We are not as wealthy as we thought we were

The Census Bureau has released new data on wealth:

The recent financial crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said on Monday.

The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.

This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.

The story is here.  Matt adds comment and posts a good chart.


Aren't there a lot of adjustments that need to be made before interpreting this? People entering the sample, family size, etc.?

The only way the housing bubble ever made sense was if there were going to be an endless stream of Mexican immigrants who would make so much money that they could pay off their mortgages.

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Hmmm....why is this comment accepted but not another one? Censorship at MR? hehehe. Or the MR server does not like certain other servers.

More likely either a bad internet connection or a stupid commenter.

You mean... The Bush debt / housing / let's bribe Latinos with subprime / Open Borders / cheap labor / giant trade deficits / outsourcing / tax cuts bubble ended badly?

Really? This could not possibly be true. Libertarian policies make everyone richer. All right thinking people know that.

What has government debt and bribing rent-seekers (okay, mortgage-seekers) to do with Libertarian policy?

Or that the money would keep being produced indefinitely. We know the money illusion can affect reality in the short-term and vice versa. That makes some people think you can fool all the people indefinitely. Real versus nominal appears to not be an either/or proposition but a dynamic interaction.

Back in 2005, you can find Stephen Roach of Morgan Stanley (now at Yale) predicting that the asset based saving paradigm (bubbles now, bubbles forever) would end badly. It was an article of faith of the libertarian / neoliberal, Open Borders, "free" trade crowd that the status quo could persist forever. Forever lasted about 3 years. Read it all.

See "What Global Saving Glut?" (http://www.morganstanley.com/views/gef/archive/2005/20050705-Tue.html)

"There may be a deeper and potentially more sinister meaning behind the saga of the global saving glut. In my view, it is being used as a foil to deflect attention from one of the world’s most serious imbalances -- the excess consumption of America’s asset-dependent economy. In his treatise on the saving glut, Ben Bernanke goes on at length to dismiss the connection between America’s saving shortfall and its current account deficit. He stresses, in particular, the seemingly incongruous relationship between America’s fiscal balance and its external shortfall -- noting that the US current account deficit widened in the late 1990s as the federal budget moved into a rare position of surplus. What Bernanke conveniently leaves out of this discourse is the plunge in the personal saving rate over this same period from 4% to 1% on the back of a powerful wealth effect brought about by the equity bubble. In a similar vein, he all but dismisses the even more worrisome substitution of property-based wealth effects for income-based saving in recent years. In fact, he actually reverses the causality of these asset effects -- arguing that they should be treated as “endogenous” by-products of the global saving glut and the associated search for return, or yield. In other words, according to this line of reasoning, America’s asset bubbles are innocent victims of global circumstances rather than visible signs of domestic markets and US consumers that have gone to excess."

What happens when the asset bubbles implode? Now we now. The ineluctable truth is the libertarian ideas ("free" trade / Open Borders) yield profoundly anti-libertarian results (economic failure, welfare state expansion, soaring taxes, PC suppression of free speech).

Nothing to worry about, the median household in the top 10% is still 2% wealthier than 2007. Losing money is for the proles.

So now it's the 90%?

It's like "99 bottles of beer on the wall," except the song stops at 51. As soon as it dips below 50, it has to reset to 99.

Well, the report didn't have data on the median networth of the top 1%, so...

But regardless, "99%" is a catch phrase and a heuristic, not a serious analysis.

Income is more relevant than wealth for the median. Their wealth is low enough that it doesn't make a lot of difference. $77K at todays interest-levels give you something like $2K/year in additional income, and this is a fairly small fraction of the income of a median family.

Earnings is a lot more worrisome. Median earnings has been falling compared to GDP/capita for 3 decades, i.e. the earnings of a median family is a smaller and smaller fraction of the earnings of society in total. A larger and larger fraction goes to the tiny fraction at the top.

You are projecting notions that are far more relevant for high-net worth individuals. For middle class households, wealth is what you use to send your kids to college, to buy a car, to pay medical bills, and to supplement Social Security during retirement.

I think Gunnar may be focusing on the consumer spending aspect. However, your "wealth" also includes the debt on the balance sheet which since it was nominal did not drop commensurate with the drop in assets. And the income has been funneling to paying that down in part, so you can't really separate wealth effects from earnings effects.

Oh, I agree and the nominal debt point you make is a good one and highly relevant to the discussion of over-leveraged household balance sheets. My point is simply that a drop in median wealth of about $50,000 is significant no matter how you look at it. Wealth is not just a way of earning income through interest but is also a vehicle for "self-insurance." That insurance policy has failed for millions of people and this could have fairly significant economic and political consequences.

Huh-what? $77K at today's interest levels gives you something closer to $500/yr. Anything more than that, and it's got to come from someone else's pocket (which can work, retirees should be bleeding value over time).

Which also reminds us that "today's interest levels" are in an environment with Ben Bernanke raping savers in any possible way he can figure out how to. He probably has a suggestion box by his office "please provide ideas on how to rape savers, legality is not your concern when brainstorming." Not to mention The Treasury borrowing almost half the Federal Budget mainly to hand cash to old people. It's not exactly a steady-state environment to evaluate a wealth effect.

'...hand cash to old people'

Aren't old people the majority of the savers (CDs, Treasuries) being raped? Robbing Peter to pay Paul?

Sure. Although "savers" and "old people" is just shorthand. Slightly longer is to say that by financializing and entitling I think we've completely gutted the capital market so that we could stop doing high ROI public goods projects.

Who's this "we"? If you're a CEO of a large company, or even better, a bank, then you'll have seen your income and wealth rocket upwards and stay there, even as your company tanked and the owners (i.e. _us_, via large shareholding bodies that invest our pensions) found ourselves with less and less money.

The disparity in growth of wealth and incomes between the lower 50% and the upper 1%, even as the productivity of the upper 1% was poor or even negative (in terms of what they did to their own companies or the rest of the economy) is striking, and belies the usual moralizing about living beyond our means, of which this post is a thinly disguised version.

Whaaaaat?? Are you joking? Where is the moralizing in a quote from the census bureau?

Read chapter 10 of James Rickard's Currency Wars.

1) Are there more or fewer single-parent families in 2010 than in the early 1990s? Doesn't there need to be an adjustment for the difference in "family" over this time?

2) Are there more or fewer baby-boomer retirees dissipating/accumulating wealth in 2010 than in the early 1990s? Doesn't there need to be an adjustment for the demographic difference over time?

3) How many millions of low-skilled immigrants (legal and illegal) entered the sample between the early 1990s and 2010, dragging down the "median," but unquestionably better off in the lower half of US wealth and income than where they were in the early 1990s--when they weren't counted in this sample? Doesn't there need to be an adjustment for the demographic difference over time?

Why not just look at the data rather than throwing up your hands and whining, 'demographic change' as a means of dispensing with the whole thing?

1. Household size is .04 people lower (2.63 to 2.59). Single parent households have increased by a couple points, at most. Non-family households by 4 points.

2. Household heads aged 45-54 up from 15.5% of households to 21.2%. For 55-64, up from 13.4% to 17.4% Households have their highest networth, by far, when headed by someone aged 55-64, followed by 45-54.

3. Percent of families speaking Spanish at home (a quick and dirty proxy for 'low skilled immigrants' has risen from 7.5% of population in 1990 to 12.5% in 2009.

So (1) is negligible, (2) should be driving networth up, and (3) should be driving it down.

http://www.census.gov/hhes/socdemo/language/data/census/table5.txt (for the 1990 language data)

+1. I love it when people speak facts.


So, what effect does adding 5% with zero net worth have? I wonder what the distribution is and how much just adding 5% at the bottom shifts the median downwards.

Well, that's pretty easy to calculate for the mean. I don't know where to find data for calculating the median (what is the networth of the 45% household? That's basically our new median networth if we add 5 points of 0 NW households).

Mean in 2010: 500k. (Assume this is also true for 'the early 90s, since I'm not going to be arsed to dig that up)
Mean in in 2007: 580k

If NW for 100% of the pop was 500k, you would expect the addition of 5% 0 net worth individuals to distribute the same pot among 105%. Readjust to get to 100% and... you would expect mean wealth to be 476k. So our fictional 0% net worth immigrants would drive things down ~25k/household for our mean.

In 1992, the mean was 4.2x the median
In 2010, the mean was 6.4x the median.

Not sure what to do with that, but the guess is that the fictional immigrants would push the median down ~5k.

3 is a great point, a lot of people triple their incomes or better by coming to this country. If you come from a really poor country it's not unusual for your income here to be 10x higher than it was in the 1990s.

That's why it's such a fallacy to say "the top 10% did such and such from time X to time Y" -- there is not actually a continuous group of people there!

There are continuous parts and discontinuous parts to every income strata, and there is certainly a section of the 10% that has been there continuously. Longitudinal demographic change doesn't make cross sectional comparisons meaningless, just worthy of extra attention to detail.

It doesn't make the comparisons completely meaningless, but many of the statements people make from those comparisons commit obvious fallacies of aggregation -- such as yours re the 10% above. You can see on p12 that even for 2007-2009, turnover was > 25% for all income quintiles (and over 50% for some); though wealth is presumably stickier, many in the top 10% from 2007 lost so much they fell into the bottom 90% and many "peons" joined the top decile; all we can really say is that there is still (of course) a top 10% in 2012 and the median wealth in it is 2% greater than in 2007.

And your number appears to be wrong anyway -- on p18 the chart says median wealth for the top wealth decile fell from 1991.9 to 1864.1.

I was looking at the net worth numbers by income decile, not net worth decile. P.17. They are correct. 1194/1117 = 1.019

Whether people move in and out of income deciles tells me nothing about the truth of whether or not there exist a strata of individuals who stay wealthy across time and a strata of individuals who stay poor across time. Such people exist.

Absent data on the constancy of such status, the wealth of all people who are poor is a good enough proxy for the wealth of all people who continue to be poor across time, and vice versa for the wealthy who stay wealthy across time.

In any case, I don't see what's so important about membership in the top 10% of income or net worth or whatever being consistent over time. Tax the rich when they're rich and feed the poor when they're poor, regardless of whether you think they'll be poor or rich in the future. Perfectly coherent principle, whether or not one agrees with it.

Median wealth by income decile is even less meaningful than median wealth by wealth decile. Not only are they not the same income earners, they aren't the same wealth-holders either. So you're comparing different people's wealth on the basis of different people's income. And the variability in income is greater than for wealth, and it's obviously likely that people with high income in a given year are going to tend to increase their wealth -- some of those people are young and in lower wealth deciles, it would be very strange if their wealth decreased!

I'm sure some people do manage to stay high income and high wealth (about 10-25% over a generation, apparently), but your statement that "losing money is for peons" as a general matter was not supported by the statistic, but did represent a great example of the aggregation fallacy.

Funny, I thought it "represented" a flippant remark.

Perhaps I should have said, "Don't worry, the richer you are the the smaller the portion of your net worth you probably lost!"

(In 2010, the median in 25-49 in NW had lost 43% and the median of all households had lost 34% while the median top 10% had lost 6.4%. Oh, and you don't wanna know about the 12.5% - they lost 96%+ of their net worth - though I'm sure that's just from all the broke immigrants who've been coming to America during the recession when broke immigrants stopped coming to America).

Or it could be that I actually really truly believe only poor people ever lose money.

Yes, my point was that flippant remarks like yours tend to commit obvious aggregation fallacies.

That statement would be better, but not very interesting since those with more wealth will generally see smaller relative changes in both directions, because their absolute income or loss will tend to be proportionately smaller.

"Poor people" generally don't have wealth to lose by definition.

Not saying the drop in Income isn't important, but the loss in wealth is pretty bad.

Wealth matters quite a lot if you've lost ~60k in home value but are still straddled with the same mortgage payments, it traps people in their homes which gives you a less flexible workforce and makes people desperate not to lose their jobs, for those who do lose their job the situation becomes that much more worse as it becomes more difficult for them to get assistance from the banks which leads to an increased risk of foreclosures etc. etc.

A more relevant snippet with regard to homeowners:

"In 2007, the median homeowner had a net worth of $246,000. Three years later that number had fallen to $174,500, a loss of more than $70,000 on average."

I'd say it's pretty dire.

If you then consider on top of that the loss of net worth for non-homeowners which must have come from savings / investments / pensions, it all makes the loss in income that much worse.

Losing 70K in net worth is never good, but go just about anywhere else in the world and try to explain to the first guy that you meet that having $174,500 is "pretty dire."

that cites the Fed consumer finances report:

can anyone explain to me why the household net worth in this consumer finances report is so much lower than the household net worth given last week by the Fed's "flow of funds"?

the former cites a figure around $77K; the latter gives national household net worth at $62.9 trillion, around $200K per...

Given that this was almost entirely driven by real-estate, couldn't it be argued that it was a good thing? Yes, oldsters will realize much lower capital gain profits when they sell their last house, but youngsters buying their first house will pay much less (especially given current mortgage rates) -- so this be seen as a rare and welcome transfer of wealth in the opposite of the usual direction (from old to young instead of young to old)?

That's looking on the bright side. Unfortunately it's more that a bunch of money we thought existed simply evaporated when the bid-ask spread on houses exploded due to the money and refinance hose running dry. It was a negative-sum event. The oldsters are keeping working to offset their wealth loss and the young who might have been able to afford the reduced houses can't get the jobs and can't get loans.

There is no 'lump of work' -- continuing employment by old people is not keeping the youngsters unemployed. And money that evaporated was all 'vapor wealth' in the first place that vanished with the bursting of the housing bubble.

When the bubble was inflated, here's what was going to happen: young people were going to help finance baby-boomer 'golden years' retirement by buying and laboring for years to pay for the boomers' houses at massively inflated prices. Now, what's going to happen instead is that young people are going buy houses at reasonable prices and boomers are going work longer to finance their own damn retirements.

So I guess employment among women didn't go up when men were drafted.

And I guess labor force participation among people aged 16-24 falling 12 points from 1990 to 2010 has nothing to do with LFP among people aged 55 and older increasing 13 points and among people aged 65 and older 11 points. No, clearly, changes in LFP by one person or group have no effect whatsoever on changes in LFP by another person or group. Blah blah something something lump of labor fallacy blah blah something something.

Don't you just love it when allegations of fallacy are... fallacious? If group A increases their propensity to work, labor supply increases, labor price falls, and some members of group b of labor suppliers may be priced, or skilled, out of the market.

You're right -- what was I thinking? The 'fixed lump of labor' theory must true. That's why, for example, as the population of the U.S. doubled in roughly the last 60 years unemployment ramped up to 50% during the same period.

Let me give you a hand here.

The truth or falsity of the fixed lump of labor strawman has nothing to do with whether increased employment among group A has driven down employment among group B. It's a non sequitur.

Here is a simple example. It only uses basic addition so you should be able to follow along:

7+3 = 10 lumps of jobs

(7-1) + (3+3) = 12 lumps of jobs

Now this may be hard for you, but I'm going to jump to percentages now. Maybe you haven't covered fractions in your remedial math classes yet, but I have confidence in you.

{5/10 + 4/10}/2 = 45% LFP

{(5-2)/10 + (4+3)/10}/2 = 50% LFP

The point: The internal dynamics of labor force composition have no necessary relation to the dynamics of total labor force size (lump of jobs) or total labor force productivity (lump of labor). The internal dynamics could be static, expansionary, or contractionary with respect to employment or production. And the assumption isn't that propensities to work and be hired across classes are fixed, either - merely that they are interactive and internally related, such that fluctuations in my propensity to work/be hired affect your propensity to work/be hired.

That doesn't seem to be happening because of the high unemployment/underemployment for youngsters. The younger cohort have the highest unemployment rate of any group and thus postpone marriage, house buying, and child rearing.

Yes, right now. But when the smoke clears, the young are going to be much better off under post-housing-bubble conditions.

unemployment and median wages for those under 30 are both dismal. There has been no transfer of wealth to the young yet. Maybe that will change if housing prices ever start climbing again...but not yet.

My balance sheet doesn't reflect it, but I sure as hell enjoy owning a house for half what it was worth 5 years ago.

The employed young who didn't already own housing are already much better off post-bubble.

Also, don't weep too many tears for the young, even those at the poverty line enjoy a lifestyle better than the average of the 1950s -- largely without working!

You mean the employed young who work at Starbucks and have 5 figures in student loan debt are much better off?

I guess we have different definitions of the word "enjoy". But since you are a liar I would guess that this too is an insincere statement.

and have 5 figures in student loan debt

Wasn't borrowing money to pay college tuition kind of a voluntary act? Or did university bursars demand at gunpoint that 22 year-old adolescents get loans so they could pursue their theater arts major? Should we feel sorry for laid-off residential carpenters that are having problems making the payments on their new 4x4 diesel pickups?

I made this comment before but I can't help repeating it. How can this make any sense? If I had the exact same house I have now 5 years ago, and all I was getting out of the house was, well, living in it, I would be 'richer'? Furthermore, even if you imagine that people were richer because they could sell their house. Wouldn't they eventually have to buy another house that was equally overpriced?

If results don't make sense doesn't that mean we are measuring the wrong things?

Well said, sir. Is measuring the wrong things par for the course in macroeconomics?

That's the point. You aren't less wealthy. You never were that wealthy.

10 years ago you could go and get a loan (using your house as collateral) to buy a boat. Now you can't. Has your wealth changed?

Depends on your time preference.

Again this is a fallacy. If the basis for your loan was only your house value you wouldn't be able to pay the loan. So yes, you might trick the bank for a while but at the end of the day you and the bank are not richer.

but the bank was richer because they re-package the loan and sold it...and the guys that bought it levaraged up 10-100 times aqnd bought that...and when they went bankrupt the taxpayer gave them a couple trillion.

the rich are richer...the poor and middle class are poorer

Fine, ignore the bank loan. Ten years ago, you had the option to trade your house for 100,000 widgets. Now you have the option to trade it for only 50,000 widgets. It's great that you like your house and all, but you are poorer because of the loss of option value.

That option only had value based on very few people exercising it.

On average, you missed the boat.

In 2005 it was common for people with a home to leverage their equity to "invest" in a second home. I think you can see how that became problematic.

I think the point is that retirees generally cash out a relatively expensive house and then move to a smaller home in a lower taxed town. The spread between sell and buy prices* add to the retirement.nest egg - money used for travel, leisure activities, etc.

When the spread is less, that leaves less money for the nest egg, and with higher gas/utility prices, food prices, travel prices, that nest egg doesn't go as far to begin with.

* The presumption that lower prices across the board are good for everyone isn't necessarily true. If you have a home "valued" at $500k during a bubble (whether you know it's a bubble or not) and are looking to buy a $250k home, but the bubble bursts and all prices come down by 25%, your nest egg is now $63k less.

Case in point -- I lost something into six figures selling the townhouse I bought in 2005, but otoh I was able to buy a very nice house we never could have afforded at 2005 prices, and we saved more twice as much over 2005 prices as I lost on the townhouse.

It's funny, I planned to be a millionaire by now, and I would be if property values had continued their prior trajectory, but I'd also have lower living standards!

You should be depressed and demanding government intervention Dave. Now seriously, that is why I even have a problem with the 'we *thought* we were wealthier". I mean, our real estate was overvalued but did we really felt richer back then? I doubt it.

You'd think it would be a wash. However, I assume that we've artificially pushed people into houses. If we haven't then all the trying to has been a failure, right? So it will be a net negative-sum result.

True, but I think the more salient point is that we've artificially pushed people into debt. It could have been spent on anything, really.

Until we go all Islamic finance, and until we stop having mortgages denominated in nominal dollars, nominal housing prices matter. They impact the amount of emergency liquidity available to a family, its ability to relocate without defaulting on a loan, the amount of inheritance that goes to the next genreation rather than a bank, housing affordability for new home buyers, the risk to banks of making mortgage loans, and more.

This nicely illustrates why I keep saying you can't solve this problem with AD -- the old equilibrium was unstable and unsustainable. Attemps to re-inflate the AD bubble with fiscal spending will only make things much, much worse down the road.

It's what I might call the "Macro ratchet." That's ratchet, not racket. You ignore the cause, and you can only be recovered if you achieve the peak in nominal terms by any means necessary. The silly hoi palloi are deluded by the paradox of thrift, so we have to trick them into trend spending by the money illusion.

Fyi, Your capacity to absorb short short term losses or borrow was affected by this change in wealth. If you borrowed based on this wealth, your current consumption would change.

Wealth matters.

Just ask a wealthy person, or a person without wealth.

Bill and Benny,

If the implication here is that we had wrong indicators 5 years ago (i.e., house bubble) and a lot of bad loans were made based on that, then I am ok with that. However, to say that 'we were richer' implies that we had value and now we don't. That is what bothers me. My house was exactly the same house 5 years ago, and I am not poorer than I was then. Maybe banks are less willing to lend me money now but to say that this is based on 'wealth' just makes me think that we are defining wealth incorrectly here.

It is like thinking that I am wealthier today than tomorrow because my clothes will be worth a little less then. While it is true, it is not a meaningful way to measure my wealth in my opinion. A think that people who used their house equity to get loans were a minority (even though I do agree these loans impacted the economy) and they are definitely not poorer today because their home prices are lower - they might be poorer because they cannot pay those loans.

You could sell your house and rent an apartment. Rents and house prices did not move in tandem.

Of course this is possible, and so it the retirement example from dead serious. But again, how common are these? Should we really make these sweeping statements that 'we are all back to 1990s wealth' based on losses suffered by a small percentage of the population? Are we measuring the right things here?

Exactly, that wealth was an illusion.

The debt bubble didn't actually make us richer, it just seemed to, for a while.

I don't understand why this concept bothers you. Can you explain what it is about market valuations and stores of wealth that bother you? Would it help if we talked about other assets?

Imagine it is 1930 and you had 100 dollars in a savings account. Suddenly there is a run on your bank. Boom. Now you don't have that 100 dollars. You have less wealth. Some of your assets are gone.

Now stick with me here. Houses can be bought and sold. They have value. Just like any other asset. Wealth comes in many forms. Usually not clothes though, because they have so little in resale value. So I don't think they include clothes when measuring household wealth.

The source of the data is the federal reserve, not the census bureau cited in the lead sentence.

Good point. 'We were not as informed as we though we were'

"Field work for the 2010 Survey Consumer Finances was completed by the National Opinion Research Center (NORC) at the University of Chicago early in 2011 and the final data were received at the Federal Reserve Board (FRB) in May 2011."

TC phrases this correctly: We are not as wealthy as we thought we were.

The quote cited would rather lead us to believe that we had more wealth, which was taken away from us by the housing crash. In fact, that wealth never existed in the first place.

Market corrections "true up" the economy. When we hear that something is back to 19xx levels, we learn the approximate date factors departed from fundamentals. We can then tell who was responsible - the people whose policies or actions controlled the subsequent environment.

We have too much of a tendency to focus on recent causes than distal causes. The first blow of the bubble is earlier than we think.

Even worse when you consider the projected future health care burden for an American family now, versus the early 90's.

Statistics boast their own reality, the anecdotal boasts its own: here in eastern (inland) South Carolina, while most residential property prices have declined c. 25-30% since 2007 as per the national experience, farm prices have doubled (or tripled, on a per acre basis) since the late 1990s (even as tobacco faded as the regional cash crop and as Federal price supports for tobacco production were ending), both for cropland and timberland. Because few farms are being sold presently, this non-economist guesses that local farm values will continue to rise for at least as long as it takes local residential property values to return to nominal pre-2008 levels.

If a 40% drop in wealth results in a 6% drop in income, the wealth effect would be about 15%?

SHUT UP, TERRORISTS! Everyone knows that the REAL reason for the declining prosperity is the lack of new rag money flowing through the system! If only people had more nominal dollars to swish around, suddenly, we would be so much more productive and we'd be able to make up for the enormous waste of the past twenty years!

*rolls eyes*

*ends mindmeld with scott sumner*

If we paired that with fiscal surplus, then probably yes. NGDPLT would let us inflate away debt and government both, and there would be no liquidity trap.

Could you comment about @functionsfour's website? In particular, normalizing to money supply rather than, say, GDP.

The Times story linked here says this data came from the Federal Reserve, not the Census Bureau, fwiw.

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