[I love the idea that the "average" household is at the 95th percentile. Are averages like that, instead of medians, used often in supposedly respectable publications when they discuss income and wealth? I thought it was considered a pretty base trick.]
Financial Times, May 1, 200
LETTERS TO THE EDITOR: An eye-popping propensity to consume
>From Mr Doug Henwood.
Sir, Gerard Baker writes ("Steady as she goes," April 26) that the US savings rate has dipped below zero because "consumers have calculated that the growth in their wealth satisfies their long-term savings needs". That's a common analysis, but it's probably wrong.
It's always dangerous to draw conclusions from simple averages, but it's especially dangerous with something as skewed as the distribution of wealth - itself the joint product of two highly skewed distributions, assets and liabilities. In 1998, the top 10 per cent of the US wealth distribution held 63 per cent of assets, but owed only 30 per cent of liabilities. Aside from their houses, the bottom two-thirds of the distribution has few assets to speak of at all.
The "average" household, a statistical fiction frequently derived by dividing the aggregate figures from the flow of funds accounts by the number of households in the US, actually corresponds to the 95th percentile of the wealth distribution. Yes, the middle class saw some gains from the run-up in house prices, but the growth in mortgage debt far outstripped those gains. In 1991, owners' equity equalled 61 per cent of the value of household real estate; by 2000, that had fallen to 54 per cent.
A more accurate picture would be this: the stock market boom drove richer Americans to consume more than they would have otherwise, either by spending their unrealised capital gains or by borrowing against their unrealised gains. Non-rich Americans have spent all their income and then some, thanks to vigorous borrowing.
Since the beginning of the expansion in 1991, Americans have shown a marginal propensity to consume (MPC) of 111 per cent - an eye-popping number with almost no historical precedent, almost 20 percentage points above the 1946-90 average. The expansion immediately following the end of the second world war showed an MPC of only 109 per cent - that after 15 years of depression and war. But for most people, the stock market was only a small part of the story; more important was the growth in subprime credit, no-money-down mortgages, and home equity lines of credit. No wonder Alan Greenspan, the Fed chairman, is acting worried.
Doug Henwood, Left Business Observer, Village Station - PO Box 953, New York, NY 10014, US
Copyright: The Financial Times Limited