Healthier and Wealthier

Americans have gotten a lot richer since the passage of supply-side tax cuts in mid-2003, according to the Fed's latest release on household net worth.




Total wealth (assets minus liabilities) gained $8 trillion or 18.5 percent between the second quarter of 2003 and the first quarter of 2005 according to the latest data. Real estate increases led the way with a gain of $3.5 trillion. Mutual funds placed second with a $1 trillion increase and stocks came in third with an $800 billion appreciation. Combining stocks plus mutual funds comes to $1.8 trillion or 22 percent of the increase in total net worth. The rest of the wealth increase was distributed across pension funds, credit market instruments, and bank deposits.

Some economists, most notably David Malpass, believe that changes in household net worth are a more accurate gauge of personal saving. Over the past seven quarters this measure of net worth has increased at a 10.2 percent annual rate, much higher than the reported saving rate that has been hovering around 1 percent. The narrower saving measure derived from personal income does not score investments or their mark-to-market capital gains.

Many years ago Arthur Laffer taught me that people save to invest, and invest to create wealth. Hence, strong periods of market-related wealth creation are frequently accompanied by a low income-based saving rate. That is exactly what is happening now.

The real estate boom really began in 1997 when tax reform permitted the first $500,000 of capital gains from home sales to be tax-free. So in a strict sense the 2003 tax bill cannot claim credit for the ongoing housing boom.

However, indirectly through a 4.4 percent average annual GDP growth since the tax cuts, as well as rising job creation, lower unemployment, and strong income creation, there is a linkage between the Bush tax cut and recent real estate wealth creation. By the way, give President Clinton credit for signing the 1997 tax cut bill into law.

Meanwhile, recent wealth gains from stocks and mutual funds are surely linked to the 2003 tax cut-induced reduction in capital costs and the increase in after-tax investment returns. Incentives matter. Give President Bush credit.

During Alan Greenspan's Congressional testimony hearing yesterday, numerous members of Congress cited the low-reported saving rate as an example of economic illness. No one mentioned the huge wealth gains. The fact is, however, the U.S. economy is growing healthier from wealth creation of all kinds.