The Distribution of Households’ Balance Sheets and the Recovery

Mark Thoma Households’ Balance Sheets and the Recovery:

I still think tax cuts need to be part of a recovery package, and that it’s okay if those tax cuts are saved:

[full-sized version]

Quite a bit more on this here: Households’ Balance Sheets and the Recovery, CBS MoneyWatch.

Check out that CBS Moneywatch link for the full argument.

Four quick charts. One is that I’m very interested in the issue of a balance sheet recession and households are definitely looking like they are repairing their balance sheets for the foreseeable future:

But one thing to keep in mind, especially as we talk about tax cuts as a way of repairing balance sheets, is that there is a big distributional issue here with the balance sheet problem. The problem of working off this massive debt load is concentrated largely among the middle class. It is certainly not a major issue for the top 10% of Americans, and as such tax cuts for the richest 3% of Americans won’t help with this problem for the recovery.

From the Federal Reserve’s Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances:

The first chart is the leverage ratio – debt/assets, by income distribution. From 1998-2007 we see the leverage ratios of the top 10% decline, while the leverage ratios of the 20%-90% range of household income range skyrockets. Notice that the average overall doesn’t change much, but the dynamics underneath involves a lot of shifting around, with the biggest percent gains in the 20-60% of the distribution.

The second chart (click through to see the whole thing) is the ratio of debt payments to family income. We are interested in the first two boxes, which are the aggregate and median for debtors. Once again, same dynamic. From 1998-2007 we see the debt payment ratio of the top 10% decline, while the leverage ratios of the 20%-90% of household income range increases. This also happens with the median value of the top 10% of income; so those at the 95th percentile of income also see a similar decline