Did Americans Get Poorer or is USA Today Wrong?
|October 5, 2011||Posted by Roshawn Watson under Uncategorized|
By: Roshawn Watson
A recent USA Today article suggests that the typical American family got poorer in the last 10 years. They cite the following as their rationale:
- According to the Census Bureau, the median household income decreased by 2.3% to $49,445 last year and has fallen 7% since 2000 after adjusting for inflation.
- Inflation adjusted-income is the lowest since 1996.
- Poverty has risen too. Now, 15.1% of people live in poverty, the highest level since 1993.
- This decline in income is particularly prominent among minorities and the young; many have chosen to move in with parents as a result.
My initial impression from reading this article was “Yuck!” However, upon further review, I realized there were some important confounders to the data presented and underlying assumptions being made that I don’t necessarily agree with. Let’s explore this article critically, and you tell me afterward whether YOU CAN DECIDE WHETHER AMERICANS GOT POORER.
Net Worth Changes?
We love to discuss income; clearly it is important. The size of the shovel determines the speed and efficiency with which one can get out of any hole. However, income is merely a singular component of our overall financial pictures. Net worth is also important: to many, it is more important, especially over the long term. If you don’t believe me, consider the median income of the typical American household: $50,000. At this income, a household will bring in approximately $2 million over a working lifetime (not including taxes nor adjusted for inflation). Now if this household invests $900 monthly, it would end up with at least $2 million WITHOUT EVER GETTING A SINGLE RAISE (assuming 10% rate of return and 30 year time horizon). Here’s the rub, even if I am half wrong, this household would have a net worth in excess of 11 times the median net worth.
Problem with the USA Today article #1: Why wasn’t there any mention of median net worth? Note total household wealth in America increased by $10 trillion (this could be skewed by unequal distribution of wealth).
Of course, the net worth isn’t perfect. Perhaps, among the biggest criticisms with using net worth as a metric is that it is often inflated (or at least inaccurate): our perceived value of our assets differs from their true market value. For example, if you purchased a house for $750,000 in 2004, that doesn’t necessarily mean that you should list the value of the house in your balance sheet as $750,000 today. It is possible that your real estate agent would list the house for $500,000 (or $950,000). Similarly, it is arguably more difficult to determine the “proper valuation” for a privately-owned business. Sentiment and “good will” often obscure an objective valuation. All to often, we hear tales of the illiquid business owner having cash flow problems or the family having to sell their inheritance in order to pay for the death tax due to lack of cash (note the death tax laws have temporarily changed). Thus, this is why I suspect wealth research is increasingly focusing on “investable assets.”
Problem with the USA Today article #2: There was no mention of investible assets despite the fact that savings rates are UP (from negative during the pre-recession to 5.7% in 2009; the highest in 14 years).
Debt to Income Changes?
Americans are shedding debt. Debit card usage now surpasses credit card usage. Credit card balances have gone down. Unfortunately, recent news suggests that BOA and Wells Fargo (and other large banks) may reverse this trend by charging a $3-5 fee monthly fee to those using debit cards to make up for the $2 billion loss in revenue from the Dodd Frank bill (necessitates that banks charge businesses less for debit transactions).
Problem with the USA Today article #3: There was no mention of Debt-to-Income (or any other pertinent financial) ratios despite the fact that debt to income ratios have also gone down since 2007. Incidentally, had the article include this ratio, it would have supported their argument (Debt-to-income ration was 100% in 2001 and peaked at 133% in 2007).
My point is the USA Today article may be misrepresenting the issue. The author asks one to assume that income is the only determinant of wealth and poverty. If your income stagnated or went down by 5%, but your wealth increased by $250,000 (certainly possible over a 10 year period), you are poorer according to the article. Is that how you would classify people in that situation? Suppose your income went from $60,000 to $50,000 because you retired: that is you went from earned income to solely portfolio and passive income. Are you worst off financially for doing this considering that your expenses (i.e. gas from a commute, clothes, etc.) likely have also decreased? You can see the flaw associated with their oversimplification. Anyone can cherry pick a few statistics to support a point, which is why an article looking at the aggregate of pertinent ratios (i.e., Debt-to-income, quick ratio), financial statements (i.e net worth and income), and other key metrics (i.e., liquidity) would yield a more fruitful discussion of American finances. Perhaps such an article won’t provide you a sensationalistic title or talking points in line with a particular agenda. However, it would be the TRUTH.
More broadly, you should NOT be force fed your opinions about the economy, investing or personal finance in general. I am certainly not representing the current economic climate as anything but challenging. However, the hyperbole surrounding its discussion is thwarting our chances at having an honest discussion about macroeconomics that might effect any real change.
I SIMPLY REFUSE TO FEAR.
|Image was adapted from Aldrin Muya|
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.