This week, the Federal Reserve dropped two bombshells—the news that from 2007 to 2010 household wealth dropped 39% to a level last seen in 1992 and the smaller but perhaps more fraught headline that median income fell 8% in those three years.
The fall of median family net worth to $77,300 from $126,400 is mostly a real estate phenomenon; homeowners certainly feel less wealthy and the statistic reminds Americans that happy days have yet to return.
But the slide in income reflects that fact that Americans remain financially pinched with less to spend, and reduced incomes have a depressing economic effect: When the policeman lessens the frequency of dentist visits, the dentist will buy fewer baseball tickets or have less wealth for his financial advisor to manage.
Politicians will doubtless spin the vanishing wealth in predictable ways. Conservatives will say the president's policies have been calamitous; liberals will note the timeframe 2007 to 2010 includes the administration of the president's predecessor, whose policies they hold responsible. The former generally want to see tax reduction, expanded trade and deregulation while the latter generally favor income redistribution and government programs targeted to middle-class and poor Americans.
But let's try and put politics aside and examine principles that may help in evaluating proposed policy fixes. The debate in economics often comes down to whether to pursue efficiency or equity. Advocates of equity, or fairness, think the efficiency crowd is heartless, while those most focused on the efficient use of resources think their opponents are dimwits for not understanding that inefficiency shrinks the pie that is to be carved up and shared.
The fact is that both sides are correct, and the art of economic policy is understanding which to emphasize at different historical moments. To give some extreme examples, I recall a friend in college arguing in favor of the death penalty—not because someone who has taken a life deserves to lose his own and not because he felt it had a deterrent effect, but because it was "inefficient" to spend so much in tax dollars on the maintenance of criminals.
