April 21, 2006

The Mr Horse School of Economic Analysis

EARLIER THIS WEEK, news agencies proclaimed that the number of American millionaire households had hit an all-time high, to some 8.3 million. The stories were based on a survey from the Chicago-based Spectrem Group consultancy, which conducted mail and on-line surveys about household wealth with roughly 1,000 people. According to Spectrem's research, the number of millionaire households jumped 11 percent compared to the prior year, while the number of "ultra high net worth" households (those with over $5 million) grew 26 percent, to 930,000.

Sounds great, right? I agree. However, at least to me, the numbers don't make empirical sense.

For instance, Spectrem says there are 8.3 million American households worth more than $1 million -- excluding the value of their primary residence. But with 105 million households in the U.S., that would mean 8 pc -- or one out of every 12 households -- are millionaires. Furthermore, if Spectrem is right, just under one out of 100 U.S. households is more than $5 million.

Think about that. One out of every 12 households has more than $1 million? I mean, that's quite a statement -- and certainly something worthy of running through the Mr Horse School of Economic Analysis. Here's what I got when I did:

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"No, sir! I don't like it." -- Mr Horse

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You see, the numbers just seem awfully high -- especially when compared to the CapGemini Merrill Lynch World Wealth Report, which is the gold standard for these types of studies. Here's the most recent edition (PDF file). The new one should be out soon, but the 2005 WWR report -- using data from 2004 -- is most illustrative.

On page 15 of the report (page 17 of the PDF file), look at Figure 10. You'll see that on a worldwide basis, there are only about 8.3 million people with more than $1 million in investable assets -- and just about 10 percent of that number have more than $5 million. (Just under one percent have more than $30 million). In the United States (see page 27 of the report), there are roughly 2.5 million individuals with an estimated worth of more than $1 million. If we extrapolate from there, we can estimate there are roughly 250,000 U.S. individuals worth more than $5 million, and 25,000 worth more than $30 million.

If we further assume that these numbers translate to households -- a simplistic assumption that necessarily increases the frequency of the rich -- we find that one out of 52 U.S. households has more than $1 million, that one out of 520 has more than $5 million, and that one out of 5,200 has more than $30 million.

Now, I fully admit it's possible that some weird economic happening took place in 2005 that would account for such a wide spread between Spectrem's estimates and Capgemini/Merrill Lynch's. However, I'm not aware of any such happening. To my mind, the Capgemini/Merrill Lynch numbers seem to make more sense than the numbers which Spectrem derived from its surveys. Furthermore, Capgemini/Merrill Lynch's methodology makes it clear that while its survey may not be exact, it does draw from a wide variety of data sources and does considerable economic analysis on that data.

Posted by Benjamin Kepple at April 21, 2006 10:17 AM | TrackBack
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