Hic Sunt Dracones

by Martin Harris

As a mere amateur in economics, your Humble Scribe hesitates to predict trends, but the relatively sudden availability of wealth stats for households and individuals suggest that something is happening out there among the professional bean-counters. It seems to have started with the sharp decline in household net worth because of the 2007 housing bubble, and the data are still insufficiently developed to be able to show how much wealth is tied up in real estate, which doesn’t create a cash flow of earnings or interest, and how much is tied up in investments which do, but the socio-economic structure for today’s citizenry seems a lot more fiscally comfortable than it once was for their (our) grand-parents, when home-ownership, if you had achieved it, was most likely the great majority of your nest egg. Now the stats for median and average net worth, both individual and household, are being more frequently published (albeit with a few years delay, such as the Fed’s reports) and they are remarkable for showing how wealthy average Americans have (fairly recently) become. All this is still pretty much unknown territory for socio-economic analysis and commentary –for example the stats showing that Vermont and California are uniquely attracting upper-income- and -wealth quintiles into high cost-of-stay jurisdictions– and there may be unexpected hazards in the intellectual fog. Hic sunt dracones, cartographers used to print on unknown parts of old maps: here be dragons.

The big one is, of course, “sustainability”: can States losing their middle-class because of governmental cost-of-stay policies, increasing their under-class because of “free-stuff” policies, and increasing their upper-income and –wealth quintiles (but not by large demographic numbers) for whatever reasons of attraction, make the economics of governance work as the base begins to move away from traditional active-income wealth-creation and towards passive-income wealth-consumption? Vermont, with its second-smallest State population and nationally-known reputation for “adverse business climate” is betting that it can; California with its largest-State population and massive existing investment in industry, agriculture, technology, and the for-profit arts seems to be betting that it can’t, and that the upper-quintile in-migration is not passive-income so much as active entrepreneurs. Both upper-quintile categories share a remarkable modern financial phenomenon: the historically-high net worth per household or per adult.

At the end of WWII, the Total Net Worth of US Households was less than $1 trillion; now it’s in the upper-$60 trillion range. We have no early per-household or per-adult numbers, but now it’s about $320,000 per household and $53,000 per adult. These averages (or medians) aren’t enough to live on, passive-income-wise, but they are enough to under-gird and thereby encourage entrepreneurial risk to some degree, which explains the personal economics for some of the farmers’-market growers in Vermont and some of the digital-connection experimenters in California. And, of course, about half of each such group is well above those averages or medians in such dollar-comfort; that’s wealth which, which, to whatever extent it’s not tied up in real estate, is generating, even in these Fed-caused low-interest years, a passive-income cash flow to cover some of such cost-of-stay needs as food, fuel, health insurance, and taxes. Such historically-unmatched wealth stats explain a closely-related one: the new highs of inter-generational wealth transfer from older to younger generation. An organization called “The Planned Giving Design Center” has been estimating the size of the (mostly) bequest-fund at $41 trillion, in 1998 dollars, from that year to 2052. That’s about 2/3 of total household wealth now. And, in turn, such wealth numbers may well explain the historic declines in the percent-of-population in the potential labor force, and the percent-of-labor-force actually employed or actively seeking employment: the former is now down to the mid-50% range, and the latter is now down to the low-60% range. When you’ve inherited a nest egg, the pressure to go out and earn diminishes.

Older readers (I’d guess that younger ones, even if they’ve taken American Lit in the modern high school, didn’t get to read Edward Bellamy’s “Looking Backward”) will detect some of his predictions here: the higher general wealth level in particular. Bellamy foresaw a socialist economy with all wealth public, everyone getting an equal spending stipend, reduced working hours for all but especially for “difficult” jobs, retirement at 45 unless you enjoy it and want to continue, and so on. The modern fact of such high net worth numbers as we now see for households and individuals suggest what we also see: less of a completely free-enterprise economy than prevailed in Bellamy’s late-19th century years, and more of a socially-regulated and -leveled economy just as he foresaw by 2000 (the hero awakes from a long sleep in that year) with no strife, no rich-v-poor, almost no crime, and presumably, although he doesn’t write of it, not much incentive or competition to succeed via invention, innovation, improvement of product or service, upward mobility, or the profit motive. Nor does he write of taxes, since, in his vision-of-the-future, government owns all the wealth; it issues spending-money stipends (in 19th century company towns, it was sometimes called “scrip”) equally to all.

But the wealth numbers haven’t been missed by government, still stuck with less-than-full economic ownership, which explains why news pieces are now reporting a new and promising tax-target: wealth. Up to now, it’s been off-limits. Two exclusions: one has been property, nation-wide’ and the other has been occasional attempts by States to tax “intangible assets” like securities or savings (modestly at first, of course) either at value (Florida) or at interest (Kansas) but that may be about to change. Proposals are already in Congress for Federal ownership and management of private 401-K savings accounts; news reports have mentioned just such preliminary events in some South American and European countries: Argentina and Italy. The pressure to move to a US wealth tax as income and profit takings prove inadequate is much like the pressure to tax vehicle mileage as fuel use proves inadequate: the tax-seeker goes where the money is. A Constitution supposedly prohibiting an income tax was “repaired” with the 16th Amendment; now that Constitutional “emanations and penumbras” prevail, fixing the obsolete document to enable wealth taxation isn’t as improbable as it was in Bellamy’s years: Looking Backward was published in 1887, he died in 1898, and the income tax arrived in 1913. A wealth tax would be an unknown-lands dracone indeed. One such was just slain in Cyprus. There will be more.