The United States has all the makings of a pronounced spike in income and
wealth inequality. The major trends of the past eight months suggest that the
least wealthy/lower earning 80% of the American population are in increasingly
severe pain. The vast majority of Americans live off of labor income and
possess only one significant asset: their private home.
More than four out of five of us need strong labor markets and stable or rising
home prices. Our standard of living and ability to function economically rests
heavily on these two pillars. However, employment is plunging, house prices
have tanked and wage growth is stagnant.
The wealthiest Americans see their fortunes driven by asset market performance,
tax structure and corporate profits. For the
past eight months, asset markets have turned in their second-best performance
in a century. On March 9, the S&P 500, the broadest measure of US stocks,
stood at a low of 676.53. On the evening of December 3, 2009, the S&P500
stood at 1099.92. This index has risen 423 points (63%) from its low.
Individual tax rates remain low and corporate profits have staged a dramatic
recovery. We have all the makings of massive divergence between the upper
reaches and the increasingly crowded lower ranks of the economy.
Incomes/employment
Between the start of 2007 and the end of September 2009, there was a US$379
billion (3%) increase in personal income. Across the same time period, there
was a $449 billion (27%) increase in social assistance payment from the central
government. More than the total increase in income is accounted for by
temporary government programs designed to partially offset hardship.
There has been a $531 billion (6%) decrease in American's real income when we
subtract special assistance programs. Income losses have been concentrated in
the lower 80% of the income and wealth distribution. Our incomes are under
pressure and we are subsisting on extensions of government assistance programs.
Our national unemployment rate through November was 10%. This number fails to
capture discouraged workers and involuntary part timers. These are people who
want and need work but have either given up looking, or have had to settle for
fewer hours than are needed. If we include these groups we have a national
unemployment rate of 17.2%. Employment and income look unlikely to provide a
meaningful boost in the near term.
The average private home has lost 10% of its value since late 2008. We have
seen some slight increases in recent months, but this year will still show a
significant loss in price for the average house. Last year also saw a
significant reduction in the average house price as well.
Thus, the only significant asset most Americans can claim continues to
depreciate, year over year. Federal Reserve data suggest that American
households have lost $3.7 trillion in residential real estate wealth since
2006. The US Census makes clear that homes represent 42% of the average
household's net worth. Almost half of the wealth held by our families is held
in the form of the private home in which they live.
Wealth in homes is measured in net worth calculations as owner's equity in the
house. This is the portion of the home value, above the mortgage debt owed on
the home. Mortgage debt is gauged by the long-term contracts signed when
mortgages are written. Falling prices reduce wealth as the value of the house
declines and the debt owed on the house remains fixed. Home mortgage debt
stands at $10.4 trillion today and was at $10.5 trillion one year ago - that
is, it has stayed very flat over the past year. Prices have been moving down.
If your debt on the house is fixed and the price has fallen, your wealth is
falling. The falling price of American homes hits the hardest for those who own
little or no equity in their homes. This tends to be the young and those who
were taking money out of their homes using equity withdrawal to supplement
income. About 25% of Americans at present owe more on their homes than the
appraised value of the home. For these millions, home ownership has shifted
from a source of wealth to a source of poverty.
About 42% of wealth for the average family comes from home ownership, home
equity; 61% of net worth is held as home equity among African-Americans, 59%
for Hispanics. For the 3rd quintile, the middle of the income distribution, 79%
of net worth is home equity. On average, the private home is the largest wealth
category and is four times the size of stock and mutual fund shares, the
second-largest component.
US home equity, the portion of the average American home owned by the average
home "owner" has plummeted from 58% in 2003 to 43% in the middle of 2009. Thus,
the average American now owns significantly less than half the value of their
home. This means a decline in the wealth, net worth, of the bottom 80% of
households.
This means that we are the midst of a great shift in social wealth in the US.
It means that the past nine months have likely seen a massive upward shift in
the distribution of America's wealth. We have seen massive increases in labor
productivity with stagnant wages. We have surging stock and bond markets and
struggling housing markets.
The shifts in wealth and income over the past year will take a while to show up
in national data. There are already being felt around many kitchen tables. It
is likely that the wealth and income trends discussed above will have profound
impacts on life for tens of millions of American families. It is also likely
that these trends, and public responses to them, will drive American political
developments for the next few years.
Max Fraad Wolff is a doctoral candidate in economics at the University of
Massachusetts, Amherst, and editor of the website GlobalMacroScope.
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