June 9, 2006 3:12PM

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?