I'm generally an optimistic fellow. I believe that the past 10 years -- boom, bust, and bubble included -- have been one of the better stretches of U.S. economic history. And in replying to pessimists, I've often made the point that I'd happily take a repeat of the past decade, with its strong productivity growth, a lower poverty rate, higher real wages for less-skilled workers, and an increase in overall national wealth.
But as new data come in, it's becoming clear to me that the New Economy has been at best a mixed blessing for one group: the young. The reason is simple. Most of the benefits of strong productivity growth over the past decade seem to have flowed not through rising wages, but through higher returns on capital.
The stock market, after adjusting for inflation, is up by some 67% since 1995, and inflation-adjusted home values are up by 65% over the same stretch. As a result, real net worth per person -- a measure of the wealth of the country -- is 46% higher than it was in 1995, when the New Economy boom began. That's the good news.
But the sad truth is that an economic boom based on capital appreciation discriminates against the young, who have not had a chance to build up any investments. While older folks -- some 75% of whom own their own homes -- have been enjoying the benefits of seeing their home values soar in recent years, young Americans who were just entering the job market could only stand by and watch helplessly.
Call this a New Economy definition of torture: to be forced to watch a feast of rising property values without being able to partake.
Here's a number that summarizes the problem: Between 1995 and 2004, the median net worth of young households (aged 25-34) rose by a meager 1.3%, adjusted for inflation. Meanwhile, the net worth of older households (aged 35-64) soared by almost 40%.
These numbers come from the Federal Reserve's authoritative Survey of Consumer Finances, released in February. They suggest that people who have written about the plight of the young -- including Tamara Draut, author of the new book Strapped, and Susan Berfield, who wrote a story for BusinessWeek entitled Thirty and Broke (Nov. 14, 2005), are right on target. While the overall state of the economy is better than it was a decade ago, the young have lagged behind.
This difference between young and old shows up even more strongly for the college-educated. The net worth of young, college-educated households rose by 11% between 1995 and 2004. That's O.K. But it's far below the 89% gain of their older counterparts.
To add insult to injury, the burden of education debt more than tripled in real terms for young, college-educated households, going from $5,420 in 1995 to $17,000 in 2004 (both in 2004 dollars).
Data on income show a similar pattern, though not quite as stark. From 1995, the beginning of the New Economy boom, to 2004, the date of the latest Fed survey, real incomes for young households rose by 8.6%. That's better than nothing.But it's half the 16.6% gain of older households. Similarly, incomes for young, college-educated households rose by 15.7% over this stretch, about half the 31.2% income increase for the older generation.
Is there any good news for the young? Well, it appears that real wages for young college graduates are finally beginning to creep up, after dropping for four years (see, for example, my blog). That will soften the worst of the pain and get young families back on the upward track.
Moreover, younger workers have the advantage of being far more comfortable with the online environment, which is likely to dominate the economy going forward. Finally, the likely fall in housing values is going to make homes more affordable for people just entering the labor market.
For these reasons, I'm optimistic that this may be the low point for the generation just leaving college. Kids in high school right now -- including my two teenagers -- are likely to do quite well. But a positive future can't change the facts: The past 10 years have not been a good stretch for the younger generation.