A new report by the Federal Reserve Board shows how hard Americans were walloped during the Great Recession. A Washington Post summary stated, “median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010.” That rolled back wealth to 1992 levels, essentially wiping out nearly two decades of wealth creation.
“It’s shocking,” Esmael Adibi told us; he’s the director of A. Gary Anderson Center for Economic Research at Chapman University. He explained that there’s a difference between income and wealth. Income is your paycheck and other compensation for work. Wealth is “all of your holdings, typically your home. If you’re wealthy enough, it would include your savings, stock market investments, maybe a boat.”
The main culprit in the decline, of course, was the housing crash. He said home values dropped by up to 60 percent in some places, such as Modesto and the Inland Empire. Orange County was more fortunate — if you can call it that — seeing prices drop by about one-third.
The stock market also crashed hard. The Dow Jones industrial average peaked at 14,164 on Oct. 9, 2007, then plunged by more than half, to 6,594.44 on March 5, 2009. Last Wednesday, the Dow stood at 12,496 about 12 percent off the peak. That’s a greater recovery than for home values, but still lags the peak reached nearly five years ago.
The consequences of the plunge in the median family net worth involves what’s called the “wealth effect,” Adibi explained. When people’s home and stock values rise, their “wealth effect” generates more spending. That happened in the early 2000s, when soaring home prices sparked new spending. Especially in Orange County, it was a time when people used the “wealth effect” to refurbish homes, or buy second homes to rent out.
The prosperity rippled through the economy.
During the 2007-10 crash, the opposite happened: The “wealth effect” went negative, and people stopped spending. “That’s the reason the recession was so bad,” Adibi said. “Those who lost jobs, lost income. And those who kept their jobs, lost wealth. Both spent less. Spending is about 70 percent of the economy.”
Only now are home prices starting to rise a bit in some areas, he said, while remaining stable in others. This is affecting consumer spending.
He noted, for example, that Tiffany & Co.’s sales of luxury jewelry increased 8 percent in the first quarter of 2012 over the year previous.
For us, that means policies need to restore some certainty to the system to make sure we don’t get Great Recession II — or worse. A nagging sore on the body politic is tax rates. The Bush-era tax cuts — already extended — are set to expire Jan. 1, 2013. Taxpayers at all levels of income have no idea what their tax liability will be Jan. 1, 2013.
The president should take this problem off the table by immediately working with Republicans on making these tax cuts permanent.
The Orange County Register