Household Income and Debt Trends Since 1980: Quick Picks

The folks who write Credit Slips are among those who have long wondered what the “exit strategy” was for an economy that was predictably on a wobbly course, with about 70% of GDP driven by household spending when many of those households were on kind of shaky ground.  That’s obviously not a sustainable long term strategy for economic growth when, on one hand, the income side of the ledger for a large share of those households was sputtering or stalling, while demands on the expense side from big ticket, basic items like health care and health care financing, education, and housing were growing.  The American household debt burden looks like a more complex problem if you think about the cumulative impact of all of these trends, rather than just thinking “flat screen TV” and stopping there.

In looking at data about these trends, I’ve been struck by the comparisons between the first post-WWII era (roughly the 30-35 years ending in the late 70s – early 80s), and the second one covering the last 30-some years.  Since the current crisis seems likely to serve as the end point to the late 20th century economic era, it’s interesting take a Before and After look at the household account trends.

Income growth:  Through this last period, the income gains have skewed increasingly not just to the top, but to the very tippy-top.  From 1946 – 1976, the average income growth for the “bottom” 90% of households was 92%, compared to 25% for the top 1%.  But from 1976 to 2006, the bottom 90% saw only 10% growth, while for the top 1% it was (wait for it --)  239%. (Sources for this and related figures are cited in the appendix to CRL’s comments to the Fed's then-proposed rules defining unfair and deceptive practices for credit cards.)   For a really cool visual of this uncool trend, take a look at the graphic in Clive Crook’s 2006 Atlantic article called "The Height of Inequality." And while you’re there, the story’s pretty interesting, too.

Savings:  A chart on the "By the Numbers" page on Inequality.org shows that the savings rate roughly doubled from 5% in 1949 to over 11% in 1982.  Since 1982, it looks like a downhill ski slope, and the rate was in negative territory by 2006.

Debt:  The debt-to-disposable income ratio of American households more than doubled from 60% in 1980 to 133% in 2007.  A recent article in the Economist says that household and consumer debt went up from 100% of GDP in 1980 to 173% now.

Sorry I haven't yet collected nice links to specifics on those expense-side demands, except for a recent Washington Post article noting that “college tuition and fees have jumped nearly 440%" since the early 80s, but you get the picture.

Lots of factors went into shaping this picture, not the least of which is just the economic world evolving.  But it wasn’t all out of our hands: we made some public policy decisions that helped. (And yes, personal decisions, including collective decisions that made up private sector policy decisions as well.  Personal responsibility is appropriate for both home and work.)  Now will be a good time to find our way to some better trend lines than these. Yes we can.  You betcha.  (In the spirit of bi-partisanship.)

Comments

[E.L. Beck]

This resonates with the Federal Reserve data I first reviewed a couple of years ago, and in simplistic form dropped into my 12/8 post: bottom 80 percentile of households with single-digit increases in household incomes from 1989-2004, triple-digit increase in household debt over the same period.

It's nice to know The Fed is generating this data, but the policy makers appear not to have bothered following it. No stimulus relying on renewing consumer lending is going to work... there's a lot of deleveraging to be done.

[SJ]

I would like to see Congressional hearings exploring the reason for the staggering increases in college tuition and fees.

By saddling graduates with a lifetime of student loan repayment, we have systematically destroyed the ability to build perosnal wealth and have lowered the standard of living in the United States.

I am not convinced that the increase is not merely greed which has been allowed to flourish by the corresponding decrease of manufacturing and other jobs that allowed people with "only" a high school diploma to earn a middle-class lifestyle.

An acquintences' succinct answer to the quesiton "why do you think college has gotten so expensive" was "because they have people who have no choice but to pay it."

[Steve Klesner]

The charts on the inequality.org site are eye-opening. The last peak of inequality was in 1928, and we had just about equaled that in 2005. Is our current economic condition due primarily to income inequality?

The charts showing the growth of real income by quintiles during the post-war 30-year period and the past 30 years suggests that our economy, and even the richest Americans, do better when there is more equality in income growth.

The past 30 years show some real income growth for most groups, but those would be completely offset, I suspect, by the rapid increase in the costs of health care and higher education.

I think there is one underlying factor for our public policy on wealth distribution, and it is not about greed. Compared to many nations, we are a heterogeneous nation in so many ways: by race, by religion, by culture. While often a strength, it can be a real weakness when we fail to closely identify with our fellow citizens. We tend to view wealth in society as a zero-sum game: if someone gets something, it is at my expense. So, for example, a person doesn't want to have the state pay for health care and higher education because it costs that person money today for some stranger's benefit. Even if the person can be shown that he or she benefits far in excess of the investment, it is objectionable. This trait is very pronounced, I think. I was thinking about why we have different attitudes about education up through high school and higher education. I think it is historical, in the sense that we all grew up with universal education and so expect it, but I also wonder if we would approve universal education today if we did not have a history of it.

[Patches]

Great post Kathleen I like your point of view and the color of the post. Holy smoke! 239%? “Trickle Down” doesn’t seem like a downward flowing mechanism anymore. “Hoover Economics”?

There are some great and powerful aspects to capitalism but one thing is for sure the consequences for getting it wrong are huge. It seems like every time we hit one of these “bumps” in the road we have to enact things like Social Security, FDIC, etc… We could have kept in place “some” reasonable regulation and avoided things like: Giving a sub-prime borrower an “Option” 80/20 ARM; an ARM period; an Option ARM; average daily balance; Payday loans. I heard this “chick” on TV today saying that one of the major reasons for this “downturn”/ “recession” was the “Community Reinvestment Act”. I call her “chick” (meaning no disrespect to you Kathleen) I know she was more like some right wing radio talk show host. I mean how can she say that the Community Reinvestment Act forced the banks into offering those “creative” lending instruments to sub-prime borrowers? What the heck is FHA for?

What my wife and I personally experienced was that FHA loans took longer to close; had stricter conditions on the actual condition of the house; and required various seller concessions. If the government was to “invest” the underwriting had to be tight. It’s our (collective) money right? So, those loans even today are the ones least likely to be “underwater” even though they only required a 3% down payment. At least locally that is what I am and have been seeing. In 2005-2007 you could not even buy certain houses if you just had FHA financing. Some if not most sellers wanted “conventional” financing. It was a sellers market and they got every penny plus some and FHA didn’t want you to have more House than you could afford among other conditions. So…. we were outbid even on the homes that had open conditions on financing.

It stands to some “micro-economic” reason that if these “creative” financing options were not available to sub-prime borrowers then we would not have seen the dramatic increases in property values; tax revenues; Home Depot credit card debt. There were some people who made more than they lost (how could you not with 239%?) but there but the increases were not sustainable and everyone knew it.

We really need to take a closer look on how the availability of Bankruptcy Relief correlates to greater risk taking on the part of the Banking industry and how the availability to effectively restructure consumer debt effects retail growth. When student loans were made all but impossible to discharge in bankruptcy we saw (by coincidence, wink wink) dramatic increases school loan lending and in college tuition increases. The 910 Statute in Chapter 13 was passed in Oct. 2005, I started seeing more and more vehicle notes with deficiencies on vehicles that were backwards at trade in financed. If you make it hard for a consumer debtor to restructure the longer (if ever) it will be before he or she jumps back into the game. Our “Game” needs volume unless we start actually producing something in this Country.

[mark]

I suggest that the period 1946-1976 was itself a bubble, a wage bubble, caused by the fact that US based manufacturers, and consequently their workers, had no meaningful competition on the planet, due to a host of factors, most particularly WWII's devastation of the main prior competition, the sequestration behind the Iron Curtain of certain potential competitors, the undeveloped state of "third world" competition, race and gender based legal and cultural barriers to entry into the work force within the US, significantly lower immigration rates, the infrastructure investment made during that period in US airports, ports and highways, and the favorable proximity of US manufacturers to the only consumers with disposable income, i.e., the US consumer. While most of those factors have public policy origins, so too does the decision of the US to disable communism by cultivating capitalism in postwar Europe and in the "third world" Asia, which gave rise to the competition that has eviscerated the wage premium in evidence in 1946-1976. Those factors were historic accidents, not replicable today, and it is quixotic and unproductive to expect to recreate a working class wage structure similar to what 1946-1976 workers were able to extract.

[catherine]

Wow great read. Amazing makes me understand how the loss of one of our incomes was our two parent households undoing. I watched maxed out-showtime Elizabeth Warren from Harvard has some great insight too. Now what will our country do? Has anyone thought about how many of us late baby boomers will retire without having a home paid off and since we have used up all our surplus of social security we will have just a small pension based on current market loss. I've come to the conclusion I owe it to my children to die young. I am only 46 but I may have to get a dnr order in the interest of preserving the the future for my college kids and almost post college kid. I also have to say that the preditory lending thing really does happen. Any one thinking of buying a home or anything get a Lawyer!!! I can't over emphasize that. I know in our situation we would have never bought our second home had we gotten a lawyer to review everything. You just assume brokers have to follow legal standards. Our first home an FHA when we went to get our second you were right everyone was selling only conventional. I think the only good thing we as Americans can hope for is some new standard of fair play, we can only hope.