That credit card isn't getting quite as much work.

While the Rich Rebound, the Poor Sink

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
Read More.
a | A

Two things stand out about the Federal Reserve's latest survey of consumer finances. First, inequality has increased. And second, household debt loads have decreased, drastically.

I confess to being a bit surprised by the first trend. Not exactly shocked, because we'd already seen signs of this in other studies. But five years ago, I would have expected that we'd be seeing inequality decreasing, and I wrote as much at the time.

Why would I expect that, when "rising inequality" has been on everyone's lips for the last decade? Because that's what we saw after the last global financial crisis, in the 1930s and 1940s. Inequality fell drastically, because a lot of assets were destroyed by a decade of financial ruin and another decade of war. The rich who lived off those assets never recovered the soaring financial heights that they had enjoyed in 1929.

In retrospect, it's easy to explain why This Time Was Different. First, today's megarich are not clipping coupons on their inherited stash of stocks and bonds; they're mostly living off earned income . So while their wealth suffered when markets contracted, their incomes didn't fall as drastically as it did for their predecessors.

Second, thanks to a combination of better institutions, such as the Federal Deposit Insurance Corp. and various "automatic fiscal stabilizers," and timely intervention by the Federal Reserve and the Treasury Department, this crisis wasn't nearly as bad . The stock market is now back where it started after six years; it took a couple of decades to recover from the Great Crash of 1929.

And third, taxes haven't gone up nearly as much this time around. It wasn't actually mathematically possible for them to go up again by as much as they did in the 15 years after the Great Crash. From 1929 to 1944, the top tax bracket rose from 25 percent to 94 percent. If we tried the same move today, people in the top tier would owe about 110 percent on their income above $35 million .

But at the time the crisis was happening, I expected much deeper devastation of financial assets -- and extrapolating from Thomas Piketty and Emmanuel Saez's 2006 work -- therefore a less substantial gap between top and bottom. Which just goes to show the dangers of relying too heavily on historical analogy.

The second is less surprising, because we've known all along that households needed to deleverage, and indeed, were doing so. Median net worth has fallen a bit, but unequally: people with money in savings accounts, certificates of deposit, bonds or owner-occupied housing have lost a great deal; people with business equity or stocks have made a bit of money. The bottom half of the population is saving even less for retirement, while the top half has started to rebuild retirement accounts after pulling back in the immediate wake of the financial crisis.

But asset declines have been largely offset by drastic declines in outstanding debt. And before you start talking about foreclosures and "jingle mail," most of that decline has come from debt not from housing, especially credit card balances. Debt-to-income ratios are lower than they've been in more than a decade, and so are debt payments as a percentage of income.

Looking over the data, my immediate instinct was to attribute this to crackdowns by lenders, and undoubtedly, some of that is at work. But the percentage of people who reported having difficulty accessing credit actually fell slightly from the 2010 period, even as debt burdens improved. While some of that will simply reflect people working down, or companies charging off, old credit card balances (bankruptcies were up slightly), improving employment prospects and very low interest rates seem to be doing more of the work -- at the same time that they're severely hurting folks with fixed-income investments. To that you can add some change in consumer behavior; more people now say they use credit cards for convenience only, rather than carrying a balance.

None of this is great news. But it's nowhere near as bad as it could have been; households don't have as many assets as they used to, but they don't have so many liabilities either.

The biggest area of concern is among nonwhite families, who saw much bigger declines in both income, and wealth, than did white non-Hispanic families. Sadly, I probably could have predicted that five years ago, based only on the demographics of the construction industry, and the subprime mortgage industry. The economy and the majority of households are recovering, slowly. And the rising tide is definitely not lifting all boats.

  1. Yes, yes, we can have a fascinating discussion on some later blog post about whether "earned" = "deserved." The point is that they get the money in exchange for work, like playing pro basketball or founding a company, not simply because they were born to the right parents or got lucky in the stock market.

  2. Yes, yes, we can have a fascinating discussion in some later blog post about whether these institutions have unfairly bailed out rich banksters who deserved to lose everything.

  3. As these numbers suggest, these rates were largely theoretical; our top rates today are lower, but apply to a lot more people.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net