Americans are poorer –poorer by half—then on the day Ronald Reagan took office in January 1981. By this I mean simply that the per capita income that Americans can expect to earn on their aggregate wealth is half of what it was in 1981. How did it come to this?
|Nominal Wealth (Bns)||$11,975||$97,067|
|Wealth in 1982 Dollars (Bns)||$13,639||$41,107|
|Per Capita Wealth in 1982 Dollars||$59,539||$128,457|
|Income Per Capita from Wealth, 1982 Dollars||$9,387||$6,089|
On paper, to be sure, the wealth of Americans has risen to $97 trillion in 2014 from $11.975 in 1981. After adjusting for inflation, wealth has tripled from $13.6 trillion in 1982 dollars to $41.1 in 1982 dollars. Adjusting for the growth in population, per capital wealth has doubled, to $128,457 per American in 1982 dollars from $59,539 per American in 1982 dollars.
If we were Scrooge McDuck, and enjoyed wallowing in a swimming pool filled with currency, there would be no problem. But people accumulate wealth in order to earn income. The income that Americans can earn on their wealth has shrunk, because prospective returns to capital have fallen. Long-term medium-grade (Moody’s Baa-rated) bond yields are the lowest in half a century. At a yield of just 4.74% for long-term corporate bonds, the aggregate wealth of Americans would generate a paltry $1,903 per capital in 1982 dollars, against $3,965 per capital in 1981. In its capacity to generate income, the wealth of Americans stands at half the level of 1981.
1981 was a bit of an anomaly, because bond yields were extraordinarily high due to inflation and the Fed’s monetary tightening in response to inflation. But it’s clear from the chart below showing per capita interest income on the aggregate US private wealth that the great period of US wealth creation was between 1982 and 1975, when the Great Stagflation of the 1970s began. Since then, per capital income on wealth has fluctuated in the range of $6,000 to $8,000 1982 dollars.
There are two reasons that interest rates are so low. First, the Federal Reserve has kept short-term rates at the lowest level in history after adjusting for inflation since the 2008 financial crisis, and has added more than $4 trillion in bonds to its balance sheet. Both suppress the yield on all financial instruments.
Second, the prospective return on capital investments is low. We know this because US nonfinancial corporations have shifted from net borrowing during the 1980s and 1990s, to net lending during the 2000s. This is a long-term factor that monetary policy can’t change. Raising prospective return on capital would require drastic fiscal and regulatory reform.
US corporations can’t reinvest their profits in new projects, and overall economic growth remains at much lower levels than the growth rate that prevailed since the early 1980s. S&P corporations have doubled the amount of cash on their books in the past ten years.
This corresponds to what Nobel laureate Edmund Phelps calls a “structural slump,” characterized by a downshift in the growth rate of GDP.
Two rounds of capital misallocation–the Internet bubble of the 1990s and the housing bubble of the 2000’s–dissipated the gains of the Reagan era. America might have gotten away with one decade of misspent capital. Two decades made Americans poor. It is a Shibboleth that free markets allocate capital efficiently. No such thing is the case: allocation of capital ultimately depends on investors’ vision of the future, and a vision of the future founded on (for example) downloading pornography, games and popular music was warped to begin with. That was the issue I addressed in the first “Spengler” column for Asia Times Online in January 2000: if Internet stocks were not a bubble, it would mean that American culture had become pathological. By the same token, uninterupted increases in home prices were not consistent with a declining rate of family formation.
Another hallmark of shrinking growth expectations is the collapse of the “real” interest rate, gauged roughly by the yield on inflation-protected government bonds.
The income available on assets has shrunk. The present value of assets has risen because shrinking future growth prospects has reduced the discount rate on assets. America’s prospective retirees, including the top 20% of income earners who own most of the assets, are rich on paper but poor in terms of income. That helps explain why the consumer spending boom forecast by the consensus macroeconomic model never materialized.
Note: Part of this essay was published by Reorient Group Ltd (“The US Savings Gap: Implications for Consumer Spending”).
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