The Guardian, January 18, 1999
The United States' image as a nation of shareholders is so ingrained that few would believe the net wealth of the typical US household has fallen in the 1990s. In fact, the most reliable US wealth data show that despite the equity boom - the Dow is up about 350 per cent so far in the 1990s - the typical American household is poorer now than at the end of the 1980s.
To understand what is going on, we have to take a careful look at the balance sheet of the 'typical' American household - one right in the middle of wealth distribution. The household balance sheet weighs assets such as cash, houses and shares against liabilities such as mortgages, car loans and credit card debt. Three features account for the disappointing wealth performance of the 1990s.
First, despite the hype, the majority of American households do not own shares. According to the most recent available data from the Federal Reserve, 60 per cent of households in 1995 did not own shares, directly or indirectly, including the US equivalent of unit trusts and pension funds. Many of those that do own shares own very few. About 72 per cent of households, for example, had direct and indirect holdings worth less than $5,000, (£3,000) hardly the basis for a prosperous retirement.
Shareholdings have risen dramatically during the decade, but from small initial levels. Projections by New York University economist Professor Edward Wolff suggest that shareholdings of the typical household more than doubled between 1989 and 1997. But even by 1997 the typical US household held only $7,800 in all forms of equity investments. In the same year, the top 1 per cent of US households owned shares worth $2.5 million, while the next 9 per cent held shares valued at $275,000.
Second, other assets especially real estate are far more important to the typical American household, and the prices of these assets have been stagnant or falling through much of the decade. In 1997, the typical household's assets excluding shares - overwhelmingly real estate - totalled about $90,000, a figure more than 10 times greater than the corresponding shareholdings. In practical terms, this means that a 5 per cent change in the value of house prices has a greater impact on the typical household's wealth than a 50 per cent change in share prices.
A third and final feature of the typical household balance sheet is the most important. Debt levels have rocketed. Between 1989 and 1997, the typical household's debts rose $8,200, after adjusting for inflation. The increase in debt exceeded the total value of the same household's shares at the end of the period. The net effect of sharp rises in shareholdings, stagnant values of other assets and mushrooming debt was to leave the typical American household's net wealth about 3 per cent lower in 1997 than in 1989.
At a macroeconomic level, high and rising indebtedness has been a mixed blessing. On the one hand, more than any other factor, the growth in household debt, from 75.8 per cent of total personal income in 1989 to 84.8 per cent in 1997, has fuelled the current economic recovery. The 'American model' has a lot to do with the US financial system's ability to channel enormous volumes of easy credit to consumers through credit cards and a wide range of real estate-backed loans.
On the other hand, the unsustainable growth in debt undermines the stability of the current recovery and threatens to magnify the impact of any downturn. Long-term stagnation in incomes and falling interest rates have led many Americans to take on higher levels of debt. With interest rates low for the moment, the debt burden, the share of income devoted to paying interest on debt has held steady through the 1990s. A rise in interest rates could, however, put some newly indebted households over the edge.
Share prices wildly out of line with underlying corporate earnings have undoubtedly contributed to the great American spending spree. The dizzy Dow has added an independent element of economic instability. But none of that has reversed significantly the deterioration in the balance sheet of the typical American.