Warren's next scare statistic, introduced around the ten minute mark, is the massive increase in revolving debt. Revolving debt (that's basically credit cards and bank overdrafts, for those who don't speak Accountant) has skyrocketed since 1970 as a percentage of personal disposable income.
Warren's audience seems not to have noticed that this is kind of a weird number to pick. Having more of a particular kind of debt doesn't tell you much; if you take out a home equity loan to pay off your credit card, your financial position has (arguably) slightly improved, even though your housing debt just jumped. What you really want to know is the overall level of indebtedness. Warren covers this by implying that she's just using revolving debt as an example; "I could have used consumer loans or mortgage debt", she says, and "it would have been much the same".
This is desperately, hopelessly wrong. Not an exaggeration or a misreading; just flatly untrue.
I cannot read the little squib at the bottom of Warren's chart to find where she got her data, but the gold standard for this sort of thing is the Federal Reserve Board, which among its many other functions keeps tabs on how much credit is sloshing around various markets. The class will please turn to FRB web page G.19, "Consumer Credit Outstanding (Millions of Dollars; Not Seasonally Adjusted).
You will note that the Federal Reserve didn't even begin measuring revolving debt as a separate item until January 1968; this was the birth of the modern credit card era. You may also notice that revolving debt increased fourfold just between then and the end of 1970. You will probably further note that the growth of non-revolving debt slows down around then, as credit cards began substituting for installment buying.
In December 1970, the American public carried $5 billion worth of revolving debt, and $128 billion worth of non-revolving (secured and fixed-term debt). In December of 2004, the American public had $1.3 trillion worth of non-revolving debt--and $823 billion worth of revolving debt. One number had increased by a factor of 10; the other by a factor of 160. Saying that these two increases are "much the same" is like saying that a newborn kitten is pretty much indistinguishable from a full-grown lion.
Of course, these figures are in nominal dollars, which is to say, not adjusted for the inflation that has taken place. In constant 2004 dollars, according to the excellent inflation calculator provided by the Bureau of Labor Statistics, the outstanding non-revolving debt was $625 billion, while outstanding revolving debt was $24 billion. It doesn't take much math skill to see that the increase in the two figures is nowhere near the same magnitude.
Warren then goes on to do something really, really weird: she puts up a chart showing the savings + revolving debt as a percentage of personal disposable income. This is a useless figure, though her audience appears to think it is deeply significant. For one thing, it doesn't show all forms of debt, which is what we really care about. For another, to get a good financial picture, you don't add those two things; you subtract, which tells you whether you're running a surplus or a deficit. But the biggest problem is that she's comparing a stock to a flow. A stock is everything you have--the inventory in a store, say. A flow is the shipment of canned goods you got in today. You never compare the two directly; it's meaningless. If I tell you that your mortgage is 80 times the size of this month's 401(k) contribution, are you saving too much or too little?
It's especially useless because we don't know what the interest rate on the revolving debt is. In the high-inflation early eighties, the debt would have been smaller relative to people's incomes, but high interest rates would have jacked up their monthly payments; by the late 1990s, the reverse would be true.
The correct comparison would be total assets to total debt, or savings to debt service payments. As it happens, we have some data on that; though the available time period is not quite the same as Warren's, it is close enough for government work. In the Federal Reserve's 1964 survey of consumer finances, the average household net worth was $22,588 ($137,641 in constant 2004 dollars). In 2000, it was about $200,000 in constant terms.
But we're so much more unequal! People will cry. Bill Gates is screwing up the average. Indeed this is true . . . but apparently he was back in 1964 as well. Back then the median net worth was $7,550 ($46,000). In 2000, it was $55,000. To be sure, not an impressive increase. But families hadn't gone backwards--and the 1964 figure counts some things the 2000 figure doesn't, like life insurance policies. And the number of families with negative net worth was about the same in 2004 as it was 40 years earlier: roughly one third.
Having seen that the stock has, in fact, improved for both mean and median households (insofar as we can tell from discontinuous data series), let's look at the flow: debt service payments. Warren's weird chart implies that they must be piling up on households like never before. Well, this is kind of true.
To examine how much it has increased, we turn to a little Fed publication winningly entitled "Household debt service payments and financial obligations as a percentage of disposable personal income; seasonally adjusted". Memorize that: you can recite it at parties.
Now where was I? Ah, yes. Unfortunately, the series only starts in 1980--recession territory. Back then, households were using 11.13% of their personal disposable income to service mortgages and consumer debt. By mid-2004, when Elizabeth Warren was giving that speech, the DSR had soared to . . . 13.5%. All of which seems to have been housing debt and property tax payments, since the Financial Obligations Ratio (the DSR + auto leases, property taxes, and homeowner's insurance) for renters actually fell slightly.
Americans are simply not being bankrupted by their credit cards and mortgages. 2% of my income is a lot--I sure wouldn't want to have to write that kind of check out for no reason. But it wouldn't push me into bankruptcy, or even out of the middle class.
Good points.
"In the Federal Reserve's 1964 survey of consumer finances, the average household net worth was $22,588 ($137,641 in constant 2004 dollars). In 2000, it was about $200,000 in constant terms."
Isn't "household net worth" also misleading because households are considerably smaller now? I seem to recall the per capita numbers look much better.
I refer you to 11 USC 503(c) (Warren's contribution to the bankruptcy code via BAPCPA):
Notwithstanding subsection (b), there shall neither be allowed, nor paid-
(1) a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor's business, absent a finding by the court based on evidence in the record that-
(A) the transfer or obligation is essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation...
So basically, imagine that a company is entering bankruptcy for reasons having nothing to do with poor management, or imagine that new management was brought in to fix the company's problems and chose to do so under bankruptcy protection. This management is now working for a company that may not exist in the near future, but to increase compensation in recognition of the riskiness of the job, managers must first shop around their resumes to (presumably) financially healthy firms. Once they have perfectly good offers from those firms, the firm operating in bankruptcy can only MATCH those offers, not beat them... at which point, why would management stay?
Good points.
In the Federal Reserve's 1964 survey of consumer finances, the average household net worth was $22,588 ($137,641 in constant 2004 dollars). In 2000, it was about $200,000 in constant terms.
Isn't "household net worth" also misleading because households are considerably smaller now? I seem to recall the per capita numbers look much better.
I'm really enjoying this series. Warren's presentation seemed full of holes and at the level of data analysis that we *might* allow as a final undergrad project in my stats department, but deeply annoying as an invited lecture.
If the typical American consumer is doing so well why does the average length of auto loans keep lengthening since about 1980 despite the very significant drop in interest rates?
spencer,
Stupidity. The same reason people carry balances on credit cards.
The thing about getting older is that you get more perspective. It's hard to tell someone who remembers the 1970s that things were better back then.
I think that's why so many of the younger generation buy into pessimism. They don't have more than a 10 year perspective, and things were better 10 years ago in many ways. But compared to 30 years ago? No way.
And I have been hearing doom about the middle class my whole life... but I keep working and keep doing better and better. So did my parents, oddly enough. And their parents...
Also, don't lower interest rates go hand in hand with longer term loans?
Virginia top marginal income tax rate: 5.75%
District Of Columbia: 8.5%
You are paying more than 2% of your income to live on one side of the river over the other.
If the typical American consumer is doing so well why does the average length of auto loans keep lengthening since about 1980 despite the very significant drop in interest rates?
When things get cheaper people buy more of it.
-dk
Elizabeth Warren seems utterly confused about how to interpret economic data. Both men and women have seen their real incomes rise over the last 30 years or so as can be seen here. So it's just preposterous to say that the middle class is moving backwards, that it's just becoming impossible for people to save, or that their "situation is getting desperate."
To be sure the rise in the real income of men has been modest, but that does not justify hysterical claims about middle class people "on the precipice." An informed person discussing these questions would not have failed to discuss the rate of productivity growth and the causes of changes in that rate over time. Nor would an informed person have neglected the rise in asset values when discussing the changes in the saving rate. But Elizabeth Warren isn't informed. She doesn't know what she's talking about.
Spencer,
Cars last a little longer then they did in 1980.
Re: I think that's why so many of the younger generation buy into pessimism.
???
Doesn't it usually work the other way around? The younger generation is all about the future while the older folks are nostalgic for the past and are full of complaints about how awful the modern world is? At least that's the way it works with most people, young and old, I know. Unless you went through nine kinds of personal hell in your youth, you will always see the past through rose-colored glasses simply because you were young. While the present basically sucks, and the future (to any older person) looks very dubious indeed given that older people don't have all that much of a future to look forward to.
Re: So it's just preposterous to say that the middle class is moving backwards, that it's just becoming impossible for people to save
Um, then, why is the US savings rate so abysmally low?
Um, then, why is the US savings rate so abysmally low?
I'd point at consumption, but that's just me. Megan just bought a Kindle (although one could argue it's a work-related expense.) I really, really covet a 20-gauge shotgun and a gun cabinet.
I've recently really, really begun to save (although I've saved in one form or another for the last 9 years); there's only so much joy that you can derive from seeing the numbers get bigger on your bank balances. But the joy from holding that shiny new (blank)? Incredible (and incredibly ephemeral.)
Read the post before: desired wealth accumulation seems to be relatively constant. When asset prices rose, people saved less.
John -
A lot of people in your generation took out loans to buy houses. The average home price has gone from 2X median income to close to 4X median income. The bet paid off. Now the people in my generation realize that homes are really, really expensive. It's highly unlikely that the prices will continue to go up. So we have to pay more, and it's unlikely that we'll see the same ROI that you did.
regarding the unimportance of 2% (or whatever number you consider unimportant)-
"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored. As I am!"
Meagan-
Prime rate in 1980 was 15-20%. Prime rate today is 5%. If the 5% rate is sustainable, then all is well. Judging by the price of oil and other commodities, it is not. The last time inflation in commodities was this bad, Volcker had to knock up the interest rates up to 15%. If that happens again, that DSR comparison will a look a lot more worrisome.
"Um, then, why is the US savings rate so abysmally low?"-JonF
JonF, Megan is right. The decline in the saving rate has resulted chiefly from the rise in asset values. As people saw their investment portfolios and home prices appreciate, they saw less need to save. Essentially, they treated their increase in wealth as a form of saving.
There is a good discussion of this issue by economist (and St. Louis Fed President) William Poole here. The punch line is this:
Incidentally, since I've been critical of Megan at times lately, it seems only fair to give her credit here. She is doing good work in taking on Elizabeth Warren, pointing out the flawed reasoning and misused data in Warren's arguments.
By neglecting to discuss the rise asset prices when the decline in the saving rate is central to her thesis, Warren is proving that she is either hopelessly confused herself or deliberately misleading her audience. I suspect the former. But either way, her analysis has little or no merit.
Elizabeth Warren is not a hack, she is not stupid and she is not ignorant. Whether she has an axe to grind or is simply incorrect is another story.
But the US savings rate is very low, both as compared to countries with comparable GDP per capita and simply in terms of being able to fund US investment and government debt. The most obvious evidence of this is the large amount of capital we have to import to finance the latter.
I don't follow Warren's point about the nature of indebtedness not mattering, but I don't follow Megan's either. She writes that "Having more of a particular kind of debt doesn't tell you much."
But if I were looking at a balance sheet, I would be very concerned if a corporation's debt structure had shiftly heavily from long term debt secured by fixed assets to short term debt (e.g., accounts payable and commercial paper). While this might not be an indicator of looming bankruptcy, I'd certainly be worried about illiquidity and insolvency, especially if some of the assets on the other side of the balance sheet were volatile financial assets (which over the past decade has seemingly come to include homes).
Isn't this in essence what has happened with US households? And assuming that long term debt ismore likely to be directed toward productive investment than short term debt (more likely to be spent on current consumption) wouldn't the composition of debt matter very much in evaluating the borrower's prospects?
Why would the aggregate DSR statistic prove or disprove an assertion about the middle class?
Your jump from debt-service to cause of bankruptcy is a bit tenuous, right?
The proximate cause of almost every bankruptcy is too much debt, revolving or otherwise. It is true, however, that many liabilities do not end up on a credit-card, ... Is the point to suggest, counter Warren, that credit-cards are a trivial component?
Whatever the case, the last passed bankruptcy *cough* "reform" insisted that people go for ... credit counseling. That might be an indication that credit management is viewed as incident to most bankruptcies ...
Great discussion, but it has been centering around averages while for me the central fact of US life in the recent past has been the bifurcation into two societies, one of which is successful, peaceful and well-educated and one of which is poor, violent and ignorant. So there is intense anxiety about falling into that second society and, I think, in being close to it in any way. And all the talk of averages is confusing the issue.
Where is Elizabeth Warren? She should be responding to McArdle's arguments. Does anyone know if she is? Is anyone else in the leftosphere taking up the gauntlet?
Jult52 wrote: And all the talk of averages is confusing the issue.
While much public discourse focuses on the margins -- the horrible plight of the urban underclass vs. the high-life of the hedge fund manager -- I suspect, if you look, you'll still find a bell curve.
Manipulating economic policy in response to marginal cases seems to me to be a terrible idea.
Interesting discussion. This is a slightly embarrassing question but is it clear to anyone where the 2000 net family worth numbers are coming from? They seem off by a factor of two. The 2004 SCF survey seems to give the 2001 (in 2004 dollars) mean as $423,000 and the median as $92,000. Which seems significant.
I don't follow Warren's point about the nature of indebtedness not mattering, but I don't follow Megan's either. She writes that "Having more of a particular kind of debt doesn't tell you much." But if I were looking at a balance sheet, I would be very concerned if a corporation's debt structure had shiftly heavily from long term debt secured by fixed assets to short term debt (e.g., accounts payable and commercial paper). - gene
Yeah, I was confused by that too. What is the point Megan is making by noting that revolving/credit-card debt has ballooned by 34 times since 1964 (if I read that stat right) while mortgage/secured debt has only doubled? I mean, the mortgage debt is backed by your house; people presumably usually have assets that more than cover that debt, except in unusual times like the current housing market. But what covers your credit-card debt? Isn't the fact that more debt is "unsecured" a strong hint of middle-class "insecurity" in this sense? Especially since the interest on your credit-card payment is usually a lot higher than the interest on your mortgage, right?
And in fact, looking at the DSR chart Megan references, it looks to me like DSR stays around 11% in the early '80s, heads up to 12% in the late '80s, drops to 11% or less in the early '90s. And then in 1995 or so it starts a sustained rise. By 2004, yes, it was at 13.5%. Today, it's up to 14.3%. What is driving that? Maybe someone who understands these things can explain it to me.
Also, isn't it important to compare the DSR and especially the FOR consumer component to the prime rate at the time? In the early '80s relatively high FOR consumer rates may have been due to high interest rates. But in the late '90s and 2000s we find that those FOR consumer rates -- the ratio of households' credit-card and car payments to disposable income -- are actually higher, despite lower interest rates.
Insert the usual caveat about how the plural of anecdote isn't "data", but:
My personal experience as a member of the middle class is that yes, I do have a ton of credit card debt and a terrible savings rate, but it's not because the Man is keeping me down or society is declining. It's clearly the result of a bunch of decisions I made, and I'll live with them.
I took out a lot of student loans to get my engineering degree, and spent my college time focusing on college rather than working a part-time job. I didn't skimp much on luxuries or entertainment purchases, and I ran up a goodly amount of credit card debt during that time. I have now secured a good job with above average pay, thanks to the education I received. I will spend the next several years trying to pay down my debt, and living well below the standard expected by my salary, and with little or no savings.
This probably looks bleak on a chart of statistics, but had I chosen to live within my means or go to a different school or not take that job in NYC, I could certainly have afforded to save much more and avoid revolving debt. I chose otherwise. And the fact that I have a Wii but no HDTV hardly makes me "poor". I do not believe this is indicative of a societal collapse...
The middle class is struggling only if "struggling" means that they can no longer be force fed the mass quantities of the life draining consumer fetishes the Business Roundtable gets rich on. This is a crisis only of corporate profits and greed, not of human welfare and needs.
While much public discourse focuses on the margins -- the horrible plight of the urban underclass vs. the high-life of the hedge fund manager -- I suspect, if you look, you'll still find a bell curve.
Does anyone have any data on this point? I suspect that it's becoming less true, but I have no knowledge one way or the other.
I observe that technology has been a tremendous boon to the productivity of the educated while simultaneously devaluing low-skilled workers. And furthermore, the value at the low-skilled end is being eroded by outsourced manufacturing and illegal immigration.
I suppose if you back out far enough it looks like a bell curve (Central Limit Theorem and all that), but I suspect that it really is becoming more and more bimodal. The educated get a larger share of a growing pie while the uneducated (or ineducable...) get an smaller piece - both proportionally and eventually (if not already) in absolute terms.
But it's just a supposition on my part. Does anyone have any data on the topic? I'd guess it would be something like household net worth as a function of highest level of education in the household. I wouldn't be surprised to find that distribution having grown increasingly skewed over the last 20-30 years.
The point is that if you show a scary multi-thousand percent rise in one sort of debt, when that sort of debt was just beginning to be used, you cannot claim that it would be "much the same" to look at all the other forms of debt; you've cherry picked a statistic whose rise was an order of magnitude larger than other sorts of statistics. And that's just the net amount of debt outstanding. As a percentage of national personal disposable income, outstanding consumer credit of all forms has gone from 19% of personal disposable income in 1970, to 25% in 2004; again, a small rise, but nothing like as dramatic as Warren proclaims. But of course, as I say, debt-to-income ratio is not really a very useful statistic; what we want is debt-service-to-income.
In the case of the company, you would be concerned because the commercial paper markets are already extraordinarily deep, so you'd want to know why the company needed to keep turning there. But in the case of consumers, the revolving debt market was essentially invented in the 1970s and 1980s, and revolving debt replaced less flexible and attractive forms of debt: installment buying, "rent to own", store credit, personal finance loans, letters of credit, pawnshops, even loan sharks. If commercial paper had just been invented, would you worry if Calvin Klein switched to notes from factoring?
Warren implies that we went from a nation of savers to a nation of debtors. This is not true; we went from a nation of people who saved some and borrowed some, to people who saved less, had more assets, and borrowed a little more. The boomers are in slightly worse financial position than their predecessors, but nothing like Warren implies.
Why does no one note that household incomes that used to be generated by one working family member, are now generated by two?
In these terms the way we live has changed significantly. The suburbs are not full of stay at home moms. There are none in any of my immediate family or friends, everyone works. Was that true in the 50's and 60's?
Personal income is more of a power law distribution than a bell curve. This may have been first observed by Pareto in the 18th century and has been consistently observed since.
Maybe this what you are looking for. In particular if you scroll down to the SCF chart book you can get the 1989-2004 data. In the data set rows 27-30/columns 118-123 might be what you want. The charts are functions in time but if you flip it and plot the different years as a function of eduction you'll get the picture you want. And
it would seem that there is the effect you expected - though it is slight.
But in the case of consumers, the revolving debt market was essentially invented in the 1970s and 1980s, and revolving debt replaced less flexible and attractive forms of debt: installment buying, "rent to own", store credit, personal finance loans, letters of credit, pawnshops, even loan sharks.
Today people use revolving debt (credit cards) to pay for things that not too long ago were almost always cash-only: restaurant meals, movie tickets, gasoline, service transactions of many varieties. Even supermarkets used to accept only cash or checks as recently as the early 1990's in many places.
Personal finance loans have been replaced by home equity lines of credits (or "second mortgages" to the less euphemistically inclined), more so than by credit cards.
Just to expand on what Peter just said (credit card purchases replacing checks). At any given instant, I have a fairly high (at least to my mind) set of balances on my credit cards. Ask the credit card companies about current balances, and those get added in.
But all of them get paid off in full every month. Ask about balances carried over at the end of each month, and they don't show up at all.
So, do I have a lot of debt? Or am I just using this revolving credit card debt as a convenience, and not actually running up a long-term (more than a month in this case) debt at all? All depends on what question got asked when compiling the data.
I do exactly the same as do most people I know.
My AMEX gives me airline miles so I use it whenever possible. So I usually carry a large balance that is paid off at the end of the month.
In the case of the AMEX I am getting PAID to do so.
So if I start each month with an AMEX balance of zero and end the month at say $2000. I am showing on average $1000 of debt for the year from this alone.
There are 2 problems with Megan's response immediately above.
First, given that during the period in question the United States went from being the world's largest creditor nation to being the world's largest debtor nation vis-a-vis the rest of the world, it seems pretty clear that we are in fact a nation of debtors. Obviously this is not included in personal/household income and wealth data, but we as a people consumer these excess government services and we as taxpayers are going to have to foot the bill. So when one compares household assets and debt, as Megan argues in favor of, then the implicit off balance sheet liabilities ought also to be considered.
Second, Magan's response addresses changes among forms of unsecured debt, not the massive shift from secured to unsecured debt. Certainly credit card debt is more attractive than installment payments, just as commercial paper is more attractive than factoring. And in both instances the widespread availability of this new, superior form of short term credit will lead to shifts not only among types of short term credit (i.e., the examples above) but also from long term, secured forms of credit to short term, unsecured forms of credit. Fair enough, though her point about the depth of commercial paper markets seems totally irrelevant.
But the data she presents in the original post indicate a shift in the ratio of secured to unsecured consumer credit from 26-to-1 in 1970 ($128n to $5) to roughly 3-to-2 in 2004 ($1300 to $823). It is myopic to argue that a change of this order of magnitude is not significant. And I believe that it is pretty well established a shift of this order of magnitude from secured long term debt to unsecured short term debt is generally a sign of financial ill health. Ask anyone who does credit analysis.
Gene, I suggest you look at Figure 2 from the Poole speech I linked to above. It gives consumption as a percentage of houshold net worth. That alone debunks Warren's thesis that their has been an alarming deterioration in people's finances. For the ratio of consumption to net worth has been pretty much constant for more than 50 years.
But if there were the sort of deterioration that Warren is claiming, consumption as a percentage of net worth should have risen sharply. It's pretty clear, then, that the correct explanation for the decline in the saving rate (as usually measured) is that as people saw their wealth increase due to equity appreciation and then a real estate boom, they increased their consumption. And that's just what conventional consumption theory would have predicted.
Whether people prefer one kind of debt to another is really of secondary importance. What matters chiefly is the overall financial condition of households, and that has not worsened.
What Warren and you seem to be arguing is: "Look at the rise in credit card debt. That means that consumers are strapped for funds and are desperately tapping their credit cards to continue a middle-class lifestyle they can no longer afford." But the thing is that we know that's not true. The inference is faulty, as the data on median incomes and houshold net worth show.
What I think would be plausible would be to argue that the rise in living standards from the early 70's on has been somewhat disappointing. It would then be reasonable to look at productivity (a word with which Warren seems unfamiliar) and to explore the reasons that prodcutivity growth was not higher in the 70's and 80's. It would also be quite reasonable to note the rise in inequality and consider what is driving that. But Warren doesn't do any of that. Instead, she cherry-picks a few misleading statistics that seem to support her assertion that the middle class is collapsing and just ignores the mountain of evidence that shows that, in fact, the middle class is okay. Maybe not great, but okay.
This is one spectacular post and set of follow-up comments. Kudos to Megan for launching the conversation and everyone else for carrying it.
rwe, I looked at the earnings data from Census that you say shows men and women are better off than 30 years ago or so. Note that if you just look at the first table, that seems to be correct. Beware of demographics: if you look at age groups, that is not always true for men. For my demographic, the median is higher today than in the 1960s, but lower than 30 years ago. And none of the numbers are adjusted for hours worked, which have certainly risen for women. From another table, median earnings for full-time year-round male workers are lower today than in 1972.
"And none of the numbers are adjusted for hours worked, which have certainly risen for women"
In reality I think women have shifted their work from inside the home to outside the home
Day Care, Washing machines, Dishwashers, Cleaning services, Microwaves, Pre Packaged dinners/Eating Out, Online banking/shopping etc. Have all alowed women to reduce their at home work and add formal job work.
Regarding the distribution of income (not a Bell curve -- a lazy-ass guess on my part), here's a chart and article from the Cato institute.
Sure it's the Cato Institute -- you can knock the messenger if you want -- but the data is from the CPS. And the key point is that the middle class is declining because the middle class, generally, is getting wealthier:
the middle of the distribution (the middle class) dramatically declined over the 1980s.... But the main point is that the vast majority of the “disappearing” middle moved to the right tail with a small minority moving to the left. That is, while inequality certainly increased in the United States in the 1980s, it did so primarily because the disappearing middle became disproportionately richer.
The news is much better for the 1990s. The 2000 distribution is to the right of the 1989 distribution. That is, in 2000 the person found at every point in the income distribution was better off than the person at that same point in the distribution in 1989—first order stochastic dominance.
"From another table, median earnings for full-time year-round male workers are lower today than in 1972."-ScottB
Where is this table? It certainly isn't in the link I provided. The link I provided shows that median income rose a little for men and a lot for women. Now, if you want to talk about the wage rate, look here and here. The two links show the same result: that the median hourly wage rate has risen in the last 30 years.
You might also want to look here. The census bureau has been nice enough to break down family income by family size. And what does it show? Real median family income rose for families of every size for the preceding 10, 20, and 30 year periods (going back from 2006). Can a reasonable person look at that and say: "Yeah, Ms. Warren is right. The typical family has been going backwards"? I don't think so.
Again, though, it's quite reasonable to argue that something went amiss in the early 70's and tha the rise in compensation and living standards was a little disappointing from say 1973 to 1995. What isn't reasonable is to pretend that living standards actually deteriorated for the typical family from the 70's on. That's just not right.
Isn't Warren's point not that Americans are being bankrupted by their mortages and credit cards, it's just that they are more leveraged than they were in the past. If someone loses a job, then they are in trouble because they don't have savings and because they don't have the back up of spouse who can enter the workforce to pick up the slack. The safety net of savings and the potential earning of unemployed spouse is gone. Net worth is now tied up in the home and isn't liquid. So, if someone loses a job, they could sell the house and get a rental. That might not be a disaster, but it is highly disruptive.
But the data she presents in the original post indicate a shift in the ratio of secured to unsecured consumer credit from 26-to-1 in 1970 ($128n to $5) to roughly 3-to-2 in 2004 ($1300 to $823). It is myopic to argue that a change of this order of magnitude is not significant.
Gene - you're missing the point here. Megan is pointing out that the rise in unsecured debt is due simply to its existence, and that that revolving debt replaced other forms of non-measured less institutional debt.
Thus, those particular measures of 'revolving debt' do not actually include all forms of unsecured debt that consumers had in 1970.
Your argument that these numbers represent a significant change in debt habits would be similar to arguing that the growth in downloadable music sales evidences a booming music industry without taking into account the concurrent decline in physical record sales.
They _may_ represent a significant change in debt habits, but the numbers here aren't enough to indicate whether that is true or not.
Henry -
Thanks for your effective response to my 7:57am comment about the bifurcation of US income classes. I wasn't making any sort of extreme statement about the country splitting into the poor and the superrich, but rather about a solid-to-upwardly-mobile portion pulling away from a not-upwardly-mobile section. Judging from the flattening bell curve that Cato report describes, it seems as if there's some truth to that idea but the development is more positive than I expected.
Do these numbers include illegals? It has already been noted that a lot of the middle class are moving up, not down, the scale. If you add millions of immigrants at the bottom, that further dilutes the theme that the middle class is drowning in debt. The real message is more like we don't have enough poor willing to work hard and succeed, so we import them.
Yes, I have way more revolving credit debt than I did 30 years ago. But I pay it off, in full, every month and Citibank gives me cash to use their card.
Isn't Warren's point not that Americans are being bankrupted by their mortages and credit cards, it's just that they are more leveraged than they were in the past.
She's arguing both. Yes, she talks about Americans being more leveraged, but she clearly makes a larger argument (fairly specious, as Megan has pointed out) that Americans can hardly avoid being leveraged, that it has nothing to do with consumption and Kindles and spending the emergency fund on new kitchens and everything to do with health care and "good" schools and evil credit card fees.
OK, I was multi-tasking during her talk and may have misunderstood, but didn't she say that the primary reason that Americans have become so leveraged was because of the cost of homes in good neighborhoods, the cost of a college education, daycare, and healthcare. The credit card fees wasn't the biggest ticket item. In fact, she said that Americans were spending less on discretionary items than they had in the past. The discretionary items are things usually on credit cards, not mortgage payments or tuition. I'm not sure that Megan has proven to me that American spending habits have stayed constant.
Hang in there--I'm only at minute 14
didn't she say that the primary reason that Americans have become so leveraged was because of the cost of homes in good neighborhoods, the cost of a college education, daycare, and healthcare.
She said it, she just didn't come anywhere near to supporting the claim with data.
E. Warren is a fraud
she was a participant in a widely repeated "study" saying medical bills were the driving force in over 50% of personal bankruptcy
Her definition defined "medical bills" as $500 of out of pocket expenses for 2 consecutive years. (It also included using cocaine and gambling as "medical problems")
So if someone had $30,000 of credit card debt and lived the life of a fool, so long as they shelled out $500 for "medical" reasons for 2 years straight they were driven to bankruptcy by Warren et al
This is the dishonest state of academia and politics in this country!
Health care takes a big and invisible bite out of wages and salaries, one that has grown much faster than incomes (or inflation). If you include company-paid health insurance in income, you get much higher figures. But the care we get now is vastly superior to that of the 70's, which is why our lifespans are so much longer and healthier than they were then.
Education, particularly higher education, has also become vastly more expensive. Unfortunately, its quality has declined.
Taxes have also increased far faster than incomes or inflation, particularly state and local taxes. Part of this is to subsidize...health care and education for those who can't (and never could) afford it.
Essentially the American masses have health care and education far better than what the wealthy could have afforded in those days, and doing so for people (e.g., middle class and poor kids) who would have had no access to it then.
And still our debt/net worth ratios are little changed. This cup is way more than half full.
Another "the plural of anecdote" story...
I'm horrible at saving and, thankfully, I know it. I refinanced my 30 year mortgage to a 15 year mortgage at the interest rate trough a few years ago - my payments went up $100 per month. I'm house-poor on purpose as a "forced savings" mechanism. I plan on living here until, at least, the mortgage is paid (10 more years).
Despite the current housing market and the state of my house (one bathroom is basically inoperable), I could still sell at a modest gain, if I needed to.
The anecdote: I have an annual party. Last year some acquaintances from the 'burbs remarked, "We love seeing houses in the city; in our neighborhood everything always has to be perfect." While not sure if I should be insulted or not, I realized that my as-time-and-money-allows approach to home improvements is not currently popular.
I would say that taking on debt to finance a complete renovation of one's kitchen rather than doing it based on cash flow is a sign of greater middle class wealth, rather than lesser.
If one is willing to spend $10,000 plus interest in order to get a "perfect" kitchen now, solely to maintain appearances, rather than saving $250 a month and doing things piecemeal as the savings allows, things are pretty good.
You're a real piece of work, McGargle.
Whistle in the dark some more, stretch; that'll take care of that national insolvency problem.
If one could spend $10,000 and get a perfect kitchen I would say things are fan-fing-tastic. I live in a nowhere town, not some big city, and $10K doesn't begin to get a new kitchen, much less a perfect one, even here. Where do you live -- in 1978 or something?
Yeah, let's look at that table and the claim that 'median wages have gone up'. in 2006, in constant dollars, the median male earned $32,265. In 1976, 30 years ago, the median male earned $29,692. That's a jump of less than 9%. Over _thirty_ years. It gets worse: that translates into an average raise of income of less than 0.03% a year.
Yeah, that's some 'growth', alright.
Which means that if inflation is understated (and it most certainly is) by 0.03% or more, the median male has lost ground. And if one also accounts for the fact that median hours have also increased for full-time workers, and that the median age has increased over the last thirty years as well, well . . . it's pretty grim.
[1] You've got to be careful with these stats, of course. The median hours of employment has actually fallen over the same time frame. How is this possible? Because of the number of part-time employed, or under-employed people have increased. If Jack goes from working 40 to 50 hours a week, and if Jill enters the work force working 20 hours a week (perhaps she's Jack's wife, and they're trying to make ends meet), the average rate of employment _drops_ to 35 hours a week.
ScentOfViolets, try using compensation for that time period instead of earnings.
==
Back then, households were using 11.13% of their personal disposable income to service mortgages and consumer debt. By mid-2004, when Elizabeth Warren was giving that speech, the DSR had soared to . . . 13.5%.
==
Late comment but have to say it - Gene's note about the balance sheet nailed it. Megan, in the same way we have to adjust for inflation, we have to be sure to always stay consistent with median and mean for discussing income in this country. The DSR is a mean estimate - it doesn't even look at any *actual* loans or people, it just divides nation-wide totals. Not relevant for Warren's talk.
As far as technology innovations with credit cards, and the debt increasing as people get used to it and the market matures - should that really take 37 years? Also most of the innovation is credit-cards replacing cash, checks and money orders (think paypal and automatic bill paying) - it makes credit cards more ubiquitous, and radically increases the usage of it, but should have no impact on debt by itself.
Gene, another sign that things are pretty good, I'd say: The definition of "perfect" has risen.
If you are talking brand new everything, granite counter-tops, Viking range, stainless appliances, etc.. Then, no, $10,000 is not even close.
But let's take an example: cupboards rarely fail structurally. Most people just don't like the current ones. Take them down, sand them, re-finish them, then put them back up. Total cost: sandpaper (a belt-sander if you don't have one) and paint. Result: New cupboards. New hinges and handles can, again, be pricey, but something reasonably nice will be less than $500. Probably a two-weekend (three or four for me) project.
Floors are much the same: Peel up the linoleum/no-wax. Put down backer-board, tile, grout. Two weekends. Costs about $2,000 - even with good tile.
That leaves $7,000 for sink, appliances and counter-tops. You can see where this is going.
Maybe I'm not "middle class" because I consider doing this sort of thing myself as normal. Hiring a contractor to put in a floor? You must be kidding. Hiring a plumber to replace a sink? Why? A new sink in a new room, yes, a plumber is a good idea.