Is our prosperity illusory?

National Review, Nov 25, 1988 by Ed Rubenstein

THE NOTION THAT the present level of prosperity is unsustainable because it depends upon the accumulation of a vast amount of debt is at the heart of the Democrats' assault on Reaganomics.

There is no denying the increase in debt in America. The Federal Reserve reports that we collectively owed $10.3 trillion as of the end of last year, more than double the $4.7 trillion owed at the end of 1980. Federal Government debt accounted for about $2 trillion of the total; other government debt, $1.6 trillion; mortgages, about $3 trillion; corporate liabilities, $2.3 trillion; credit cards, auto, and other bank loans, $1.4 trillion.

But one man's debt is another man's asset, and in recent years the value of those assets has grown faster than financial liabilities:

Not every sector of the economy saw assets outpace liabilities over this period. The net worth of farm as an abortifacient? Of course, some would. We might strive to limit their number with legal penalties, or by professional self-regulation through the AMA ethics committee, or by instituting a straight system of regulated distribution. But some abortions would be performed which otherwise, would not take place.

That would be deplorable, but nothing new: illegal abortions have always been performed just as other laws are regularly broken. Law, however, has two purposes: declaratory and regulatory. The declaratory purpose of abortion law, expressing society's belief in the value of unborn human life, will remain valid in all circumstances. But its regulatory function seems likely to be eroded by technical advances in medicine, such as our hypothetical pill above. There is already a new drug, cytotec, that prevents ulcers in arthritis patients and induces abortions as a side effect; and the French drug RU486, originally developed as an abortifacient, is thought likely to retard the progression businesses, for example, was 25 per cent lower at the end of last year than in 1980. The real net worth of non-financial corporations fell nearly 6 per cent between 1982 and 1987, as these companies increasingly borrowed to buy existing assets (e.g., other companies), rather than create new ones.

But American households are more than holding their own: the government reported in April that aggregate net worth of U.S. households rose from $5 trillion in 1980 to $8.5 trillion in 1987, a 24 per cent increase after inflation. The trend is corroborated by a recent Money magazine survey that found, for example, that although the average household's outstanding mortgage debt rose to $19,300 this year from $17,100 in 1984, home prices increased nearly eight times as much, going from $74,900 to $90,900. The average household now has savings (excluding real estate) of $43,700, versus $35,800 in 1984, and a net worth of $103,700, versus $88,200 in 1984, according to Money.

Of course, real-estate prices could, as some are now predicting, come crashing down as fast as they've gone up. But even a 50 per cent drop in home prices -highly unlikely even in the worst-case scenariowould leave households with enough home equity and savings to liquidate outstanding mortgage debts should that become necessary. In short, our debt situation shows no sign of pushing us toward the financial collapse that the doom-sayers sa is inevitable.