It was the best of times; it was the worst of times…
March 7, 2013
As the stock market hits new all-time highs, the AP reports today on the state of household wealth in the U.S…
It took 5 1/2 years.
Surging stock prices and steady home-price increases have finally allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. The gains are helping support the economy and could lead to further spending and growth.
The Federal Reserve says household wealth amounted to $66.1 trillion at the end of 2012. That was $1.2 trillion more than three months earlier. And it was 98 percent of the pre-recession peak.
Private economists calculate that further increases in stock and home prices this year mean that Americans’ net worth has since topped the pre-recession peak of $67.3 trillion. Wealth had bottomed at $51.2 trillion in early 2009.
Some economists caution that the regained wealth might spur less consumer spending than it did before the recession.
Caution, indeed. While the total figures look terrific, the details are a little more troubling. And more troubling, as it turns out, than we think…
In a 2011 study, economists Dan Ariely and Michael Norton asked Americans what their ideal distribution of wealth would be. Then they asked what the respondents thought the actual distribution of wealth was. Less equal than their ideal, came the answer. The reality…
Here are the implication for wealth of that reality animated in a short justly-viral video:
So that increase in wealth– it’s up in that top 20% quartile, most of it, in the top 10% The balance of folks? Well, the other breaking news this week is that “household deleveraging” may be over– that”s to say, American households are borrowing again… this reality is much more democratically-spread. And it’s frighteningly-scaled…
The same NY Fed report that brings those tidings– ostensibly good for the economy, as more borrowing means more spending– breaks down that debt, paying special attention to student loans– which have effectively tripled over the last eight years, to nearly $1 Trillion. Note that “Student Loan” is the relatively small red section of each bar in the chart above. Still, as the Fed notes:
Deferrals and forbearance [borrowers given temporary "grace"]… mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.
(Why have student loans grown so quickly? Here’s an explanation.)
But surely the fact that most household debt is mortgage debt is an encouraging sign– after all, mortgages are a route to building home ownership equity. Well, for some they surely are. But while the numbers have improved a bit since the post 2008 trough, there are still over 27% of all mortgage holder “underwater” in the U.S.– with mortgage obligations that exceed the value of their homes. There’s no equity there.
Which is all simply to observe that, while the aggregated “good news” that we’ve been hearing this week is better than hearing that everything is down, it’s no cause to celebrate an end to our concerns. As Ariely and Norton demonstrate, most of believe that income and wealth should be more evenly distributed than it is. And given that we live in a consumer economy– as or more dependent on “consumptivity,” the ability of the population to purchase, as on productivity– our economic future demands it.
Stocks are up; aggregate household wealth is up– but for way too many, the American Dream is a nightmare.
“A rich man is nothing but a poor man with money”*…
October 12, 2012
A guest post from (Roughly) Daily…
click here for larger version
Intrigued by the mechanisms that generate a world like ours, in which over 33% of the wealth in the U.S. is held by 1% of the population, economist Ricardo Fernholz and mathematician/statistician Robert Fernholz developed a model that might explain the high degree of income and wealth inequality we see in advanced economies.
As James Kwak notes in Baseline Scenario,
The model assumes that all households are identical with respect to patience (consumption decisions) and skill (earnings ability). Household outcomes differ solely because they have idiosyncratic investment opportunities—that is, they can’t invest in the market, only in things like privately-held businesses or unique pieces of real estate. Yet when you simulate the model, you see an increasing share of wealth finding its way into fewer and fewer hands [as illustrated in the chart above].
As the authors emphasize, “it is luck alone – in the form of high realised random investment returns – that generates this extreme divergence.” In the absence of redistribution, either explicit or implicit, this is the kind of society you end up with…
Clearly, the world is not quite so simple; there are some redistributive mechanisms (taxes and the like), and (given, e.g., educational differences) not all peoples’ earning abilities are equal. Still, as Kwak observes,
…this is a useful antidote to the widespread belief that outcomes are solely due to skill, hard work, or some other “virtuous” attribute. Even if everyone starts off equal, you’re going to have a few big, big winners and a lot of losers. Because we want to find order and meaning in the universe, we like to think that success is deserved, but it almost always comes with a healthy serving of luck. Bear that in mind the next time you hear some gazillionaire hedge fund manager or corporate CEO insisting that he knows how the country ought to be run.
Read a summary of the Fernholzs’ paper here; download the (rather mathematically-intense) original here.
* “A rich man is nothing but a poor man with money” - W.C. Fields
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As we ponder polarization, we might send balanced birthday greetings to Elmer Ambrose Sperry; he was born on this date in 1860. An early exemplar of equipoise, Sperry was the engineer and inventor who devised the gyrocompass (a huge advance on traditional magnetic compasses, first tested on the U.S.S. Delaware in 1911). His compasses and stabilizers have helped navigate and “balance level” first ships, then aircraft ever since.
Caveat Lector…
May 21, 2010
For whatever reasons–reduced newsroom budgets? the proliferation of complex issues?– the news media seems to have made a habit of reporting study results as reality, however inconclusive the studies actually are. For the last decade or so, the unquestioning paraphrasing (even verbatim reprinting) of announcement releases as “news” has grown endemic.
Case in point: a recent Research and Policy Brief (pdf) from the Institute on Assets and Social Policy at Brandeis declares that “the wealth gap between white and African American families has more than quadrupled over the course of a generation (1984-2007).”
The result has been very widely reported… in a way that largely paraphrases the press release (e.g., here, here, here). And it’s been very widely discussed… in a way that takes the report’s findings as stipulated (e.g., here, here, and here).
What’s interesting is that the Brandeis study is based on a “standing panel” (The Panel Survey of Income Dynamics, University of Michigan). Other studies– like Ed Wolff‘s/NYU’s– use other data sets (in Wolff’s case, Federal Reserve data) and get radically different results (in Wolff’s case, while the gap is large, there’s been no change over the last couple of decades)…
To observe the obvious: either outcome is bad. No change is certainly not good– but it’s a very different reality than four times worse.
Now, it’s easy to make cases for both data sets/methodologies… what’s striking to me is that most of the reportage takes no account of this “squishiness”; it recounts the Brandeis findings as if they’re as Platonicly-solid as a temperature reading. (The one exception I’ve found in this instance is the public radio program Marketplace, which did cite the Wolff study.)
This is a moderately benign example of the phenomenon, as in this case, while the degree of response may be in question, there’s no directional policy impact from the imprecision: the wealth gap between white and African-American families is either large or larger. In either case, there’s an inequity to address. But as the Census process grinds on– with an all-too-grounded fear on Bureau officials’ parts that the results will not be representative– the coverage of Brandeis study is a(nother) reminder of the epistemological challenges to informed citizenship and policy-making.
At least the Brandeis and NYU studies and the Census are trying to find “the truth”; even then, it’s a problem. But the conflicting statistical arguments that rain on the debates over financial reform, immigration reform, health care, and the like are “evidence”– data cobbled together to make a point, to justify a position. They’re not about “truth”; they’re about achieving an outcome.
Indeed, the noise level is sometimes so high that it’s tempting just to say “plague on all your houses”– to ignore issues altogether, or to deny all of the evidence as prima facie unreliable, precisely because it’s evidence. But of course, denial isn’t an option; the issues at stake are simply too grave.
Happily, inconsistent data doesn’t have to mean paralysis. There’s real disagreement, for example, on the specifics of climate disruption; still, the preponderance of studies– and the agreement of virtually every informed observer– make it clear that there is a huge problem on which we must act. Like the income disparity between whites and Africa-Americans, the direction is clear.
But even these directionally-clear issues get murky as we try to get more specific, to divine trustworthy grounds for appropriate action. And other less obvious issues (e.g., the aforementioned financial reform, immigration reform, health care, and the like) are even murkier, clouded as they are by a fog of statistical arguments– arguments that are too often amplified, not clarified, by the media.
There is reportage that regularly looks deeper– e.g., Planet Money, How the World Works– and commentary– e.g., Grasping Reality With Both Hands, Beat the Press– and thank the Lord for them. But surely the real moral of this tale is that each of us needs to read (and watch and listen to) the news that we get much more critically…
We owe it to our society and to ourselves to make ourselves numerate– to develop the capacity to question constructively, to determine what we can know and what we can’t, to bracket the uncertainty we face– so that we can make better-informed decisions as to when and how to act.
Mark Twain (quoting Disraeli) famously observed that “there are three kinds of lies: lies, damned lies, and statistics.” In facing them, it’s wise to assume that we’re on our own.
