David R. Henderson  

Glass 45 Percent Full

PRINT
Does liberty require polymaths... Rothbard: How a Circle Becomes...
American households have rebuilt less than half of the wealth lost during the recession, leaving them without the spending power to fuel a robust economic recovery, according to a new analysis from the Federal Reserve.

From the peak of the boom to the bottom of the bust, households watched a total of $16 trillion in wealth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth, according to the report from the St. Louis Fed released Thursday.


This is from Ylan Q. Mui, "Americans have rebuilt less than half of wealth lost to the recession, study says," Washington Post, May 30.

The news report does not link to the St. Louis Fed study, but here is the link. The study is quite short.

The whole tone of the article is negative. Yet to me it seemed like good news, relative to my priors. I was surprised at how much of the wealth loss has been recovered. We are, essentially, half way back from the depths.

Of course, as the Washington Post article reports, there is something to be negative about: that most of the comeback is in stock values and, therefore, has not much touched households that had few investments in stocks to begin with.

Take a look at the study and you'll see the disparate averages by demographic characteristics.

One of the numbers that surprised me was the one for the category most descriptive of my family's demographics: Families headed by someone who is white or Asian, 62 years old or more, with a two- or four-year college degree. The average net worth in the fourth quarter of 2012, in 2010 dollars, was $1.95 million. Given that most of the increase was in stock values and that stocks have gained substantially since then, and that there has been some inflation since 2010, this number today, in 2013 dollars, would be over $2 million and possibly $2.1 million or $2.2 million. I've thought for a long time that my wife and I were doing well, but we are well below that average.

But notice the word "average." What that reflects, I'm willing to bet, is the huge wealth of the top million families in that category. Our family's wealth, I'm sure, is well above the median for that category.


Comments and Sharing


CATEGORIES: Family Economics



COMMENTS (9 to date)
TA writes:

I have two problems with the argument, as stated. Yes, average net worth per household is substantially lower than it was in 2006, 2007, at the peak of house prices, and a high point for the stock market. But it is substantially higher than it was in 2000, at the peak of the dot com stock bubble, and early in the house price wave, and higher yet than it was in 1997, at the front edge of both price waves. So what exactly are we complaining about?

Second, I don't see how you argue that this household net worth position is a drag on recovery when household savings rates have crept back down to the historically minimal levels of the high-flying bubble years.

Baldly stated, the argument seems to be that the way "things ought to be" is house prices like 2006 and households spending every dollar they earn.

kebko writes:

Some of the comparisons between demographic categories are probably somewhat due to accounting issues. For instance, many laborers depend on pension distributions in retirement. Those pensions are certainly better off than they were a few years ago. But, the pro rata share of the pension is not accounted for in the net worth of the member families, as their future pension receipts aren't marked to market with every boom and boost of the pensions' assets.

Vangel writes:

@TA

I have two problems with the argument, as stated. Yes, average net worth per household is substantially lower than it was in 2006, 2007, at the peak of house prices, and a high point for the stock market. But it is substantially higher than it was in 2000, at the peak of the dot com stock bubble, and early in the house price wave, and higher yet than it was in 1997, at the front edge of both price waves. So what exactly are we complaining about?

I don't know about you but I would argue that the economy is in a lot worse shape now than it was in 2000. I do not think that it is positive to flood the system with money and credit or to have the government use debt to stimulate economic activity and prop up asset prices artificially. Eventually all trends that are not sustainable will pop and I would argue that when that happens Americans will be in a lot worse shape than they were in 2000. Surely anyone can see that the trillions spent on useless military activity, bailouts, student loans, food stamps, etc., have made things worse rather than better. What should have happened is the same thing that happened in 1920; taxes and spending should have been cut and the malinvestments should have been allowed to be liquidated by the market.

Brandon Berg writes:

It's perhaps worth noting that aggregate measures of asset-based wealth in cash terms is inherently problematic. If we say that the total value of real estate held by American families is $20T, what does that really mean? Well, it means that for each house we estimate its market value based on recent sales of comparable houses, and then we add up estimated market value minus mortgage balance for all houses in the US.

But the total isn't really a meaningful quantity. Any one person can sell his house at market value, but it's not actually possible for everyone to sell their houses at the current market value. And that value can fluctuate wildly based on sales of a small minority of the housing stock.

All we can really say is that we have so many houses of this quality and so many of this quality, and these physical assets producing this much with that much labor input. Calculating aggregate value based on the prices of marginal sales yields a value with false precision and no meaningful interpretation.

Andrew Hofer writes:

Median and Means for the 2010 study are here. In your age group the median is 1/4 to 1/3 of the mean in various periods. It doesn't have the exact race/age cross-section you cite above.

http://www.joshuakennon.com/a-look-at-household-net-worth-and-household-income-by-age-group-from-the-2010-survey-of-consumer-finances/

Bostonian writes:

Recessions are not so much when wealth is lost as when people *realize* wealth has been lost. People were not as rich in 2007 as they though they were. Their homes were worth less, and the stocks of financial companies they owned holding lots of subprime mortgages were worth much less than the quoted market prices at the time.

Mike Rulle writes:

Reply to Brandon Berg Comment.

Your comment is literally correct. However, that holds true for any asset which is not actual cash money. All assets are valued at "mark to market" which one can say are all "marginal" prices added up. Some markets are deeper than others and more liquid too.

At the end of the day, humans get wealthier in economic terms when there is more production and consumption per person---itself not easy to calculate.

The meaning of mark to market is a mystery regarding human nature. We have conventions and rules (per the Fed Household Balance Sheet for example) but, as you hint at in your comment, it is more complex than that.

Floccina writes:

Don't some of those loses have to balanced against the fact that it is easier for non home owners to buy a house now?

Michael writes:

How sustainable are those gains, considering the stock market has been driven by unusually high Corporate Profits - 11% of GDP vs. 6% long-term average?

http://research.stlouisfed.org/fred2/graph/?g=j8l

Comments for this entry have been closed
Return to top