Opinion pieces and speeches by EPI staff and associates.

THIS PIECE APPEARED IN THE FLORIDA TIMES UNION ON JUNE 2, 1999.

What Has the Dow Done for You Lately?

by John Schmitt

The stock market is riding so high that most Americans have trouble accepting that the net wealth of the typical U.S. household has actually fallen in the 1990s.

Three features of the balance sheet of the typical American household -- the one right in the middle of the wealth distribution -- account for the disappointing wealth performance of the 1990s.

First, despite the hype, 1995 figures from the Federal Reserve (the most recent official data available) indicate that 60 percent of households don't hold any shares in the stock market. Moreover, of the households that do own shares, about 72 percent have holdings worth less than $5,000 -- hardly the basis for a prosperous retirement.

According to projections based on the 1995 data, stock holdings have risen dramatically during the decade, nearly doubling between 1989 and 1997. However, even by 1997, the typical American household held just $7,800 in all forms of equity investments. To put this in perspective, in the same year, the top 1 percent of U.S. households owned stocks worth $2.5 million, while the next 9 percent held stocks valued at $275,000.

Second, real estate values have been stagnant or falling throughout much of the decade. In 1997, the typical household's real estate assets approached $90,000, a figure more than ten times greater than the corresponding shareholdings. In practical terms, this means that a five percent change in the value of home prices has a greater impact on the typical household's wealth than a 50 percent change in stock prices.

Third, household debt levels have skyrocketed. Growth in credit card debt, mortgages, and home equity lines have more than offset gains in stock prices and the lackluster real estate market. As a result, between 1989 and 1997, the typical household's net wealth decreased by 3 percent, after adjusting for inflation.

The growth in household debt -- rising from 75.8 percent of total personal income in 1989 to 84.8 percent in 1997 -- is driving much of the current economic boom. The unsustainable growth in debt, however, also undermines the stability of the recovery and threatens to magnify the impact of any downturn. With interest rates low for the moment, the debt burden -- the share of income devoted to paying interest on debt -- has held steady through the 1990s. A rise in interest rates, however, could put some newly-indebted households over the edge. Even a mild increase in unemployment could produce a substantial rise in bad debts, private bankruptcies, and mortgage foreclosures.

Stock prices that are wildly out of line with underlying corporate earnings have undoubtedly contributed to the great American spending spree. The dizzy Dow has added an independent element of economic instability. But the balance sheet of the typical American continues to deteriorate.


[ POSTED TO VIEWPOINTS ON JULY 9 ]

John Schmitt is an economist at the Economic Policy Institute. He specializes in labor markets and is a co-author of State of Working America 1998-99.