6 ms·

Wealth Levels, Wealth Inequality, and the Great Recession [pdf]

77 points by kevin818 12y ago

alexeisadeski3 12y ago
Long story short: The wealth of non rich Americans is almost entirely contained in their highly leveraged houses. If housing prices collapse, their wealth collapses. In 2008, housing prices collapsed.
- cwal37 12y ago
  Not exactly. The 25th percentile's wealth was dropping even before the recession, which suggests some additional downward pressure, although I am not sure what that could be off the top of my head.
  - araes 12y ago
    My suspicion is that it may be due to the inflation adjusted real wage effects, which hit the bottom 25th percentile the hardest, as that is generally their only source of income, and their resulting margin for wealth storage is so much closer. [1] Honestly, real wage income has been flat since about 1965, and for many has been going down since the great recession. [2] And if you only got high school or less, well, you're just boned. [3] (Note, take sources with a grain of salt, as they're 5 minute Google searches) [1] http://1.bp.blogspot.com/-aGE47oMJAQw/UhZtjjtKorI/AAAAAAAAJz8/Ot1MeYCjnzo/s1600/Screen+Shot+2013-08-22+at+4.27.44+PM.png http://1.bp.blogspot.com/-aGE47oMJAQw/UhZtjjtKorI/AAAAAAAAJz... [2] http://www.pgpf.org/Chart-Archive/~/~/media/A130E85DDC064B81A89A777E06C589C7.gif http://www.pgpf.org/Chart-Archive/~/~/media/A130E85DDC064B81... [3] http://www.frbsf.org/wp-content/blogs.dir/1/files/1106bb.gif http://www.frbsf.org/wp-content/blogs.dir/1/files/1106bb.gif
    - alexeisadeski3 12y ago
      That would explain only a slowing in the rate of wealth increase, not a decrease in wealth.
      - araes 12y ago
        Not necessarily. Everybody has a burn rate for money, as a natural feature of living in a market economy where we do work for pay. At its minima, its the cost to meet Maslow's needs. In the worst version, if our pay goes below the absolute minima, then we'll likely be eating our wealth, looking for other support, going homeless, or dying. Unfortunately, we also tend to be habit creatures, and our burn rate often stabilizes to our pay and our social class (keeping up with the Jones'). If our real wage starts to go down, then we often have trouble adapting, and keep burning as if we were still at the prior equilibrium (credit card debt, eating into savings, taking out loans). This is made even worse when the source of real wage reduction is the subtle erosion of our buying power through inflation. We complain about how much things cost, but we still see our paychecks slightly increasing so it seems good, and the burn gets worse.
  - anigbrowl 12y ago
    Wage freezes at nominal values which did not keep pace with inflation during the 2000s, I'd guess.
    - alexeisadeski3 12y ago
      Converting home equity to consumption is my guess. Remember HELOCs?
      - Paul_Dessert 12y ago
        HELOCs are back and bigger than ever! Home-equity lending surpassed 2009 levels in 2013, with $111 billion in new home equity lines of credit (HELOCs) opened. In the fourth quarter, new lending increased 43% from quarter four 2012, according to data from Experian-Oliver Wyman Market Intelligence Reports and Experian’s IntelliView tool. http://www.marketwatch.com/story/helocs-made-a-comeback-in-2013-2014-03-07 http://www.marketwatch.com/story/helocs-made-a-comeback-in-2...
        alexeisadeski3 12y ago
        Haha awesome. Though I imagine that surpassing "2009 levels" is not very exciting. Wake me up when they surpass 2005 levels!
  - ehmish 12y ago
    The chart that showed the movements of the various percentiles showed an interesting thing, where in 2003, the 25th percentile's wealth started to drop, while at the exact same time the higher percentile's wealth suddenly went up, before dropping after the recession hit. I have a feeling there's a link
    - alexeisadeski3 12y ago
      2003 was when the stock market recovered.[1] The wealth of the rich is highly correlated with the stock market. [1]http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5EGSPC;range=my http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbo...
  - deleted 12y ago
    [deleted]
  - niels_olson 12y ago
    > some additional downward pressure, although I am not sure what that could be I'm not an economist, so these are speculative, but seem reasonable based on the fact that we're talking about loss of wealth from households below median: Loss of life (specifically heads of household) due to the wars (I'm guessing most military households, being young and having maximum education of high school to "some college" will be below median) Increased energy costs (gas being a marginal cost would hit people with less marginal income harder). Loss of jobs to automation (I'm thinking secretaries, anything that can be replaced by an iphone, etc) Declining birth rate (last I heard total high school graduations were supposed to peawould tend to lead to oversaturated teaching jobs, also relatively low-paying. Chrysler was in distress long before the recession.
    - alexeisadeski3 12y ago
      Those describe downward pressure on income, not wealth necessarily: None of these would lead to a decrease in wealth so quickly, except for situations in which the wealth had to be consumed to make up for loss of job / disability / sickness / overconsumption. Re: Military families: Most people getting killed/dismembered were too young to have any wealth to lose. Even still, their wealth would actually increase upon death as the military's life insurance policies are quite generous.
- thrownaway2424 12y ago
  What's the home ownership rate in the bottom quartile of net worth? The closes I could find was rate for the bottom 90%, which was apparently 66% in 2004.
  - alexeisadeski3 12y ago
    I don't know. Probably pretty low. Which is why it shouldn't be surprising that so many have zero or near zero wealth.
nickff 12y ago
This study is misleading, because it uses 'household' wealth, instead of individual wealth, and may be incorrectly interpreted as showing a decline in the middle class, when it is really showing the results of changes in family structure over the past 50 years. This graph shows how this choice affects the results: http://1.bp.blogspot.com/-g3WZGpDibPM/Up3ZAPRtScI/AAAAAAAAJqE/5hWGdOBol_E/s1600/a-gini-ratio-us-households-families-individuals-1947-2012.png http://1.bp.blogspot.com/-g3WZGpDibPM/Up3ZAPRtScI/AAAAAAAAJq... The following blog-posts go in to more detail: http://politicalcalculations.blogspot.ca/2013/12/the-major-trends-in-us-income.html#.U6n7UfldUpV http://politicalcalculations.blogspot.ca/2013/12/the-major-t... http://politicalcalculations.blogspot.ca/2013/12/the-widows-peak.html#.U6n7UvldUpV http://politicalcalculations.blogspot.ca/2013/12/the-widows-... http://politicalcalculations.blogspot.ca/2013/12/the-men-who-werent-there.html#.U6n7U_ldUpV http://politicalcalculations.blogspot.ca/2013/12/the-men-who...
- Retric 12y ago
  Supporting 1 person on x income is harder than supporting two people on 2x income. Put simply, a couple does not need two stoves, and any shared trip is less expencive etc. There are a few edge cases at the individual level for things like end of life care and taxes, but the overall economic bennifits are huge.
  - thrownaway2424 12y ago
    On the other hand, 1 person with x income pays less income tax than 2 people with 2x income.
    - deleted 12y ago
      [deleted]
    - jahewson 12y ago
      The US has joint filing for married couples so that's not the case, whereas it would be in e.g. the UK.
      - 12y ago
araes 12y ago
Project it back a few years, and I'd bet we're poorer on average as a country than we were when I was born. Man, 43% decline for the median? Ouch. I also like that the mean wealth in America is 6x the median wealth. Actually, I find the numbers for the 75th+ percentiles a bit surprising, as my mental model had them with significant uptick after about 2011 or so. Kind of a wealth transfer from the lower percentiles. Whereas, this research seems to show that while erosions were smaller for the top (due to their non-real estate growth), no demographic they researched showed overall wealth growth from 2007 on. At best, they've gotten back to zero slope.
- Paul_Dessert 12y ago
  I saw a chart a few weeks back depicting this. Starting in the early 80's it started heading downward. I can't find it at the moment, but if I do, I'll post a link. A lot of factors contribute but housing was one of the major factors. "Net worth" was/is tied directly to their home and the 2006/07 crash. With the government screwing with the markets and investors buying homes as rentals, we just might see another sharp decline shortly... http://www.zerohedge.com/news/2014-06-24/americas-most-important-housing-market-signals-red-alert-housing-bubble-watchers http://www.zerohedge.com/news/2014-06-24/americas-most-impor...
mattm 12y ago
It's depressing how 1/4 households basically have no wealth at all.
- alexeisadeski3 12y ago
  If you take a minute to consider the demographics involved and the nature of wealth, it is neither depressing nor surprising nor even "bad". Consider, for example, that many people have negative wealth.
  - TaylorAlexander 12y ago
    Consider what factors, and in what way? Also, whether or not something is depressing, surprising, or bad is entirely subjective. Something you do not consider surprising may in fact be surprising to another individual, so without knowing them it's sort of silly to say "it isn't surprising". If they say it is surprising, it means to them it was. If you do not think others should be surprised, it may be useful for you to explain what knowledge you have that prevented your being surprised.
    - alexeisadeski3 12y ago
      To be wealthy means that one possesses sufficient wealth (stuff) to live comfortably even after they quite their job. The bastardized term of "wealth" used here, however, refers simply to material possessions even when not in sufficient quantities to provide any passive lifestyle advantages; suddenly a paid off car worth $5,000 is "wealth." The estimated $30,000 in equity I possess on my $200,000 home is "wealth". It's all a bit frivolous. By definition, the poor and middle classes don't possess true wealth. Their value is their human capital and time, which they exchange for money. Even the "working rich" - doctors and lawyers - don't routinely possess "wealth" in the traditional sense of the term. Then we compare the $30,000 equity I possess to actual wealth... such as the land under a shopping mall. What is the use in such an exercise? NEWS FLASH: People who own really valuable stuff possess really valuable stuff. The rest of us don't. Let's write books about this and study the shocking phenomenon? You simply can't compare actual wealth - such as the land under a shopping mall, which generates sufficient revenue for many people to live comfortably - to "wealth". Now, demographically... Why would anyone be surprised that a significant portion of the population has zero wealth? Honestly I'm surprised it's only 25% who have zero. How much "wealth" should a university student have? How about someone who's been working for a few years? How about someone who's been retired for twenty years and expects to die within the next ten? Middle class people gradually build up a small stock of "wealth" (we used to call this "savings") throughout their working careers. Then after retirement they gradually draw it down until they die. So yes, it is not surprising that many people have zero or negative wealth.
alukima 12y ago
The wikipedia article on Income inequality in the United States is surprisingly detailed and I highly recommend it if you have any interest on wealth. It's such a polarized topic that the comments almost immediately turn into inaccurate or out of context talking points. http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States http://en.wikipedia.org/wiki/Income_inequality_in_the_United...
- alexeisadeski3 12y ago
  Income and wealth are quite different topics...
  - jmstriegel 12y ago
    On that note: http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United... http://en.wikipedia.org/wiki/Affluence_in_the_United_States http://en.wikipedia.org/wiki/Affluence_in_the_United_States
jebblue 12y ago
I didn't read anything about how the increasing numbers of older Americans who are not working might have a significant bearing on the matter. edit: What I'm saying is, America has a baby-boomer generation that is retiring in droves, more power to them but don't do a study at a major university sounding alarm bells unless an important factor like a massively retiring baby boomer generation is considered.
kostyk 12y ago
The Socialist Revolution is coming?
cloverich 12y ago
Here's a problem I have with the definition of "wealth". My wife in I, who recently finished professional schools, earn (combined) in the top 5%. But because of our student debt, when I do a "wealth" calculator, I'm apparently literally at the bottom of the wealth chart - 0%. Leads me to question: 1. Is College attendance increasing, or decreasing over time? 2. Is price of College attendance increasing, or decreasing over time? I suspect both increasing. Would that explain some (or most, or all?) of this phenomenon? Average or lower income individuals will mostly go from positive to negative to put themselves through school, while rich or upper class will not. Would be interested how much of the phenomena that would explain.
hashberry 12y ago
The average American is not wealthy. The median net worth is $45K [1], which is below Japan, Canada, Australia and much of Western Europe. [1] http://money.cnn.com/2014/06/11/news/economy/middle-class-wealth/index.html http://money.cnn.com/2014/06/11/news/economy/middle-class-we...

77 points by kevin818 12y ago

Long story short: The wealth of non rich Americans is almost entirely contained in their highly leveraged houses. If housing prices collapse, their wealth collapses. In 2008, housing prices collapsed.

cwal37 12y ago
Not exactly. The 25th percentile's wealth was dropping even before the recession, which suggests some additional downward pressure, although I am not sure what that could be off the top of my head.
- araes 12y ago
  My suspicion is that it may be due to the inflation adjusted real wage effects, which hit the bottom 25th percentile the hardest, as that is generally their only source of income, and their resulting margin for wealth storage is so much closer. [1] Honestly, real wage income has been flat since about 1965, and for many has been going down since the great recession. [2] And if you only got high school or less, well, you're just boned. [3] (Note, take sources with a grain of salt, as they're 5 minute Google searches) [1] http://1.bp.blogspot.com/-aGE47oMJAQw/UhZtjjtKorI/AAAAAAAAJz8/Ot1MeYCjnzo/s1600/Screen+Shot+2013-08-22+at+4.27.44+PM.png http://1.bp.blogspot.com/-aGE47oMJAQw/UhZtjjtKorI/AAAAAAAAJz... [2] http://www.pgpf.org/Chart-Archive/~/~/media/A130E85DDC064B81A89A777E06C589C7.gif http://www.pgpf.org/Chart-Archive/~/~/media/A130E85DDC064B81... [3] http://www.frbsf.org/wp-content/blogs.dir/1/files/1106bb.gif http://www.frbsf.org/wp-content/blogs.dir/1/files/1106bb.gif
  - alexeisadeski3 12y ago
    That would explain only a slowing in the rate of wealth increase, not a decrease in wealth.
    - araes 12y ago
      Not necessarily. Everybody has a burn rate for money, as a natural feature of living in a market economy where we do work for pay. At its minima, its the cost to meet Maslow's needs. In the worst version, if our pay goes below the absolute minima, then we'll likely be eating our wealth, looking for other support, going homeless, or dying. Unfortunately, we also tend to be habit creatures, and our burn rate often stabilizes to our pay and our social class (keeping up with the Jones'). If our real wage starts to go down, then we often have trouble adapting, and keep burning as if we were still at the prior equilibrium (credit card debt, eating into savings, taking out loans). This is made even worse when the source of real wage reduction is the subtle erosion of our buying power through inflation. We complain about how much things cost, but we still see our paychecks slightly increasing so it seems good, and the burn gets worse.
- anigbrowl 12y ago
  Wage freezes at nominal values which did not keep pace with inflation during the 2000s, I'd guess.
  - alexeisadeski3 12y ago
    Converting home equity to consumption is my guess. Remember HELOCs?
    - Paul_Dessert 12y ago
      HELOCs are back and bigger than ever! Home-equity lending surpassed 2009 levels in 2013, with $111 billion in new home equity lines of credit (HELOCs) opened. In the fourth quarter, new lending increased 43% from quarter four 2012, according to data from Experian-Oliver Wyman Market Intelligence Reports and Experian’s IntelliView tool. http://www.marketwatch.com/story/helocs-made-a-comeback-in-2013-2014-03-07 http://www.marketwatch.com/story/helocs-made-a-comeback-in-2...
      - alexeisadeski3 12y ago
        Haha awesome. Though I imagine that surpassing "2009 levels" is not very exciting. Wake me up when they surpass 2005 levels!
- ehmish 12y ago
  The chart that showed the movements of the various percentiles showed an interesting thing, where in 2003, the 25th percentile's wealth started to drop, while at the exact same time the higher percentile's wealth suddenly went up, before dropping after the recession hit. I have a feeling there's a link
  - alexeisadeski3 12y ago
    2003 was when the stock market recovered.[1] The wealth of the rich is highly correlated with the stock market. [1]http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5EGSPC;range=my http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbo...
- deleted 12y ago
  [deleted]
- niels_olson 12y ago
  > some additional downward pressure, although I am not sure what that could be I'm not an economist, so these are speculative, but seem reasonable based on the fact that we're talking about loss of wealth from households below median: Loss of life (specifically heads of household) due to the wars (I'm guessing most military households, being young and having maximum education of high school to "some college" will be below median) Increased energy costs (gas being a marginal cost would hit people with less marginal income harder). Loss of jobs to automation (I'm thinking secretaries, anything that can be replaced by an iphone, etc) Declining birth rate (last I heard total high school graduations were supposed to peawould tend to lead to oversaturated teaching jobs, also relatively low-paying. Chrysler was in distress long before the recession.
  - alexeisadeski3 12y ago
    Those describe downward pressure on income, not wealth necessarily: None of these would lead to a decrease in wealth so quickly, except for situations in which the wealth had to be consumed to make up for loss of job / disability / sickness / overconsumption. Re: Military families: Most people getting killed/dismembered were too young to have any wealth to lose. Even still, their wealth would actually increase upon death as the military's life insurance policies are quite generous.
thrownaway2424 12y ago
What's the home ownership rate in the bottom quartile of net worth? The closes I could find was rate for the bottom 90%, which was apparently 66% in 2004.
- alexeisadeski3 12y ago
  I don't know. Probably pretty low. Which is why it shouldn't be surprising that so many have zero or near zero wealth.

nickff 12y ago

This study is misleading, because it uses 'household' wealth, instead of individual wealth, and may be incorrectly interpreted as showing a decline in the middle class, when it is really showing the results of changes in family structure over the past 50 years. This graph shows how this choice affects the results: http://1.bp.blogspot.com/-g3WZGpDibPM/Up3ZAPRtScI/AAAAAAAAJqE/5hWGdOBol_E/s1600/a-gini-ratio-us-households-families-individuals-1947-2012.png http://1.bp.blogspot.com/-g3WZGpDibPM/Up3ZAPRtScI/AAAAAAAAJq... The following blog-posts go in to more detail: http://politicalcalculations.blogspot.ca/2013/12/the-major-trends-in-us-income.html#.U6n7UfldUpV http://politicalcalculations.blogspot.ca/2013/12/the-major-t... http://politicalcalculations.blogspot.ca/2013/12/the-widows-peak.html#.U6n7UvldUpV http://politicalcalculations.blogspot.ca/2013/12/the-widows-... http://politicalcalculations.blogspot.ca/2013/12/the-men-who-werent-there.html#.U6n7U_ldUpV http://politicalcalculations.blogspot.ca/2013/12/the-men-who...

Retric 12y ago
Supporting 1 person on x income is harder than supporting two people on 2x income. Put simply, a couple does not need two stoves, and any shared trip is less expencive etc. There are a few edge cases at the individual level for things like end of life care and taxes, but the overall economic bennifits are huge.
- thrownaway2424 12y ago
  On the other hand, 1 person with x income pays less income tax than 2 people with 2x income.
  - deleted 12y ago
    [deleted]
  - jahewson 12y ago
    The US has joint filing for married couples so that's not the case, whereas it would be in e.g. the UK.
    - 12y ago

araes 12y ago

Project it back a few years, and I'd bet we're poorer on average as a country than we were when I was born. Man, 43% decline for the median? Ouch. I also like that the mean wealth in America is 6x the median wealth. Actually, I find the numbers for the 75th+ percentiles a bit surprising, as my mental model had them with significant uptick after about 2011 or so. Kind of a wealth transfer from the lower percentiles. Whereas, this research seems to show that while erosions were smaller for the top (due to their non-real estate growth), no demographic they researched showed overall wealth growth from 2007 on. At best, they've gotten back to zero slope.

Paul_Dessert 12y ago
I saw a chart a few weeks back depicting this. Starting in the early 80's it started heading downward. I can't find it at the moment, but if I do, I'll post a link. A lot of factors contribute but housing was one of the major factors. "Net worth" was/is tied directly to their home and the 2006/07 crash. With the government screwing with the markets and investors buying homes as rentals, we just might see another sharp decline shortly... http://www.zerohedge.com/news/2014-06-24/americas-most-important-housing-market-signals-red-alert-housing-bubble-watchers http://www.zerohedge.com/news/2014-06-24/americas-most-impor...

mattm 12y ago

It's depressing how 1/4 households basically have no wealth at all.

alexeisadeski3 12y ago
If you take a minute to consider the demographics involved and the nature of wealth, it is neither depressing nor surprising nor even "bad". Consider, for example, that many people have negative wealth.
- TaylorAlexander 12y ago
  Consider what factors, and in what way? Also, whether or not something is depressing, surprising, or bad is entirely subjective. Something you do not consider surprising may in fact be surprising to another individual, so without knowing them it's sort of silly to say "it isn't surprising". If they say it is surprising, it means to them it was. If you do not think others should be surprised, it may be useful for you to explain what knowledge you have that prevented your being surprised.
  - alexeisadeski3 12y ago
    To be wealthy means that one possesses sufficient wealth (stuff) to live comfortably even after they quite their job. The bastardized term of "wealth" used here, however, refers simply to material possessions even when not in sufficient quantities to provide any passive lifestyle advantages; suddenly a paid off car worth $5,000 is "wealth." The estimated $30,000 in equity I possess on my $200,000 home is "wealth". It's all a bit frivolous. By definition, the poor and middle classes don't possess true wealth. Their value is their human capital and time, which they exchange for money. Even the "working rich" - doctors and lawyers - don't routinely possess "wealth" in the traditional sense of the term. Then we compare the $30,000 equity I possess to actual wealth... such as the land under a shopping mall. What is the use in such an exercise? NEWS FLASH: People who own really valuable stuff possess really valuable stuff. The rest of us don't. Let's write books about this and study the shocking phenomenon? You simply can't compare actual wealth - such as the land under a shopping mall, which generates sufficient revenue for many people to live comfortably - to "wealth". Now, demographically... Why would anyone be surprised that a significant portion of the population has zero wealth? Honestly I'm surprised it's only 25% who have zero. How much "wealth" should a university student have? How about someone who's been working for a few years? How about someone who's been retired for twenty years and expects to die within the next ten? Middle class people gradually build up a small stock of "wealth" (we used to call this "savings") throughout their working careers. Then after retirement they gradually draw it down until they die. So yes, it is not surprising that many people have zero or negative wealth.

alukima 12y ago

The wikipedia article on Income inequality in the United States is surprisingly detailed and I highly recommend it if you have any interest on wealth. It's such a polarized topic that the comments almost immediately turn into inaccurate or out of context talking points. http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States http://en.wikipedia.org/wiki/Income_inequality_in_the_United...

alexeisadeski3 12y ago
Income and wealth are quite different topics...
- jmstriegel 12y ago
  On that note: http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United... http://en.wikipedia.org/wiki/Affluence_in_the_United_States http://en.wikipedia.org/wiki/Affluence_in_the_United_States

jebblue 12y ago

I didn't read anything about how the increasing numbers of older Americans who are not working might have a significant bearing on the matter. edit: What I'm saying is, America has a baby-boomer generation that is retiring in droves, more power to them but don't do a study at a major university sounding alarm bells unless an important factor like a massively retiring baby boomer generation is considered.

kostyk 12y ago

The Socialist Revolution is coming?

cloverich 12y ago

Here's a problem I have with the definition of "wealth". My wife in I, who recently finished professional schools, earn (combined) in the top 5%. But because of our student debt, when I do a "wealth" calculator, I'm apparently literally at the bottom of the wealth chart - 0%. Leads me to question: 1. Is College attendance increasing, or decreasing over time? 2. Is price of College attendance increasing, or decreasing over time? I suspect both increasing. Would that explain some (or most, or all?) of this phenomenon? Average or lower income individuals will mostly go from positive to negative to put themselves through school, while rich or upper class will not. Would be interested how much of the phenomena that would explain.

hashberry 12y ago

The average American is not wealthy. The median net worth is $45K [1], which is below Japan, Canada, Australia and much of Western Europe. [1] http://money.cnn.com/2014/06/11/news/economy/middle-class-wealth/index.html http://money.cnn.com/2014/06/11/news/economy/middle-class-we...