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Inequality Explosion

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We have all the makings of a pronounced spike in income and wealth inequality. The major trends of the last 8 months suggest that the least wealthy/lower earning 80% of the American population are in increasingly severe pain. The vast majority of Americans live off of labor income and possess only one significant asset: their private home.

More than four out of five of us need strong labor markets and stable or rising home prices. Our standard of living and ability to function economically rests heavily on these two pillars. However, employment is plunging, house prices have tanked and wage growth is stagnant. The wealthiest Americans see their fortunes driven by asset market performance, tax structure and corporate profits. For the last eight months asset markets have turned in their second best performance in a century. On 09 March 2009 the S&P500 stood at a low of 676.53. On the evening of 03 December 2009, the S&P500 stood at 1099.92. The S&P500 is the broadest measure of US Stocks. This index has risen 423 points (63%) from its low. Individual tax rates remain low and corporate profits have staged a dramatic recovery. We have all the makings of massive divergence between the upper reaches and the increasingly crowded lower ranks of the economy.

Incomes/Employment

Between the start of 2007 and the end of September 2009 there was $379 billion (3%) increase in personal income. Across the same time period there was a $449 billion (27%) increase in social assistance payment from the central government. More than the total increase in income is accounted for by temporary government programs designed to partially offset hardship. There has been a $531 billion (6%) decrease in American's real income when we subtract special assistance programs. Income losses have been concentrated in the lower 80% of the income and wealth distribution. Our incomes are under pressure and we are subsisting on extensions of government assistance programs.

Our national unemployment rate through November was 10 percent. This number fails to capture discouraged workers and involuntary part timers. These are people who want and need work but have either given up looking, or have had to settle for fewer hours than are needed. If we include these groups we have a national unemployment rate of 17.2%. Employment and income look unlikely to provide a meaningful boost in the near term.

Homes/Wealth

The average private home has lost 10% of its value since late 2008. We have seen some slight increases in recent months but this year will still show a significant loss in price for the average house. Last year also saw a significant reduction in the average house price as well. Thus, the only significant asset most Americans can claim continues to depreciate, year over year. Federal Reserve Data (Z1 Table Release 17 September 2009) suggests that American households have lost $3.7trillion in residential real estate wealth since 2006. The US Census makes clear that homes represent 42% of the average household's net worth. Almost half of the wealth held by our families is held in the form of the private home in which they live.

Wealth in homes is measured in net worth calculations as owner's equity in the house. This is the portion of the home value, above the mortgage debt owed on the home. Mortgage debt is by the long term contracts signed when mortgages are written. Falling prices subtract wealth as the value of the house declines and the debt owed on the house remains fixed. Home mortgage debt stands at $10.4trillion today and was at $10.5trillion 1 year ago. Mortgage debt has stayed very flat over the last year. Prices have been moving down. If your debt on the house is fixed and the price has fallen, your wealth is falling. The falling price of American homes hits the hardest for those who own little or no equity in their homes. This tends to be the young and those who were taking money out of their homes using equity withdrawal to supplement income. Approximately 25% of Americans presently owe more on their homes than the appraised value of the home. For these millions, home ownership has shifted from a source of wealth to a source of poverty.

42% of wealth for the average family comes from home ownership, home equity. 61% of net worth is held as home equity among African-Americans, 59% for Hispanics. For the 3rd quintile, the middle of the income distribution, 79% of net worth is home equity. On average, the private home is the largest wealth category and is 4 times the size of stock and mutual fund shares, the second largest component. US home equity, the portion of the average American home owned by the average home "owner" has plummeted from 58% in 2003 to 43% in the middle of 2009. Thus, the average American now owns significantly less than half the value of their home. This means a decline in the wealth, net worth, of the bottom 80% of households.

What does all this mean? It means that we are the midst of a great shift in social wealth in the US. It means that the last 9 months have likely seen a massive upward shift in the distribution of America's wealth. We have seen massive increases in labor productivity with stagnant wages. We have surging stock and bond markets and struggling housing markets. The shifts in wealth and income over the last year will take a while to show up in national data. There are already being felt around many kitchen tables. It is likely that the wealth and income trends discussed above will have profound impacts on life for tens of millions of American families. It is also likely that these trends and public responses to them, will drive American political developments for the next few years.