ChartingTheEconomy.Com

The Lost Decade – Per Capita Net Worth and Living Standards

January 2009

By: ChartingTheEconomy.Com

In February 2005, I wrote an article entitled “Has the Housing Bubble Created a Wealth Illusion” in which I looked at
trends in household net worth to determine if the housing bubble was creating a wealth illusion.  I concluded that it
was.  In the article I state, “it is clear that equity in household real estate has been the only contributor to wealth
creation in the U.S. since 1999.  It is also clear that without equity in household real estate on average we are much
less wealthy than in 1999 when adjusted for inflation.  Because of this, it is concluded that we are ill prepared if there
is a sudden drop in equity in household real estate.”  I also state, “This just adds to the danger of the housing bubble.”

Now that the housing bubble has burst I thought it would be appropriate to take another look at household net worth.
The good news first – We are still a wealth country in absolute terms.  The bad news is that on a relative basis we, as
individuals, have lost dramatic wealth since 1999.  Essentially, this means that living standards have declined.

U.S. Household Net Worth

As Chart #1 reflects, total U.S. household net worth has increased over the past decade.

However, this is not the best indicator of changes in living standards.  To better understand this we need to dissect the
total household net worth data.  To accomplish this goal the data needs to be adjusted for inflation and personalized.

U.S. Household Net Worth – Inflation Adjusted

As a first step, let’s adjust the total U.S. household net worth data for inflation.  Chart #2 shows this data, adjusted for
inflation, in 2008 dollars. Suddenly, the picture is not so bright.  As you can see from the chart, when adjusted for
inflation, U.S. household net worth is relatively flat over the past decade.

It is important to adjust for inflation because it captures the decrease in purchasing power of the dollar over the past
decade.  Also, it is worth noting that it captures at least a fair share of gains in innovation.  Why? The Government’s
CPI numbers actually reflect product improvements.  For example, if a computer cost the same in 2007 as it did in
2006, but the computing power has increased, it is reflected as a price decrease in the CPI calculations.  So, by
adjusting for inflation we capture the change in the purchasing power of the dollar and gains from innovation.

Per Capita Net Worth

The next step is to personalize the data by putting it in per capita terms.  Chart #3 uses Census Bureau data on U.S.
population to develop the per capita net worth data.  Since 1999, the U.S. population has grown by about 10%.
Therefore, the total household net worth in the U.S. is now divided among many more individuals. The data is also
adjusted for inflation and is shown in 2008 dollars.  This calculation shows that per capita, net worth has declined
substantially since 1999.  Also, to the degree that an individual’s net worth largely reflects how they live, it shows that
our standard of living has declined.

The National Debt’s Affect on Net Worth

Now that we have adjusted the data for inflation and personalized it by showing it on a per capita basis, we are ready
for the final step.  This step subtracts the inflation adjusted national debt from the numbers. See Chart #4.

Why include national debt in the net worth numbers?  Simple, as citizens of the U.S. we own the national debt.  Let’s
consider the 2008, $165 billion stimulus package.  Essentially, it was a transfer of money from the U.S. Government to
most U.S. citizens.  It made the U.S. household net worth increase by $165 billion, but at the same time increased the
national debt by $165 billion.  If the national debt is not relevant, then we could just print $10 trillion tomorrow, and
give a pro rata share to every U.S. citizen.  That would take care of the declining per capita net worth and living
standards.  Obviously, this is ridiculous because wealth is not created by simply transferring money.

By not including the national debt as a liability when calculating household net worth it becomes an off balance sheet
liability for households.  That is definitely not the proper way to account for it. Therefore, I believe Chart #4 best
reflects the trends in per capita net worth in the U.S. over the past decade.  Also, to the degree that an individual’s
net worth largely reflects how they live, Chart #4 best reflects what is happening to our standard of living in the U.S.

Conclusion

In absolute terms total household net worth in the U.S. has increased at a modest pace in the past decade.  However,
to really understand wealth creation over the past decade we need to look at net worth on a relative basis.  To
achieve this:  1) total household net worth is used as a baseline; 2) the national debt is subtracted as a liability; 3) all
data is adjusted for inflation; and 4) population data is used to develop a per capita view.  Chart #4 above reflects
these calculations.  It shows, on a relative basis, that the net worth of individuals since 1999 has declined almost 25%.

As I said in 2005, the housing bubble was creating a wealth illusion, and if/when it burst we would be ill prepared. As it
turned out the housing bubble was also a credit bubble, and now that both have burst our net worth and standard of
living have suffered.  This is largely due to the fact that over the past decade we have:  1) had a lack of savings; 2)
over leveraged ourselves; and 3) not invested enough in wealth creating ventures.  For now living standards in the
U.S. will continue to decline until we turn the tide.  We need to get back to creating wealth in the U.S. Let’s not have
another lost decade.

Sources:
U.S. Federal Reserve – Flow of Funds report
U.S. Census Bureau
U.S. Treasury – Bureau of the Public Debt

Notes:
- Data on household net worth is from The Federal Reserve Flow of Funds report table B.100 Balance Sheet of
Households and Nonprofit Organizations.  The Fed’s Flow of Funds report includes data on nonprofits so the
household numbers may be off slightly (but not materially).  The Flow of Funds report is widely used as a reference for
household net worth.

- Please note that the fourth quarter 2008 Federal Reserve Flow of Funds data has not been published yet.
Accordingly, all Q4 2008 numbers are estimates based on prior Flow of Funds data and declines in real estate and
equity markets during Q4 2008.

- In this report we use per capita (average) net worth to show wealth trends.  Average net worth is much higher than
median net worth because of the high concentration of wealth in a very few super wealthy households.  According to a
March 2003 report by the U.S. Census Bureau Net Worth and Asset Ownership of Households: 1998 and 2000 by
Shawna Orzechowski and Peter Sepielli the median household net worth in 2000 was $55,000.  This would lead me to
estimate that the median individual net worth is in the $15,000 - $20,000 range today.  This is just an estimate to give
reference on how the average number is affected by the very rich.