Monday, July 26, 2010

How Is This a Problem?

Business Insider’s Chart of the Day purports to show the “dismal” state of America’s household net worth. The authors describe the chart as showing the ratio of household net worth to disposable personal income “falling back to levels last seen in the late 1980s and early 1990s.”

Now, the main thing that makes our current position look bad is those two big spikes on the far right. As the authors note, those correspond to the dot-com bubble and housing bubble, respectively. And since those were, y’know, bubbles, they don’t really represent the value of fundamentals. Those years should arguably be ignored. But once you ignore those years, a quick eyeball reveals that the profile is pretty much flat. The ratio has hovered around 500% for over half a century, with the exception of a dip during the 1970s and early 1980s. And 500% is where we are now. How is this a problem?

Maybe the authors think the figure should be rising over time, and the flatness of the graph (once the bubble are removed) reflects stagnation. But that’s a non sequitur. Since the figure is a ratio, it’s perfectly consistent with both rising net worth and rising disposable income. For the ratio to trend upward, net worth would need to rise more quickly than disposable income. But as far as I know, there’s no reason to expect that. Am I missing something?


Caveat B said...

People with an agenda that usually includes some type of policy change will employ the 'household tactic'. They cry "household wages have stagnated!", because household size has decreased, from 3.5 to 2.5 or so over the past few decades. This is the first time I've seen it done for worth though.

Individual wages and net worth are generally growing.

ruralcounsel said...

Why shouldn't the ratio be increasing?

Wouldn't that be a true sign of improving economic situations for people? It would then reflect an increase in worth faster than an increase in income. For example, by better rate of returns on savings and investments, or capital assets.

If the ratio stays the same, it says that people aren't able to improve their situation with their given level of income; i.e., it going out as fast as it is coming in. Not enough to accumulate any increase in one's financial buffer.

And given the increased risks in today's economy, people need much bigger buffers than they've had in the past. A stint of unemployment is likely to last years, not weeks or months. And when it does end, it's likely to be at a much lower salary.