A Tale of Two Accounts

According to a prominent news report today, U.S. household net wealth was $53.8 trillion at the end of the first quarter of 2006. That’s an increase of almost $5 trillion since the same time last year, and four times as much as the nation’s entire output (GDP) for 2005. 

The fact that U.S. household net wealth has consistently increased during recent years provides a comforting counterargument against those who bemoan the decline in U.S. saving. That decline, which commenced during the early 1980s, achieved an important milestone recently: U.S. personal saving dipped below zero for the first time in 2005.

Why, then, is household wealth increasing? The simple answer is that our existing assets are becoming more valuable. Those capital gains are not counted in the income base (worker compensation plus asset income) for calculating saving. 

Unfortunately, looking just at household wealth provides false comfort. The point is simple: Take the economy-wide account and split it into two parts: the government account and the household account (private firms are owned by households). Looking at just the increase in household net wealth and congratulating ourselves for how rich we are (collectively) misses the 800-lb. gorilla in the room: the government account. 

What does that account look like? The recently released annual reports by the Social Security and Medicare trustees suggest that the total unfunded obligations of those two programs alone account for $84 trillion, also an increase of $5 trillion over one year ago. That doesn’t count Medicaid, whose costs are escalating rapidly (for both federal and state governments) and the rest of government operations including the growing costs of homeland security, border control, anti-terror efforts, and wars abroad. Curbing the size of government along these dimensions is clearly crucial to achieving greater wealth. Without this, much of the household wealth will have to be devoted to paying future taxes.

How rich do you feel now?

Private Answer to Stem Cell Debate

Harvard has announced that it is launching a privately funded, multi-million dollar program to clone human embryos for use in stem cell research. In this 2004 column, I argued for exactly this kind of private sector initiative to solve the politically divisive debate over stem cells.

I wrote in part,

By its very nature, government politicizes everything it touches. Science is no exception. Stem cell research needs neither government money nor politics. It is better to get the government out and let the private sector continue its good work. Those people calling for increased funding could take out their checkbooks and support it. Those who oppose embryonic stem cell research would not be forced to pay for it.

Harvard is proving one again that civil society can do what government can’t.

Death, Taxes, and Lawyers

Didn’t someone famous say that there is nothing certain in this world except death, taxes, and proliferating lawyers? These three evils come together in the debate over repeal of the federal estate tax.

A Cato supporter alerted me to interesting data showing that there are 52,000 estate planning lawyers in the United States. Let’s say that half of their time is spent on the estate tax, or about 1,000 billable hours a year each. And let’s say that their billable rate is $200 per hour.

What you get is an estate tax lawyer industry of about $10 billion annually. If you added in the costs of all the estate tax accountants, IRS administrators, the estate tax portion of the life insurance industry, and other workers, the costs of estate tax paperwork could be as high as the amount the government collects from the tax – $28 billion annually. That is the definition of a wasteful tax.

Taylor vs. Corn

FYI, I’ll be on Kudlow & Company (probably around 5:30 EST) to debate ethanol subsidies with Frank Gaffney.  

Something to chew over while you wait for the beating to come: wholesale ethanol is selling today for July delivery at the Chicago Board of Trade for $3.40 a gallon.  Given that ethanol has only two-thirds the energy content of conventional unleaded gasoline, we have to multiply that price by 1.5 if we want to compare apples with apples.  So to get the same amount of energy from ethanol that we would get with a gallon of conventional unleaded, we would have to pay $5.10 a gallon.  What is the wholesale price today for conventional unleaded for July delivery?  All of $2.10 a gallon at the NYMEX.

But that’s not all.  Gasoline moves from refineries to retail distribution centers via pipelines, and transportation costs are low.  It costs a lot more money, however, to move ethanol from processing plants in the Midwest to retail distribution centers because it must be moved by truck and barge (one can’t use pipelines to move ethanol for various technical reasons).  So add another couple of dimes to the differential between the price of ethanol and conventional unleaded to account for that, and perhaps another dime or more if you’re shipping that ethanol to the Atlantic or Pacific coasts.

If the answer is ethanol, what exactly is the question?

Come Back with a Warrant

Last month in Dallas:

Jamie Dolloff was expecting a routine code inspection to check smoke alarms and an electrical breaker box in her northeast Dallas apartment.

She said she wasn’t prepared for a loud banging on her door and police officers entering her apartment and searching her belongings.

“Cops were going through my bathroom drawers. Then I heard them going through my kitchen,” Ms. Dolloff said of the police who accompanied fire and code inspectors during the search.

“I told them, ‘You don’t have a warrant. You’d better stop what you’re doing’,” she said. “They shouldn’t have been going through my stuff.”

Ms. Dolloff is one of at least 21 Dallas residents who have filed complaints with the U.S. Department of Housing and Urban Development over the March 13 incident at Bent Creek Apartments.

The searches were part of a sweep instigated at the behest of a local, politically powerful homeowners’ association.

The situation in Dallas is part of a disturbing trend. Police and municipal officials are increasingly using utility, fire, or regulatory inspections to circumvent the need for a search warrant. Once inside, police who accompany the inspectors snoop around. Given that the resident of the home let them in voluntarily, anything incriminating that they might find is, in theory, fair game.

Two years ago, police in Manassas Park, Va., conducted a massive SWAT raid on a local pool hall involving about 70 officers. Though they were looking for drug activity, the raid was conducted under the auspices of an inspection from the state’s Alcoholic Beverage Control, again negating the need for a search warrant.

Last April, police in Buffalo, N.Y., conducted a series of no-knock SWAT raids in low-income neighborhoods across the city, dubbed “Operation Shock and Awe.” A month later, many of the arrests were thrown out because of insufficient evidence or police errors in obtaining the search warrants. Police officials were livid – at the thrown-out arrests, not at the fact that many innocent people’s homes were wrongly raided, or that innocent people were wrongly arrested. The officials openly discussed using the city’s “Operation Clean Sweep” program to conduct future raids. “Operation Clean Sweep” sends police out with fire code inspectors, electric inspectors, social workers, and other non-police agencies. They tell residents they’re conducting routine inspections. Once inside, police search the homes for evidence of drugs or other illegal activity, again without a search warrant.

New at Cato Unbound: Frank Levy on Education and Inequality in the Creative Age

In today’s reply to Richard Florida’s lead essay on “The Future of the American Workforce in the Global Creative Economy,” Frank Levy, Daniel Rose Professor of Urban Economics in the MIT Department of Urban Studies and Planning, agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But better education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely, “all of the nation’s institutions will be at risk.”