Sentences to ponder

Via Mark Thoma, here is Stephen Gordon:

I was able to check the last time the real, per capita value of US housing equity was at its current level. Even after looking at all of these graphs, the answer astonished me: 1978.

More generally:

US real per capita net worth is back to what it was back in 1999.

We were not as wealthy as we thought we were.


Define "net worth" as "net of pro rata government debt" and see how we stand.

If you spend debt on things that have value, i.e. infrastructure that pays dividends in the future there's no issue (public works in the 30s, war in the 40s). If you spend/lose your money on wars with no payout, higher medical payments for the same conditions and tax breaks for foreign companies, maybe there's an issue.

From the looks of things, Canada also has experienced a large runup in assets and liabilities in a relatively short period of time. Why did things burst in the US but not in Canada?

Canadian banking is a half generation behind American banking. In retrospect that turned out to be a good thing. Also, there's no mortgage-interest deduction throwing gas on the fire.

In Canada, sub-prime people did not get mortgages and did not buy houses, and the country is better off for it.

I should add that the sub-prime people are _also_ better off for it.

And Ted's right that a little oil money is helping.

It's early. Net household debt in Canada just hit where it was in the US in Summer 2008.

This too.

Resource extraction economies are risky. Watch oil go down in price and see what happens to Canada.

Canada's chief competitive advantage is that it has a smart, educated, English-speaking population in close proximity to the US. Not that it has a bunch of the right kind of rocks lying around.

Dwight Jaffe, WSJ, 10/25/2010: Non-politicized banking system: Canada and most European countries - functioning private mortgage markets without government interventions like HUD, FHA, HMDA, CRA, FannieMae or FreddieMac sort, or direct mortgage guarantees.

Mark J. Perry, professor of economics, School of Management, Flint campus of the University of Michigan:
1. Full Recourse Mortgages in Canada.
2. Shorter-Term Fixed Rates in Canada – generally 5 years and renegotiate
3. Mortgage Insurance Is More Common in Canada than in the United States
4. No Tax Deductibility of Mortgage Interest in Canada
5. Higher Prepayment Penalties in Canada discourage refinancing and HEL’s
6. Public Policy Differences for Low-Income Housing. Canada provides public funding for low-income rental, and thus avoided the mistake of using misguided policies to turn good, low-income renters into bad homeowners. Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Differences in Canada’s Bank Concentration and Greater Diversification
7. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk.
8. Canada - a healthy “pro-lender” environment absent political motivations for greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.

I never thought we were as wealthy as we thought. But I get the point...

But are we now as wealthy as we think we are?

Want the scary answer?

Household debt as a percentage of GDP rose from 70% of GDP in 2001 to 102% in 2008. Household net worth has declined since the fall of 2008. Government debt as a percent of GDP remained fairly constant.

Per this report written in 2009: "Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to keep the economy afloat as the private deleveraging weights it down."

By the way, it wasn't public debt that was the problem, if you look at these statistics: it was an overleveraged public sector, and we are in the middle of deleveraging, with the government taking on some debt to prevent a crash as the balloon deflates.

Welcome to Japan.

Debt is not a problem if you can ROC it. That is why being poorer than we thought caused the recession, not vice versa. That is why the government can't borrow our way out of this because they can't ROC it.

I think more Government borrowing is the answer.

It's certainly the usual answer.

If you are going to build or buy something in the future, why wouldn't you do it now. If you were going to invest in something like education or infrastructure, why wouldn't you do it now if the benefits arose later and could be taxed, rather than not doing anything and not having future productivity improvements from your investment?

What a great idea. They should have tried that when they spent the last 700 billion dollars.

$350 billion was on tax cuts; I used mine to by a new wide screen TV.

Wealth can be destroyed or created. There have been bubbles of late for sure and there always will be, but government policy has destroyed trillions of wealth and this destruction was easily foreseeable. As a long time real estate investor I am acutely aware that one's perception and expectations of of the future (i.e., the expected NPV of future cash flows) can change in a second depending on how one perceives the future. The day folks think (and I think we are near that day) that an all powerful and always growing Federal Government like the present one that carelessly spends trillions on it cronies becomes permanently entrenched and the voters are too dependent on it to remove it, expect the diminished remainder of our assets to disappear. Contrary to the delusions of many libertarians and far too many witch doctor like pseudo scientist leftist macro economist the next election will have enormous consequences in this regard.

P.S. This does not mean that our society and economy cannot be rebuilt. It can of course and there is lots of potential given the unprecedented amount of human and physical capital left for us by greater generations. That same capital though can also be further destroyed. Visited Cuba lately with their 1950's fixed up cars? It all depends on how free we are when the next government is organized. Unfortunately the track record in these collapses and reorganizations is not good and often ends with a Peron, or worse a Hitler. Given the state of understanding and education in our populace and institutions where overwhelming numbers of future generations thought it was cool to elect a destructive Marxist president of the USA, I am not that hopeful. Unlike with Germany's experiment with Hitler, I am not sure where the society is that will arrive to save us from ourselves.

"I am not sure where the society is that will arrive to save us from ourselves." You may yet have reason to be grateful to the Mexican drug cartels.

"where overwhelming numbers of future generations thought it was cool to elect a destructive Marxist president of the USA"

This is why the country's problems can't be solved. You can't argue with someone with this world view, and that is now the base of one of the two parties.

Yes, and a few years ago the base of the other party thought that a fascist coup by the Bush administration was imminent:

Which reminds us of Megan's Mcardle's "Jane's Law: The devotees of the party in power are smug and arrogant. The devotees of the party out of power are insane." But at least 'Tom' is not predicting that Obama is about to lead a Marxist coup, so it's a significantly saner level of political hyperbole than Naomi Wolf.

Maybe Tom isn't, but a Presidential candidate that's surging in the polls felt quite comfortable in saying that the census may be used to round up people for internment camps and this pleasant quote among others:

'This cannot pass. What we have to do today is make a covenant, to slit our wrists, be blood brothers on this thing. This will not pass. We will do whatever it takes to make sure this doesn't pass.''

—Rep. Michele Bachmann, on health care reform, Aug. 2009

Are there nutters on the left, absolutely, but you don't see a fringe candidate like Kucinich embraced by the party.

Yes, and a few years ago the base of the other party thought that a fascist coup by the Bush administration was imminent

That was silly.

Imagine the Bush administration doing the preliminary planning for that.

"We'll have to figure out whether the Army will support us."

"Hey, wait a minute. How long can we keep the housing scam going? If we're in power when it collapses, everybody's going to hold us responsible."

"Oh, yuck. If we take over we can't quit. We'd have to clean up the mess."

"The housing shit will hit the fan about February 2009. Let's just lose the next election and then blame it on the second string."

"Yeah. Don't even check with the military. It was a stupid idea to begin with."

I bow to few people in my lack of love for the previous president, but there were a notable number of people calling Bush everything but Hitler well into his first term, as well. So I'd say the disease is tribalism based on either party affiliation, or on social and demographic things that correlate with party affiliation. The GOP seems to me to be notably louder and uglier in this regard than the Democratic party, but maybe I'm missing something.

I'm afraid it's rather a fact that Bush started an aggressive war, which is a war crime and a crime against humanity.

There is no such thing as a war crime, and humanity has no standing in any court of law. You're just a bitter crank.

You're just completely wrong and clearly uneducated. Obama is less socialist than Bush was.

You're sound like an uneducated hick whose mcarthyist 'socialist' boogeyman is everyone who disagrees. Our of the developed western world, we're one of the less socialized countries, and what has that done for us? According to this article, no progress since the 80s. Including the great Reagan years, the deficit cuts and internet bubble of the 90s and now the decade of wars and tax cuts. Good luck with your obsolete dogma. I'm sure it plays well in Missouri.

"comfortable in saying that the census may be used to round up people for internment camps"

Would would you use to round up people?

1999 is when some economists say the housing market should have peaked based on demographics and other factors.

I don't see any source for his data. How can I determine whether it makes sense or he made a mistake?

I think another point must be weighed: how has the distribution of wealth changed since 1999? For many people this could mean much more than a lost decade.

Here is a summary from AEI of differences between Canadian and US mortgage markets. Some of the differences are very significant.

Per capita housing equity? Why per capita? What does that have to do with anything?

Yes, I was going to ask that as well.

To be honest, adding house value as a measure of wealth is kind of silly to me. If you had a house in 99 and now in 2011 you still live in the same house... How is the market value of that property something that impacts your immediate well being? That really only matters if you want to buy/sell that house... So was that same family 'richer' in 2005? Of course not... and they are not poorer now.

What if you want to borrow against that equity? What if you're planning on selling the house to retire?

Well, didn't we get to the current situation in the first place because we were considering real estate a liquid asset?

The main point I am trying to make is that your house's main benefit is the housing, not the market value. Sure it is an asset to be considered when accounting for your estate but it is not comparable to a savings account or you job.

And yet, how many times in the years when my wife and I didn't own a house were we told that, if we didn't buy a house soon, we'd never retire.

If you're selling your house to retire, you still need another place to live so ups and downs of the market hold some sort of equilibrium for wealth creation...if you sell your house high, you have to buy high or rent high and vice versa.

If you're borrowing against your home to buy things, you get what we got :)

Isn't the real wealth building issue when you're out of work and can't sell your house in one part of the country to take a job in another part of the country?

At the very least, everything is 12 years older and potentially 12 years worse. If population growth and quality of life doesn't improve, it's a liability as easily as an asset in a mobile economy like ours. And even if one family doesn't want to sell, it's still important in the aggregate.

Market value has nothing to do with the situation of your house. Even if value was up on the average you could still have rundown houses woth less they were 12 years ago.

It's true that "we were not as wealthy as we thought we were," but 1999 was the year that Cox and Alm published MYTHS OF RICH AND POOR, which I recently reread and which is a useful exercise in taking stock. We are not by any stretch an unprosperous people.

Why the focus on housing equity? Look at the stock market. It's also where it was in 1999.

There's something about the tone of "We were not as wealthy as we thought we were." that seems one-sided. Is it ever the case that "We were not as poor as we thought we were."?
I hate to make a quantum mechanics analogy, but it seems that how wealthy we are at any point in time is not a settled matter until the future arrives. For instance, if the Fed hadn't mangled events so badly in 2008 and we had more net equity today, would that mean that "We were not as wealthy as we thought but more wealthy than we would have been in an alternate universe where the Fed mangles monetary policy during the financial crisis"?

If you reached age 65 and found out you were much less wealthy than you had imagined, would that make you more or less likely to stop working? So why did so many Americans recently stop working? Presumably because the drop in wealth affected some sectors much more than others, causing a difficult problem of re-allocation of labor. Of course the same occurs with AD shocks, which also affect some sectors much more than others. So how do we know which is the fundamental problem? We know there has been an adverse AD shock, and we know it has been the largest since 1938. We know there has been a sizable re-allocation problem out of residential construction, worsened by an adverse AD shock which also affected construction. We speculate that there may have also been other re-allocation shocks, but it's hard to find evidence that these are important at the macro level, as unemployment from re-allocation looks quite similar to unemployment from AD shocks.

The only way to find out is to boost (nominal) AD closer to the normal level. What's left of unemployment is structural or frictional.

Most stopped working because their employers asked them to.

Or maybe they maximized their intertemporal utility function and realized that they'd be best off not working, even if it meant losing their home and living in a used Ford Escort.

I could go read something, but what the heck...

Why is that? Is it to entice people to get out of cash? And if people prefer to get out of cash into something like commodities (rather than investing or consuming), that provides cash to the previous commodity holders (who may use the cash to buy more commodities), but it also raises raw materials costs at least in the short-term, right?


You are not suggesting that this is something to be done (boost nominal AD),are you? It seems like you are suggesting this as a conceptual approach.

Scooped by Kling!

Although the quote isn't quite the same.

Compare the movies that came out in 1999 to 2011 and that will paint as stark a picture as any.

Clayton, Yes, but my point was that the number who want to work exceeds the number who are working. Lower wealth doesn't cause unemployment. There must be some sort of transmission mechanism. Perhaps there's less AD.

Rich, Yes, I am suggesting the Fed increase AD to normal levels. We have nothing to lose.

SS: "We have nothing to lose"

Just our currency. . .

Don't worry, if we screw up the dollar, there's always the Euro. Right?

Why do we need the dollar to be strong? Chinese and other sovereign interventions are designed to keep it weak, and we're running unsustainable current account deficits in part due to that.

Because fuel already went up to $5 a gallon.


I was responding to how you worded it. Maybe I misread what you wrote, but I thought it said, "Why did so many Americans choose to stop working?" Thus, I got snarky. But reading it now, it just says, "Why did so many Americans stop working?"

Apologies if I just misread you.

And nothing to gain from increasing a nominal quantity that nobody cares about. Your ridiculous crusade to convince people that P*GDP is valuable is sad, but probably will be effective in a world where Ron Paul is considered qualified to be in government and Robert Reich is considered a macroeconomist.

Could Prince have been the greatest economic forecaster of our era?

Our direst poverty lies in faith and morals.

"US real per capita net worth is back to what it was back in 1999."

Can you be more specific? Is that "back UP to" or "back DOWN to"? It seems net worth would have been pretty good in 1999 with the Internet bubble.

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