However, I disagree with some of the conclusions you draw about the relationship between saving and investing, which are actually the same actions. Each action, however, has a different connotation, and its those connotations which you appear to be distinguishing between. The fundamental difference between an FDIC-insured account and nearly any other investment is likely the risk/reward profile. Appropriately in a free market economy, companies that need capital but that offer a higher risk profile than FDIC-insured deposits are compelled to offer a higher return to investors in order to attract that capital.

There's nothing inherently bad about that per se, and I think the vast preponderance of economists in both the public and private sectors would agree that buying equities or mutual fund shares is very much “saving”. In fact, a total concentration of personal capital in an asset class that does not provide returns which match inflation is a bad idea for even the most conservative households. In thinking further about the differences you draw between savings and investment, what would you consider the purchase of Treasury bills to be? More practically, an open-ended FDIC program is not fiscally prudent. Savings and investment activities are inherently risky, and there's no political or economic rationale for unequivocal protection in all circumstances. Given the above, how is growth driven by “investment” (to use your distinction) more artificially produced than growth driven by “savings”?

I think quite the opposite could be true. While the FDIC bears the risk of insured deposits, the depository institutions themselves benefit from a lost-cost deposit base that they can reallocate to higher-yielding investments. In some form, FDIC insurance is a taxpayer financed subsidy for the private sector and likely encourages a form of moral hazard not unlike what transpired with Fannie Mae and Freddie Mac. If WaMu was on the hook for every dollar of capital deposited in its checking accounts, I suspect they would have thought harder about making loans to borrows who were unquailified to repay those obligations according to the contractual terms.

The other topic I'll address is $500,000 tax exemption upon the sale of a primary residence. You neglected to clearly state that the benefit applies only to the sale of primary residences which is an important fact to bear in mind as this would exclude vacation homes, investment properties, etc. — all assets that are more likely to be held by the “wealthy” (which you neglect to define) than by the “not wealthy”. In this discussion, the average price of a home is totally irrelevant.

For those are are not wealthy, a primary residence is likely to be their single largest asset, and the ability to profit from the sale of that asset on a tax-free basis is a terrific benefit. Given what I otherwise know of your position on may social and tax issues, I'm at a loss to understand how you think this exemption disproportionately benefits the rich. Taxing the first dollar of profit on the sale of all homes would be fair to everyone, but by exempting he first $500,000, policy effectively favors those with fewer sale proceeds. Isn't it the richer sellers who are paying the greater tax?!

This tax benefit does nothing to make a house easier or harder to sell as it benefits sellers and buyers, although buyers are taking the risk of a change in legislation during the time of their ownership. You can only sell a house if there's a buyer, and factors such as interest rates are much more significant drivers of home sales activity.

Philosophically, the government's claim to any tax on the sale of real estate is a dubious proposition. In what ways has price appreciation resulted from any government act? Improvement in local public services, new roads, schools? Those are mMost often paid for with local property taxes, not federal income taxes. Federal tax on the sale of real property – specifically real property – is nothing more than a swipe for revenue. Compare that to a highway toll where the toll (effectively a use tax) is reinvested into road maintenance and expansion. In that circumstance, there's a direct correlation between the act and the use. The same cannot be said for real property.

I also think your final conclusions are misleading. All participants in the housing market are aware of the tax exemption – the market information is perfect and so is accurately reflected in prices. Buyers know they'll get the exemption when they sell and incorporate that fact into their valuation. I don't think it has any impact on the equilibrium of supply and demand – its a freebie, and one of the few that remains.

These topics are too cumbersome to futher discuss here, but I'd be happy to take them up with you offline.