Tuesday, June 19, 2012

Are American families really poorer now than in 1989?

A recent article by Businessweek's economics editor Peter Coy claims that American families were poorer in 2010 than in 1989. Mr. Coy crunches the numbers and gets the following results, in 2010 dollars:

Median family net worth in 2010 dollars:
1989: $79,600
1992: $75,400
1995: $81,200
1998: $95,500
2001: $106,100
2004: $107,200
2007: $126,400
2010: $77,300
As you can see, the median net worth was $79,600 in 1989 vs. $77,300 in 2010. So in nominal terms, I guess you could say that the median family is poorer. But who cares about money? Money is only worth what it can buy. I doubt that there are too many people in the world who value money for money's sake, except perhaps Uncle Scrooge. People want money because it helps them consume goods and services.

When you think about goods and services, a lot has changed since 1989. There was no Internet. No smart phones. No Facebook, or Twitter, or flat screen TVs. Heck, personal computers were only for the super rich. Central air was much more of a luxury. So were airbags in cars and anti-lock brakes. So even if you can make the dollars equivalent to each other using price indices, it is very difficult to equalize the goods and services available, especially when some didn't even exist! I think the real question is: how many 2010 families making $77,300 real dollars would trade places with a 1989 family making $79,600 real dollars? My guess is not many.

Mr. Coy's numbers are interesting, but I don't think a comparison between 1989 and 2010 really means much, even if you do use real dollars. The world has changed too much. It is like comparing a 2010 Ford Focus to a 1989 Mercedes. Even if a brand new 1989 Mercedes was worth/cost more in 2010 dollars, would anybody want to drive it?

I think that the more important takeaway from these numbers is how far median net worth has fallen since the financial crisis started. 2007  to 2010 is a much move valid comparison, and those numbers are terribly bad. There is no need to drag the comparison back to 1989 to demonstrate how awful the economy is right now.

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