Boom Time a Bad Time for Poorest, Study Finds
The nation’s extraordinary boom has significantly boosted the prosperity of the American middle class, but a new survey by the Federal Reserve shows that many of those on society’s bottom rungs are actually losing wealth instead of gaining.
Other recent studies of the gap between the rich and the poor focused exclusively on income. They found that the wages of even the poorest segments of the population were growing, although by much less than the earnings of the middle class.
The new Fed survey confirms this trend. But the Fed measured not only Americans’ annual incomes but also their accumulated wealth, or net worth, in inflation-adjusted terms, over the period from 1995 through 1998. And it found that by this standard, the nation’s most disadvantaged are not just falling further behind the more fortunate--they were worse off, in absolute terms, in 1998 than in 1995. A major culprit is their own indebtedness.
The new statistics offer more evidence for those who argue that Americans are living dangerously beyond their means, and that the current patterns of economic growth are creating unacceptable divisions in society.
The Fed survey, the government’s most comprehensive look at family wealth, is done every three years. The new one, being published in the Federal Reserve’s monthly bulletin for January, was based on interviews with 4,309 families.
It measures net worth, which represents a family’s assets in such things as bank accounts, stocks and a home, minus the family’s liabilities, covering such things as a home mortgage, car loans and credit card debt.
(The Fed report is separate from a private study released Tuesday that was the latest to find that the gap in incomes--as opposed to net worth--between the richest and poorest Americans widened in the 1990s. The earnings of the bottom fifth grew less than 1% in the 10 years from the late 1980s but jumped 15% for the top fifth, according to the Economic Policy Institute and the Center on Budget and Policy Priorities.)
The Fed study also broke down statistics by education level and age group. During a period when stock markets were returning double-digit gains, the net worth of those without high school diplomas shrank by about one-sixth. The net worth of Americans who had completed high school but not college also contracted, though to a lesser degree.
Young people also saw their net worth diminish: The median family in which the main breadwinner was younger than 35 saw its net worth shrink by nearly 30% from 1995 to 1998.
(The median family is richer than one-half of the population and poorer than the other half.)
Growing debt contributed to the plight of the bottom-of-the-ladder groups. The Fed researchers found that about 1 family in 8 spent more than 40% of its income toward meeting debt payments in 1998.
Families with incomes below $50,000 and the elderly showed the greatest strains.
All this happened at a time when there seemed much cause nationwide for rejoicing: The median U.S. family net worth rose from $60,900 to $71,600 between 1995 and 1998. The Fed survey showed that Americans overall hold more assets than ever before, in a greater variety of forms. Their stock portfolios are growing fatter, and they own their own homes in greater numbers.
The percentage of families who own stocks, either directly or through mutual funds or retirement accounts, has grown substantially in the last 10 years, from 31.6% in 1989 to 48.8% in 1998.
The new data also show that even traditionally disadvantaged groups are increasingly participating in investment activities.
The median family stock holdings of nonwhites and Latinos, for instance, more than tripled from 1995 to 1998, from $2,500 to $9,000. This was at a time when the median stock holdings by whites approximately doubled, from $9,800 to $20,000.
The report shows that although the economy has grown, Americans’ propensity to save has not. The proportion of families who told researchers that they had saved a portion of the previous year’s earnings rose only slightly from 1995 to 1998, and it still fell short of the savings rate that prevailed in 1992, when the current economic expansion began.
But what stands out most sharply in the Fed’s report is the uneven rate of wealth accumulation in the U.S. More Americans may be playing the financial markets these days, but the richest ones are capturing the greatest gains.
For instance, middle-class families earning $25,000 to $49,999 a year saw the value of their financial portfolios grow from a median $8,500 in 1995 to $11,500 in 1998. During the same period, Americans with incomes of $100,000 or more saw their portfolios blossom from $85,000 to $150,000.
Perhaps the most striking statistics in the report concern rising levels of indebtedness during an economic boom fueled foremost by consumer spending. Families took on higher levels of virtually all forms of debt in the three-year period under study: mortgages, installment loans, credit card debt and other obligations.
“The most amazing figure to me is that the median value of total family indebtedness rose from $23,400 in 1995 to $33,300 in 1998,” said Edward Wolff, a New York University economist. “That’s a huge increase.”
In 1998, the Fed found, the median American family spent 14.5% of its income staying ahead of its debts. Though the Fed did not cite this as dangerously high, it noted that this debt burden was greater than at any time since it began issuing such reports in 1989.
“People are hanging in there because they have jobs,” he said. “But even today, bankruptcies are at an all-time high. The situation is not exactly felicitous. Once we hit a downturn in the economy, we’re going to find a lot of families carrying a lot of debt who are not going to be able to repay it.”
