

Asset income consists of the income received as a return to capital and credit. The return to capital is called capital income and the return to credit is called interest.

An issue to be addressed is the treatment of international capital flows.

Estimating Private Asset-based Reallocations

The detail with which the asset reallocation system is estimated will depend on the availability of data. Public asset reallocations are described in the public sector flow account methodology section. Here the discussion is limited to estimating private asset-based reallocations. First, we consider private asset income. Below, we turn to private saving.

Estimating Private Asset Income

Private asset income consists of capital income and interest. Interest is the return to consumer credit, i.e., loans that finance consumption only. Rent, the return to land and sub-soil assets, is included with capital income. Capital income is generally a large portion of asset income and is treated with more detail. Distinguishing components of capital income is useful because they have distinctive age profiles than can be estimated using income data that are often available.

Components of Capital Income:

1. Mixed income, net (capital share): return to capital invested in individual proprietorships and other unincorporated businesses including farms.
2. Operating surplus, net: return to capital invested in corporations.
3. Net imputed rent of owner-occupied housing, owner's share: return to capital invested by an owner in an owner-occupied dwelling unit.
4. Net imputed rent of owner-occupied housing, lender's share: return to capital invested by a lender in an owner-occupied dwelling unit.

The net imputed rent of owner-occupied housing is equal to imputed rent less the costs of maintenance and repair and depreciation. The owner's share is net imputed rent less interest expense for housing loans. The lender's share is the interest income from housing loans.

Following standard NTA practice, asset income by age is estimated by constructing an aggregate control based on NIPA and other available aggregate data. The aggregate value is distibuted by age using age-specific population data and a per capita profile estimated using survey data.

Aggregate Controls

Source and methods for estimating aggregate controls for asset income are described in Table RA2.

Table RA2. Estimating aggregate asset income.

Component of asset income	Source and notes
Capital income: Capital's share of mixed income, net	A portion of mixed income accruing to households - a component of national income less net imputed rent to owner-occupied housing. Current estimates assume that one-third is a return to capital and two-thirds is a return to labor. Value must be adjusted upward to include indirect taxes net of business subsidies on capital invested in unincorporated businesses.
Capital income: Operating surplus, net	The return to capital of corporations - a component of national income.
Capital income: Net imputed rent from owner-occupied housing (owner's share)	Net imputed rent of owner-occupied housing is a component of mixed income, which is, in turn, a component of national income. Owner's share is calculated by subtracting interest paid on housing loans, which may be available from an expenditure survey or elsewhere. Estimated from income and expenditure survey or is their an alternative?
Capital income: Net imputed rent from owner-occupied housing (creditor's share)	The value of interest on loans for owner-occupied housing is estimated from expenditure surveys or ????
Rent	A return to land and sub-soil minerals; a component of national income.
Interest	Survey data may provide an estimate of interest payments by households for non-housing loans.

Note. Revised on 11/21/06 to reflect changes in treatment of indirect taxes.

Per capita age profile

In principle, two kinds of data can be used to allocate private asset income by age: income data and asset data. Using income data is generally preferable because income data are usually more reliable than asset data and because, to the extent that rates of return vary by age, the age profiles of asset income will differ from the age profile of assets.

By assumption all assets are held by the household head and all asset income flows to the household head. Hence, neither asset incomes nor assets, if they are being used, are allocated among household members. They are assigned to the household head. All other members are assigned a value of zero.

Some components of asset income accrue directly to households and the age profile of that income can be estimated directly from income and expenditure surveys. Other components of asset income accrue indirectly to households. These forms of asset income are allocated using proxy age profiles.

For each component of asset income, a per capita age profile is constructed in the following way.

1. The appropriate measure of income from the household income and expenditure survey is assigned to the household head;
2. All other household members are assigned a value of zero;
3. The variable is tabulated by age using sample weights to obtain the per capita age profile. IMPORTANT. The age profile is per capita not per household head.
4. The per capita profiles are smoothed.
5. The smoothed per capita profiles are multiplied by the population, cumulated, and compared to the aggregate control totals. The per capita and aggregate profiles are adjusted proportionately to match the control total.
6. The unsmoothed, smoothed, and aggregate age profiles are uploaded to the data base with documentation.

The survey variable used to construct the per capita income profile for each component of asset income is described in Table RA3.

Table RA3. Variables used to estimate the per capita age profiles of capital income.

Component of capital income	Variable from income and expenditure survey
Capital's share of mixed income	Entrepreneurial income
Operating surplus	Property income (dividends, interest, rent)
Imputed rent from owner occupied housing (owner's share)	Imputed rent less interest payments on housing loans
Imputed rent from owner occupied housing (creditor's share)	Property income (dividends, interest, rent)
Rent: Inflow	Property income
Credit income: Inflow	Property income
Credit income: Outflow	Interest expense on non-housing loans

Notes: In all cases per capita age profiles are estimated from household income and expenditure surveys. Credit income has two age profiles: one for inflows received by creditors and one for outflows for debtors.

Saving

Saving by age is estimated as a residual:

As a check it should equal net national saving?

Comments about the Asset Reallocation methodology:

Author:  A Mason
Last Revised:  January 5, 2006