I tip my hat to James Hamilton being the only real economist during this Blogjam at the PJ Corral. The recurring theme from Lawrence Kudlow, Andrew Roth, Paul Hoffmeister, and Russ Roberts was that the economy is roaring – all due to Bush’s tax cuts. Dr. Hamilton, however, properly noted:
I don’t agree that the tax cuts are the key to economic growth in the current setting. It doesn’t make sense to be trying to stimulate the economy with fiscal policy and contract with monetary policy. What we need is more saving (both national and private saving), and I see no evidence whatever that tax cuts are getting us that.
Kudlow at one point asked:
Andy Roth, don’t the new wealth numbers from the Fed show that the tax cuts are working? Aren’t those wealth numbers, up $12 trillion since 2002, a 31% gain, the real saving rate for the economy?
Absolutely. $12 trillion in new wealth with $4 trillion in new shareholder wealth.
Hoffmeister chimed in:
Negative personal savings rates are not a reason for concern when Americans are wealthy (household balance sheets are strong). Low savings rates are a sign of economic vitality.
Now, you may be wondering how wealth is allegedly rising rapidly if savings are negative. After all, saving is defined as the flow increase in wealth. Do I need to repeat myself ? Look I agree that the National Income Accounts might miss the fact that capital gains may augment savings, but Kudlow, Roth, and Hoffmeister distort matters by considering only periods when capital gains were positive and not negative. My previous post on this matter suggested that over the 5.5 years from December 1999 to June 2005, both the Kudlow-Malpass-Tamny definition of savings and the National Income Accounts measure said the same thing – real wealth accumulation has been not quite sufficient to keep real wealth per capita from declining.
But I should update this to consider the increase in wealth from the end of 1999 to the third quarter of 2005. Nominal wealth per their definition has increased by 21.38%, but the price-level has also increased by 15.64%. In terms of 2000$, real wealth has risen from $43,267.9 billion to $45,415.3 billion or 4.96%. Over the same period, the population has increased by 6.09%. In other words, real per capita wealth is still below where it was at the end of 1999.
Yet Kudlow, Roth, and Hoffmeister dismissed Dr. Hamilton’s concerns about low savings but incorrectly suggesting wealth has risen substantially. But what else would one expect from a pajamas party?