Working Paper: NBER ID: w18559
Authors: Edward N. Wolff
Abstract: I find that median wealth plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969. The inequality of net worth, after almost two decades of little movement, was up sharply from 2007 to 2010. Relative indebtedness continued to expand from 2007 to 2010, particularly for the middle class, though the proximate causes were declining net worth and income rather than an increase in absolute indebtedness. In fact, the average debt of the middle class actually fell in real terms by 25 percent. The sharp fall in median wealth and the rise in inequality in the late 2000s are traceable to the high leverage of middle class families in 2007 and the high share of homes in their portfolio. The racial and ethnic disparity in wealth holdings, after remaining more or less stable from 1983 to 2007, widened considerably between 2007 and 2010. Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummeled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.
Keywords: wealth; middle class; inequality; housing market; Great Recession
JEL Codes: D31; J15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High leverage (debt relative to net worth) among middle-class families in 2007 (G51) | Decline in median wealth (D31) |
| Falling housing prices (R31) | Decline in median wealth (D31) |
| Rising debt levels (H63) | Decline in median wealth (D31) |
| Inequality of net worth sharply increased during the late 2000s (D31) | Racial and ethnic disparities in wealth holdings widened (D31) |
| Decline in net worth and income (D31) | Worsening financial situation of the middle class (F65) |
| High debt-to-net worth ratios (G51) | Amplified impact of falling asset prices (G19) |