Tuesday, June 12, 2012

US economy: The Great Recession and the collapse of wealth

by Michael Roberts

In a previous post (The long depression – the waste of capitalism, 3 May 2012) I reckoned that the US economy has now permanently lost $5trn of income (or some 40% of current US GDP) that would have been generated by Americans at work if there had not been the Great Recession and the ongoing long depression (i.e. below-average potential real GDP growth and high unemployment) since mid-2009.

But this loss of output is nothing compared to the loss of wealth suffered by the average American household. According to data released triennially by the US Federal Reserve on US household finances (Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, June 2012), the Great Recession has wiped out nearly two decades of Americans’ wealth, with working-class families bearing the brunt of the decline. The Fed survey found that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7%. It was less for the top 10% because they get nearly 25% of their income from profits out of businesses they own and profits recovered sharply in 2010, while wages did not. The poorest families suffered the biggest loss.

But median net worth (wealth) decreased even more dramatically, down 39%, from average net wealth of $126,400 in 2007 to $77,300 in 2010. That put Americans now no better off than they were 20 years ago in 1992. The wealthiest families actually saw their wealth rise. The biggest drop occurred among middle-income Americans, whose wealth is inextricably linked to their homes.

The implosion in the housing market inflicted much of the loss. The value of Americans’ equity stake in their homes (i.e. the value after deducting the mortgage) fell by 42% to just $55,000. For most Americans, what wealth they have is in bricks and mortar (or is wood and steel?). After mortgage defaults and repossessions and an inability to get a mortgage since 2007, home ownership, part of the great ‘Anglo-Saxon’ consumer dream, has become just that – a nightmare. Home ownership has fallen back to the level of 2001, before the housing boom took off.

Households have been forced to try and pay down their debt or default on it. Even so, the value of their assets has fallen even more, so household debt relative to assets rose markedly and the proportion of American households in arrears on their debt payments rose to a record 10.8% in 2010.
The Federal Reserve’s quarterly Flow of Funds report for Q1 2012 also came out last week. It revealed that for the first quarter since house prices peaked in 2006, the value of real estate assets held by American households rose. The value of real estate held by all American households had fallen by 47% from 2006 to the end of 2011. Now it was up slightly.

In contrast, financial assets (stocks and shares, cash and bonds) had recovered the loss of value suffered during the Great Recession and had finally returned to the level of 2007 in Q1 2012. This was mainly because stock prices had recovered somewhat, along with bond prices, but also because richer Americans were building up some cash. But with home values down nearly half, the value of assets held by American households was still 20% less than it had been in 2007 and net worth was still some 8% below its peak in 2007. Net worth had recovered simply because some Americans were defaulting on their mortgages and other debts and these were being written off. In other words, overall net worth had risen because there were less Americans with mortgages. So it was the least wealthy who were taking the hit.

And that brings us to ‘deleveraging’, the necessary process that capitalism must go through to restore profitability. After the credit binge of the 2002-7, private sector debt (households, businesses and banks) had reached $40.8trn in 2008. These sectors have now deleveraged to $38.6trn, or down 8%, mainly because banks have shrunk and households have defaulted on their mortgages. But this private sector deleveraging has been countered by a huge rise in public sector debt, up over 70% from around $8trn in 2007 to $13.7trn now and still rising, if more slowly. Public sector debt has risen to finance the bailout of the banking system as well as rising budget deficits as tax revenues collapsed and unemployment and other benefit payouts rocketed.

The overall debt burden (public and private) in the US is still rising and at a rate that matches nominal GDP growth. So the overall debt to GDP ratio is still not falling. This explains why the apologists for capitalism want to reduce the public sector debt or at least shift the burden of financing it onto labour and away from capital.

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