Governing through Reason
Who Got Hurt the Most?
On June, 11th, The New York Times published a story on the just-released Survey of Consumer Finances (SCF) titled “Family Net Worth Drops to Level of Early ’90s, Fed Says”. The SCF is a cross-sectional survey of U.S. families which has been done every three years since 1989 and includes information on families’ balance sheets, pensions, income, and demographic characteristics. The New York Times’s story begins:
The recent economic 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 Monday.
A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.
The tables at this link are taken from the SCF and show that these numbers are in constant 2010 dollars. The graph to the right shows these inflation-corrected numbers since 1989. It’s clickable, so you can see it in full size.
As you can see, the top 10 percent has such a high relative net worth that the changes in the lower percentiles are difficult to discern. Hence, below is the same graph but going only up to a net worth of $240 thousand.
As you can see, median family net worth in 2010 was just about where it was in 1992, 18 years earlier. Hence, the economic crisis did erase “almost two decades of accumulated prosperity” as stated in the article for the median family. For the mean family, however, it just erased almost one decade of accumulated prosperity.
Table 4 of the 2010 SCF (from whence this data came) gives family net worth, by selected characteristics of families, from the past eight surveys (1989 through 2010). It gives both the mean and the median of the subgroups determined by these characteristics so it’s important to understand the difference between these two terms. Briefly, the mean of a series of numbers is the “average”, computed by dividing the sum of the numbers by the count of the numbers in the series. The median, on the other hand, is the “middle” value when the numbers are arranged in order of value. If there are an even number of values, it is the average of the two middle values. Hence, the series 1, 2, and 6 has a mean of 3 (9 divided by 3) and a median of 2 and the series 1, 2, 3, and 6 has a mean of 3 (12 divided by 4) and a median of 2.5. Note that in both of these cases, the mean is greater than the median. This is because the relatively high value of the last number in the series (the 6) pulls up the mean more than it does the median. This is important to remember in interpreting the numbers in table 4.
The first graph above shows the overall mean and median family net worth. Note that the overall mean is much higher than the median and is just below the median of the 75th to 90th percentile. This is because, like the example above, the majority of families have a net worth less than the mean. In fact, the above graph would indicate that about 80 percent of families have a net worth below the mean.
One useful thing about looking at the medians of percentiles is that the median represents the central percent of the percentile. That is, the medians of the 0 to 25, 25 to 50, 50 to 75, 75 to 90, and 90 to 100 percentiles represent the 12.5, 37.5, 62.5, 82.5, and 95 percentiles, respectively. That is because percentiles, like medians, are obtained by arranging the series by order of value. Hence, the data shows that 50 percent of families had a net worth less than $77,300 in 2010 and three-quarters of those families (37.5 percent of all families) had a net worth less than $32,200. This and the other data shown in the graphs above show that net worth is strongly skewed toward the upper percentiles.
The following table gives the data in the above graphs as displayed from the tables at this link:
Median Family Net Worth, by Selected Characteristics of Families
1989–2010 Surveys (thousands of 2010 dollars)
| Percentile of net worth | 1989 | 1992 | 1995 | 1998 | 2001 | 2004 | 2007 | 2010 | % change 2007–2010 |
| Less than 25 | 0.3 | 0.8 | 1.3 | 0.7 | 1.4 | 2.0 | 1.3 | - | (100.0) |
| 25–49.9 | 35.5 | 35.8 | 40.0 | 43.6 | 50.1 | 50.2 | 56.8 | 32.2 | (43.3) |
| Median for All Families | 79.1 | 75.1 | 81.9 | 95.6 | 106.1 | 107.2 | 126.4 | 77.3 | (38.8) |
| 50–74.9 | 146.1 | 132.8 | 134.7 | 160.7 | 193.6 | 196.7 | 230.8 | 157.2 | (31.9) |
| Mean for All Families | 313.6 | 282.9 | 300.4 | 377.3 | 487.0 | 517.1 | 584.6 | 498.8 | (14.7) |
| 75–89.9 | 354.6 | 309.4 | 313.3 | 413.6 | 528.0 | 586.7 | 601.2 | 482.7 | (19.7) |
| 90–100 | 1,161.3 | 1,007.9 | 967.8 | 1,195.6 | 1,602.6 | 1,645.5 | 1,991.9 | 1,864.1 | (6.4) |
The last column shows the percent change net worth from 2007 to 2010. As you can see, the greatest percent loss to net worth was to the lower percentiles. The percent loss to the lowest 25 percent, second 25 percent, third 25 percent, next 15 percent, and top 10 percent were 100, 43.8, 31.9, 19.7, and 6.4 percent, respectively. Hence, the burden of the recent economic crisis weighed most heavily on those with the lowest net worth, at least in percentage terms.
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#2 written by rgbact 6 months ago
Any conclusions? These graphs always seem confusing to me. Does it really make sense to compare people’s net worth? We know a) many peoplee have no net worth b) middle people usually have a house which accounts for alot of their net worth c) rich people have investments, which typically grow much faster than other assets.
It almost seem like all you’re doing is showing the aging process. When we’re young—we’re broke. We get older and buy a house. Then we get gray haired and start putting together a nest egg and have investments.
Anyway, my conclusion is this is why deflation is a good thing. Liberals always seem to hate deflation, but since most people own very few assets, why should they care if asset prices plunge? Course the rich will hate it.
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#3 written by channelclemente 6 months ago
I think ‘A’ take home lesson might be that the available ‘capital’, wealth in the economy may be capped. Each cohort is not age biased, the selection is made on income. I’ve seen the same numbers cast on disposable income, and it’s even more stark.
Deflation, since it’s defined by purchasing power, and not value of goods and services, would exacerbate the differences above.
The interesting data that isn’t usually seen, is how much ‘wealth’ is held in nonperson reservoirs, leveraged by each bracket.
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#4 written by channelclemente 6 months ago
Great example of the application of The Law of Unintended Consequence in the crash of 1987. As an aside, the GDP growth after that followed the same slope, as I recall, as the one we’re in now. There is a lesson in that fact, since the climb out took 7 years and 2 tax increases.
http://www.businessinsider.com/how-i-caused-the-1987-crash-2012–10
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Any conclusions? These graphs always seem confusing to me.
There’s several conclusions that can be drawn from the data. One is that inequality has grown over the past couple of decades. The table I included looked at the percent change from 2007 to 2010. Looking at 1989 to 2010, however, the change from the lowest 25 percent, second 25 percent, third 25 percent, next 15 percent, and top 10 percent were –100, –9.3, 7.6, 36.1, and 60.5 percent, respectively. Hence, the lower half of Americans, on average, grew poorer over those 21 years.
Does it really make sense to compare people’s net worth? We know a) many people have no net worth b) middle people usually have a house which accounts for alot of their net worth c) rich people have investments, which typically grow much faster than other assets.
So are you saying that a growth in inequality is inevitable? Of course, history tells us it is not. The first graph at http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States shows one measure of inequality that was very high in the 1920’s, was at a very low level from the mid 50’s to the mid-80’s, and is now reaching those highs that it reached in the 1920’s.
It almost seem like all you’re doing is showing the aging process. When we’re young—we’re broke. We get older and buy a house. Then we get gray haired and start putting together a nest egg and have investments.
It is important to keep the aging process and other factors in mind. However, the fifth graph at http://www.econdataus.com/scf10.html shows that it is not simply a factor of age. I’ve reposted that graph below:
Notice that the net worth of those 65 and older steadily increased from 1989 to 2007 (before the housing crash). However, the net worth of those 44 and younger generally went down or stayed even during that period.
There is some other interesting information in some of the other graphs at http://www.econdataus.com/scf10.html . For example, the last graph shows that home owners have a much, much higher net worth as renters. This does raise the question of whether we really should be offering quite so many tax breaks to homeowners. In any case, I may analyze and write more on the other graphs, likely after the election.
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#6 written by rgbact 6 months ago
“So are you saying that a growth in inequality is inevitable?”
If you assume stocks perform better in the long run than houses.….maybe so. That seems the implication. You’ve laid out that housing suffered worse.in the recent downturn and that led to inequality. I suppose you could find a period where stocks way underperformed housing.…and then come to the opposite conclusion and I guess that would be a period of less inequality.
The aging issue confuses me. Seems as we live longer, we should have more inequality. I suppose if we all died at age 30.…few people would live to see high wages or have time to accumulate wealth. Not having inequality seems almost a bad thing—means even older people haven’t accumulated more than younger. I’ll review it more once this dumb Disqus is gone.
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rgbact,
I think you’re making a false assumption, which is that as one ages, one gains in wealth, and that therefore accounts for the income inequality.
True, few kids are wealthy, and with extremely few exceptions those that are wealthy get their money as a gift from someone else. On average, one’s income tends to peak in one’s 40s or 50s, though I personally know quite a few people whose income peaked in their 20s.
BUT…that doesn’t mean that there aren’t lots and lots of people who are in their 40s or 50s who are earning far less than lots and lots of other people who are in their 20s. I doubt I will ever make in a single year what Mitt Romney was making in his 20s. I doubt I will accumulate in a lifetime what Mitt Romney was making in any single year in his 40s.
If an American is able to gain wealth orders of magnitude faster because of existing family wealth, that concentrates wealth in the United States not based on ability, but based on heritage. And that’s the force we must diligently counter in order to retain the healthy entrepreneurial spirit. One doesn’t start a business unless one expects to be able to succeed at it. -
#8 written by Rose 6 months ago
The number of older people who have lost jobs and can’t find the equivalent, or who were depending on pensions that have vaporized certainly means that being older doesn’t mean being richer. At least for the 99%
If I understand it correctly, vaporized pensions are replaced by the Federal Government, but only up to a fixed $ amount. I recently saw someone bitching about how the Govt didn’t protect his pension, however he ignored the fact that without Govt, he would have received zilch.
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rgbact wrote:
If you assume stocks perform better in the long run than houses…maybe so. That seems the implication. You’ve laid out that housing suffered worse in the recent downturn and that led to inequality. I suppose you could find a period where stocks way underperformed housing and then come to the opposite conclusion and I guess that would be a period of less inequality.
The recent downturn may have added to the inequality but it was not the sole determinant. If you totally exclude the downturn and look at 1989 to 2007, the change from the lowest 25 percent, second 25 percent, third 25 percent, next 15 percent, and top 10 percent were 333.3, 60.0, 58.0, 69.5, and 71.5 percent, respectively. The percentage for the lowest 25 percent is not meaningful because it’s so close to zero. The 333.3% gain from 1989 to 2007 is just a rise from $300 to $1,300 and the 100% drop from 1989 to 2010 is just a drop from $300 to zero. However, the remaining numbers show increasing gains for the top 25 percent. And, as can be seen in the first graph at http://www.econdataus.com/worth08.html , this was during a period when housing was booming much more than the stock market. Hence, this boom likely served to mask some of the growing inequality but not all of it.
The aging issue confuses me. Seems as we live longer, we should have more inequality. I suppose if we all died at age 30.…few people would live to see high wages or have time to accumulate wealth.
Once again, the graph in my prior post shows that the net worth of those 65 and older steadily increased from 1989 to 2007 but the net worth of those 44 and younger generally went down or stayed even during that period. Life expectancy changed too little over that 18 year period to explain the change. In addition, the change in life expectancy would offer no explanation for the first graph at http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States which shows one measure of inequality that was very high in the 1920’s, was at a very low level from the mid 50’s to the mid-80’s, and is now returning to those 1920 highs.
Not having inequality seems almost a bad thing—means even older people haven’t accumulated more than younger. I’ll review it more once this dumb Disqus is gone.
Nobody is talking about having equality of result. However, having a growing inequality of result suggests that there may be a growing inequality of opportunity. I recently listened to an interesting podcast interview with Joseph Stiglitz of Columbia University about the ideas in his recent book, The Price of Inequality. The podcast can be found at http://files.libertyfund.org/econtalk/y2012/Stiglitzinequality.mp3 and there looks to be a full transcript of it at http://www.econtalk.org/archives/2012/07/stiglitz_on_ine.html . Regarding opportunity, following is the start of Stiglitz’s comments:
Well, the United States has distinguished itself as having the highest level of inequality of any of the advanced countries. But even perhaps more disturbing is that it has become the country with the least equality of opportunity. And what that means is the chances of somebody going from the bottom to the middle, bottom to the top, or the top down, are lower than in any of the other advanced countries. An implication of that of course is that a child’s life prospects are more dependent on the income and education of his parents than in any of the other advanced countries.
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I’d heard that one of the reasons conservative voters are opposed to tax increases for the top 1% (or even the top 0.1%) is that they imagine they will themselves be among the top 1% one day, and they object to paying higher taxes. I wasn’t sure I believed that; clearly, the top 1% can only contain 1% of the people (by definition), so the belief that “everyone” will someday be there is far-fetched.
But rgbact’s argument explains it. Some voters really do believe that as they age, they will move through all the income brackets, and will be millionaires (or better) by the time they are in their sixties.
It doesn’t work that way. It used to be that you could expect to do a bit better than your parents did. But since about 1980, that hasn’t really been so. Look at your parents. That’s you thirty years from now — if you’re lucky.
In Ronald Reagan’s America — that is, the America that thirty years of his policies of deregulation and tax cuts for the wealthy and condemnations of gubbermint services has created — in the America now shaped by thirty years of conservative economics, if you do as well as your parents did, you’re lucky. Chances are good you’ll never make it to that point. Unless you were born into a family of wealth, the deck is stacked against you ever getting there.
And it has happened on purpose, because most of the One Percenters don’t want to share. Their annual income has skyrocketed while the rest of America has (at best) flatlined. With the taxes for the extremely wealthy being slashed, they get to keep more of what they gain — while the rest of us tend to spend every dollar we get, just to stay alive and to treat ourselves to McDonald’s once a month. This means wealth is increasingly concentrated in the hands of a few families.
rgbact, you will never, ever get into the 1% tax bracket. You’ll never have to worry about the tax rates they pay. Not unless America changes a lot. Simply living long enough isn’t going to do it. In fact, if the Romney/Ryan plan goes into effect, Social Security and Medicare will evaporate, and you’ll have to live on cat food and work as a Wal-Mart greeter — for subminium wage and with no health benefits — well into your nineties. If you live that long.
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#11 written by rgbact 6 months ago
rgbact, you will never, ever get into the 1% tax bracket.”
I’ll have to settle for the 5% bracket then. Anyway, I must be one of the lucky ones. I certainly didn’t come from fabulous wealth, but things turned out well. No cat food and Walmart in my future. None of my siblings are geniuses and they seem fine too/ I do know richer people, but they all work much harder than me.…so I have no desire to punish them. Your post is quite cynical.
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Thanks for this, Reed. You’ve laid out the numbers very clearly. The result is not unexpected, but it’s helpful to see it explained so plainly.