Taking the Plunge in Net Worth (Opinion)

Statistical snapshots are excellent tools, especially for tracking trends. But, as any liar knows, statistics don’t tell all.

Take last week’s breathtaking release from the Federal Reserve Board showing that the median American household’s net worth plunged nearly 40 percent between 2007 and 2010. We have no reason to doubt the statistics, but it should be pointed out that net worth in 2007 was at a housing-bubble-inflated high-water mark that didn’t truly reflect economic output.

Of course, the housing bubble made people feel wealthier, and a lot of people (with the help of accommodating lenders) cashed out home equity and spent it like it was earned income. And net worth did take a beating and real people have suffered financially, there’s no doubt about that. But this particular statistic needs to be understood for the limited indicator that it was — 18 months ago.

Far more disturbing than a three-year zenith-to-nadir comparison of net worth was the other major finding of the Fed’s Survey of Consumer Finances: Median net worth in 2010 was about the same, in adjusted “real” dollars, as in 1990. For the middle class of America, two decades did not produce any additional wealth or any additional financial security. In fact, financial security took a big step backward because those two decades corresponded with the phasing out of defined benefits pensions for most private-sector employees.

Net worth is believed to have bounced back somewhat since 2010, mainly the result of a new interest in the kind of saving that had fallen out of fashion when Americans considered their houses to be both savings accounts and ATMs. That financial conservatism is partly to blame for the sluggish recovery — the “paradox of thrift” — but it will be a good thing if more Americans actively manage and protect their wealth rather than letting it drift with the economic tides.