A Wealth of Wealth Data and Why the Slog is so…Sloggy

June 11th, 2012 at 7:30 pm

A wealth of data on income and wealth was released today from the Survey of Consumer Finances (SCF) by the Federal Reserve.  The NYT reviews some of the main findings here, but there’s a lot more in this report.

Most surveys of this sort focus on income and wages, but the SCF lets you look at net worth—assets (of which income is but one part) minus liabilities, or debts.  This is particularly important over a period with so much asset depreciation, specifically the loss of housing wealth.

Probably the biggest punch line here is something we already knew, but now can see quantified in all its ugliness: the loss of wealth in the Great Recession was even worse than the loss of income.  The first figure looks at middle-income families, those in the middle fifth of the income scale, whose income level was about $45K in 2010.

Source: SCF

As you can see, their real net worth fell more than three times faster than their income, 2007-10, mostly due to the decline in home prices.  The decline in net worth in 2010 dollars was from $92.3K to $65.9K.*

With declines in net worth of this magnitude, it’s no wonder the recovery has been so sluggish.  And the net worth of the median household is not just lower than it was in 2007; it’s back to the level of the early 1990s, according to the NYT.

A few other data points jumped out at me.  We know that many families have been “deleveraging” since the bust in 2007, meaning they’ve been paying off debt.  That’s understandable and helpful to them and to the economy in the long run, but is another reason why our recovery has never gained much traction—the US economy is still 70% consumption, so having a lot of households in paying-down-debt mode ain’t exactly pro-growth in the near term (Keynes labeled this the “paradox of thrift”).

Well, according to the SCF, at least by 2010, they hadn’t gotten very far.  The survey reports on a leverage ratio—the ratio of your debts to your assets.  It actually went up, 2007-10.  I suspect it’s gone down a bit since, but again, these indicators help explain the slog in which we’re stuck.

The overall value of families’ liabilities decreased between 2007 and 2010, but the rate of decline was less than the corresponding rate for families’ assets. Accordingly, the ratio of the sum of the debt of all families to the sum of their assets—the leverage ratio—rose from 14.8 percent in 2007 to 16.4 percent in 2010 (table 12). The leverage ratio for the subset of families that had any debt rose at a faster pace, from 19.4 percent in 2007 to 22.0 percent in 2010…

Finally, I always find these data to be  a useful reminder of the vast disparities in racial wealth.  The last figure compares relative incomes and relative net worth of non-Hispanic whites to everyone else in 2007 and 2010.  Since minorities were hit harder than white households, both the income and wealth gaps grew in the Great Recession.  But look at the magnitude of the net worth gap: non-white or Hispanic households had only 16% the net worth of white households.

Source: SCF

Those who track racial economic progress must look beyond wages and incomes.  Some progress has been made in those areas, but there’s still a ways to go.  But when we add the historical legacy of discrimination’s impact on wealth, it’s a whole different story, one of very little progress.  (Immigration surely plays a role here as well, though immigration fell over this period so it cannot explain the trend.)

*The median net worth loss discussed in the NYT article is even larger— down 39%.  That comes from the distribution of net worth for all families, whereas the one in the figure is drawn from the income distribution of middle-income households.

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8 comments in reply to "A Wealth of Wealth Data and Why the Slog is so…Sloggy"

  1. Lars Olsson says:

    You know, there are a lot of great things about this blog..humor, perspicacity, a thorough knowledge of economics. But if I had one criticism, it would be that when you start throwing around complicated technical terms like “sloggy,” it really leaves us laypeople confused.

    • Jacob AG says:

      That’s funny, because I’m an economist and I have no idea what “perspicacity” means, but “Sloggy” is like a second language to me. 😛

    • MC says:

      To me the equity drag and lack of ability to finance individuals way out of it is the thing that really is a drag.

      On a personal note: 2004 purchased a house @ 189K. 80/20 finance.

      Last year, my neighbor sold their house for 92k (not distressed) but prices being held back by distressed properties. (Note they had agreed to a sales price 15-20k higher but the bank wouldn’t finance it)

      Thus stuck, my 20% loan which is a 10 year balloon, there’s no path but to default or pay it down faster. We’ve paid it down but that’s $35k that would have found it’s way back into the economy in some manner or another. We’re still underwater, too!

      Multiply that by the number of people in the middle class and this is going to be a long road out and that’s been apparent to me for years. Why not so for our politicians?

      • N. Nyberg says:

        You don’t finance their campaigns, so they don’t care. The main economic problems relevant to most politicians have already been solved. The Wall Street gamblers who bought them and put them into office are doing great, after all. Corporate profits are way up, the stock market is way up, and the recession is over. Feel like celebrating?

  2. perplexed says:

    Why are we even discussing these measures of central tendency with such a highly skewed distribution?

    The fact that, on average, every American has one breast and one testicle, tells us virtually nothing about what America looks like. So it is now with wealth in the U.S. So little of it resides in the “middle 50%” that looking at that group is little more than a diversion that keeps us from looking at the real picture. So now were blinded by reams of data that probably does more to obscure what’s going on than elucidate it when presented as it is.

    Maybe its buried in there somewhere but I couldn’t find an answer to this question: what’s the impact of all of this on the Nation’s Gini coefficient for wealth and what are the implications of that?

    • rjs says:

      i dont know how to figure gini co-efficients….

      the number of families represented by the SCF is 117.6 million, the median net worth was $77,300, and the mean net worth is $498,800.

  3. USW Blog » Blog Archive » Wow… Just Wow: The Depth of the Hole says:

    […] articles on the Fed’s Survey of Consumer Finance release from yesterday give you an excellent flavor of the magnitude of what’s been lost in the Great Recession. But […]

  4. Misaki says:

    >the US economy is still 70% consumption, so having a lot of households in paying-down-debt mode ain’t exactly pro-growth in the near term

    And what happens to the money they use to pay debts with? Just it just disappear?

    This statement only makes sense if you acknowledge that high-income and high-wealth households have a lower marginal propensity to consume, if you even count assets (debt ownership) being converted into cash as “income”. If you don’t, well… it means that a property bubble which increases household wealth is not the proper way to increase economic growth, because it does not actually raise the income of people who own those assets nor their long-term consumption.

    In other words, the housing bubble is irrelevant to solving the US’s economic problems.

    Job creation without government spending, inflation, or trade barriers: http://jobcreationplan.blogspot.com/