Are Americans getting poorer or wealthier?

• Author: Adams, Tucker Hart
• Position: The ECONOMIST

THE CONCEPTS OF WEALTH AND INCOME ARE frequently confused, and the two words used interchangeably. In fact they are quite different. Income is a flow--in other words it has a time dimension. Wealth is a stock, a snapshot at an instant in time. Income can add to or subtract from wealth, depending on whether we save (spend less than we earn after taxes) or go into debt. Wealth, in turn, can add to income when it produces a stream of interest or dividends.

Economists at the Federal Reserve, who conduct periodic surveys of household wealth, recently released a study of what happened to wealth and income between 2001 and 2004. After subtracting out inflation, the real net worth of the median family (the level at which half of all families were richer and half were poorer) rose 1.5 percent to $98,100. This was well below the 10 percent increase from 1995-1998 or the 17 percent gain from 1998-2001, but better than the 9.9 percent decline from 1989-1992.

What is going on here? Why did the growth in wealth slow so substantially?

The 1990s encompassed a phenomenal bull market in stocks. A dollar invested in the stock market in 1994 was worth more than $3 by 2000 after adjustment for inflation. With almost 32 percent of American families owning stocks at the end of that boom, it's no wonder that net worth soared. Real estate, including owner-occupied homes, also surged in value. One didn't have to add anything out of income to one's assets to see them rise rapidly.

That came to an end with the bursting of the technology bubble. By 2002, the stock market dollar that had grown to $3 had shrunk to only $1.50 in real terms. The decline in the stock market wiped out $7 trillion of paper wealth.

A declining saving rate compounded the problem. Consumers, who had found it unnecessary to save out of income for almost a decade, continued to spend, going into debt and extracting equity from their homes in order to maintain spending. Mortgage debt rose 27 percent, and the share of families with mortgages increased three percentage points to 48 percent. This increase in debt and the spending of home equity had a negative effect on wealth. Only the continued increase in home values--up 28.1 percent--kepi net asset growth in positive territory.

The impact of the...