Some Common Notions Of American Income & Wealth Are Wrong

March 2011

Listening to certain political commentaries, one is led to believe that the “rich” are getting richer, while the “poor” are getting poorer. These same commentators tell us that income mobility in the United States generally does not occur. In this context, the “rich” are perceived as a relatively fixed group, consisting of someone other than us. The conclusion from these “facts” is that income redistribution must be performed by government policies.

The Federal Reserve released a March 2011 study entitled “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009” that demonstrates none of this is true. Instead, the American economy provided opportunity and economic mobility, even during the recent recession.

The Federal Reserve study is unique in that it used the same families included in the 2007 analysis addressing family finances and attitudes. In so doing, the study addressed changes in a way that is missed with point-in-time information. The Federal Reserve described the study as follows:

“The effects of the recent financial crisis and consequent recession on the household sector as a whole were often starkly apparent and readily measured. Although a great deal was known about some economic outcomes for certain subsets of households, a more complete picture for the full range of households was not available. To fill this gap, in 2009, the Federal Reserve Board (FRB) designed and implemented a follow-up survey of families that had participated in the then most recent wave of the Survey of Consumer Finances (SCF) in 2007, just as the economy started to turn down. Taken together, the information from the pairs of interviews from the two years provides a unique basis for measuring how families were affected.”

The Federal Reserve study included the following conclusions:

1. Even during the relatively short period of 2007 to 2009, there were substantial changes in the relative economic wealth of many Americans. Quoting the report:

   “… only 43 percent of families remain in the same category in both years if they are classified by deciles of wealth and only 26 percent if five-percentile-point groups are used. …

   There was a substantial reshuffling of families across the wealth distribution. Most families (63 percent) experienced losses and the median percentage change was 18 percent of 2007 wealth (Table 2). The median percentage decline in wealth for families whose wealth fell was 45 percent, and the median percentage gain for families whose wealth increased was 57 percent of 2007 wealth. Examination of the first and third quartiles (the 25th and 75th percentile points, respectively) illustrates just how diverse the experiences were for families within these two groups: wealth fell by over 50 percent for a quarter of families, but at the opposite extreme, wealth increased by about 27 percent or more for another quarter.”

2. There were substantial changes in relative income of many American families. Again quoting the Federal Reserve’s report:

   “All the measures of income change presented here suggest that income increased for families with income below the 2007 median and income fell for families with income near or above the 2007 median.”

3. There has been a considerable change in the attitudes of Americans towards the financial security that they seek. This causes a downward pressure on the recovery compared to what might otherwise occur. Again quoting the Federal Reserve’s report:

   “The 2009 survey collected a variety of attitudinal data on the economic downturn and on how families had changed or intended to change their financial decisions as a consequence. Overall, the data suggest a shift toward caution: most families - especially those whose position in the wealth distribution improved—reported a desire for less risk and for higher reserve savings. Further, in most cases, heads of households that were working full-time planned on extending their working lives….

   The data show signs that families’ behavior may act in some ways as a brake on reviving the economy in the short run. Two things stand out in this regard. First, a large proportion of families in all wealth groups and across the range of changes in wealth expressed the need for greater precautionary savings. In general, compared with families with relative losses, the families with relative gains appeared more pessimistic and cautious before the crisis, and in the 2009 survey they remained cautious even though their wealth had increased.”

   Although the Federal Reserve’s report provided no explanation as to why this attitudinal change occurred, it is widely accepted in economic circles that the following two factors are likely in play:

   a. Recent events will generally increase one’s perception as to the possibility of a recurrence, and
   
   b. Threatened changes in tax policy provide uncertainty regarding future disposable income, which lessens economic confidence.

   The Federal Reserve’s report is written in dry terms, and received practically no media coverage. That is unfortunate since the results of this study are relevant to ongoing policy discussions.

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