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June 13, 2012

Our View: Plunging net worth

From The Associated Press

JOPLIN, Mo. — The Federal Reserve has announced the median net worth of families plunged by 39 percent in just three years, from 2007 to 2010.

There, in our view, is the real effect of the Great Recession, particularly the huge drop that continues in the value of homes in America today. And the hardest hit by this plunge is the American middle class.

Yes, increasing unemployment reduces the weekly income of some, mostly those who lost their jobs. But long-term unemployment insurance has at least mitigated that effect. As well, wages have not gone up by much at all, further tightening the financial noose around citizens whose income is based only on wages. But the Fed report speaks of all wealth held by Americans, not just income on a regular basis.

Middle-class Americans accumulated wealth over their lifetimes through savings, investments in relatively small amounts but most particularly in the appreciation of the value of their homes. When those home values plummeted, there was a huge drop in consumer confidence. Spending dried up, and we still are struggling to recover.

Income from wages is typically used by many Americans to support their routine daily lives. Wage income pays for groceries, gas for the car, even the mortgage as well as the “little things in life” like going out to dinner from time to time.

But bigger investments of money, again from the middle class, are made based on overall wealth or net worth.

Many in the middle class in days gone by took out second mortgages to finance the college education of kids. That approach is no longer an option for many and so we see a skyrocketing student-debit crisis.

If, at least on paper, one’s net worth is increasing steadily over time, then borrowing money for a new car or even a new home is a comfortable financial decision. But, see that net worth go down by almost 40 percent and people get scared. No wonder consumers are reluctant to spend today, at least on big things.

It might be possible to stimulate the economy with enough federal money to gain a short-term drop in unemployment.

But reducing unemployment, particularly for the lower wage earners, will in no way restore the confidence of America’s middle class.

Most arguments today are all about the “rich and the poor.” Meanwhile, the middle class struggles.

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