This article appears in the July 15, 2013, issue of National Review.
The Federal Reserve regularly releases data on the net worth of Americans, and newspapers across the U.S. celebrated recently when the latest numbers suggested that our net worth had returned to where it was before the financial crisis. Our wealth collapsed but then recovered, and the hole that the financial market dug for us, so the story goes, has been refilled.
That story is a rudimentary one, and requires that we ignore several important factors. First of all, there has been some inflation between 2007 and today. Second, the number of Americans grew from about 302 million in 2007 to about 314 million in 2012; our real aggregate wealth, then, would need to increase commensurately to bring us collectively back to square one.
While significant, both of those issues are minor compared with a third one: The federal government has accumulated massive new debt over the past five years, and that debt will have to be paid back eventually. If we will have to pay higher taxes to do that, then we are carrying, off the books, a large implicit liability.
The nearby chart shows how total household wealth in the U.S. stacks up today compared with 2007, after taking future deficits into account. In order to calculate the present value of future deficits for households today, I used the CBO’s long-term alternative fiscal-scenario projections, the first from December 2007 and the second from this May. In 2007, the CBO also projected likely deficits out to 2050. For 2012, I generated an analogous projection out to 2050 based on the most recent CBO long-run analysis. The long-run deficits are projected in present-value terms by discounting the future. The numbers are expressed in per capita terms and adjusted for inflation.
In 2012 dollars, household net worth in 2007 was $240,790 per person. Even then, we were looking ahead to high deficits, and the present value of the implicit tax liability facing every American just to cover those deficits was $70,143, with the net of the two values coming to $170,647. At the end of 2012, per capita wealth had climbed back almost to its 2007 value, but the present value of future tax liabilities associated with deficits had climbed all the way to $152,216. So, accounting for federal debt, net wealth had dropped all the way to $62,322 per person.
To be sure, a complete accounting would also weigh in the value of government assets such as Yellowstone, the tax liability associated with maintaining a balanced-budget level of spending, and many other factors. But, holding those factors constant, the budget situation has deteriorated to such an extent that per capita net worth has dropped by more than $100,000 in five years. The Fed’s net-worth data have a long way to go before they can possibly cover that hole.
-Kevin Hassett is the John G. Searle Senior Fellow and Director of Economic Policy Studies at AEI