The Mises Institute – Wed 10 Jan, 2018



01/09/2018Ryan McMaken

Axios is reporting today on commentary from Deutsche Bank economist Torsten Slok in which Slok concludes that Americans now have a smaller net worth than they did in 1989:

A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok. And, in a note to clients yesterday, Slok said that, despite record stock market wealth and home price levels just shy of housing-bubble highs, Americans are poorer than at any point in nearly a quarter century.

Why it matters: The data suggest that the third-longest economic expansion in history, and the lowest jobless rate in 17 years, has benefitted an exceedingly thin slice of the American public.

Here’s the graph that goes with the story:


Unfortunately, no link is given to the client note.

If you’re like me, though, you always like a context for research like this, and aren’t content with a quick blurb.

So, to add some background to this, I managed to find a working paper from the NBER, titled “Household Wealth Trends in the United States, 1962-2013: What Happened Over the Great Recession?” which goes into a little more detail on these calculations.

The Deutsche Bank data appears to be continuing Wolff’s research from this older NBER report, which stopped with 2013 data.

In it, we do indeed see that median household net worth as of 2013 was lower than at any other time shown since 1962:


As the report notes, household wealth plummeted during the Great Recession, and as of 2013, at least, had not recovered. Slok’s update suggest that net worth has increased since then. It looks like median household net worth increased from about $63,000 to about $78,000 between 2013 and 2016. That’s good, but it’s still well below where it was in both 2001 and 2007.

But why do households appear to be largely spinning their wheels on household net worth?

For decades, net worth in the United States has been closely connected to housing prices. The homeownership rate reached 69 percent in 2004, and those homeowners saw their net worths expand as home prices expanded in the same period.

In recent years, home prices have gone up considerably. So why has net worth not done the same?

According the the NBERreport:

Asset prices [including home prices] plunged between 2007 and 2010 but then rebounded from 2010 to 2013. The most telling finding is that median wealth plummeted by 44 percent over years 2007 to 2010, almost double the drop in housing prices… Relative indebtedness expanded, particularly for the middle class, though the proximate causes were declining net worth and income rather than an increase in absolute indebtedness. The sharp fall in median net worth and the rise in overall wealth inequality over these years are traceable primarily to the high leverage of middle class families and the high share of homes in their portfolio. The racial and ethnic disparity in wealth also widened considerably. Households under age 45 saw their relative and absolute wealth declined sharply. Rather remarkably, there was virtually no change in median wealth from 2010 to 2013 despite the rebound in asset prices. The proximate cause was the high dissavings of the middle class, though their debt continued to fall.

So, the situation did indeed stabilize as home prices rebounded, but Americans were also neglecting to save any money in other forms. In part, they stopped saving in order to pay off debts, which were substantial:

The stagnation of median wealth from 2010 to 2013 can be traced to the depletion of assets. In particular, the middle class was using up its assets to pay down its debt, which decreased by 8.2 percent over these years. This shows up, in particular, in reduced asset ownership rates. The homeownership rate fell from 68.0 to 66.7 percent, that of pension accounts from 45.8 to 44.4 percent, that of unincorporated businesses from 8.2 to 6.6 percent, and that of stocks and financial securities from 15.3 to 14.2 percent. However, the reduction in assets was greater than the reduction of debt.

So, we end up with a picture in which Americans did see their asset values increase, which did help net worth. But at the same time, owner asset ratesamong many Americans actually declined, and at a faster rate than debt declined.

This is a fairly grim picture, and does paint a good picture for the standard of living Americans will enjoy once their prime earning years pass us by.

All too often, economic indicators rely on current earnings, and current spending. Net worth, however, gives us a glimpse into the future. If net worth is declining or stagnant, than future retirees will eventually spend down their savings more quickly, and then have to cut back their standard of living to pay for basic necessities.

Moreover, if the current trend continues, Americans will begin the next recession from a far lower level of net worth than they started the 2007-2009 recession with. That is, we’ll begin the next recession with our net worth not even having recovered from the last one. That’s not a great place to start.

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