Most of Us Aren't Rich, and Thank Goodness for That

A depression may be headed off because so many Americans can't afford to invest.

By ROBERT KUTTNER
Robert Kuttner is co-editor of the American Prospect. July 26 2002

Here is a paradox to ponder. If the stock market crash stops short of an economic depression, we can partly thank government spending-but we can also thank America!s extreme concentration of private wealth.

Ifs true, as widely reported, that about half of all Americans are now shareholders. But stock ownership is very narrow.

The majority of all shares is held by the richest 10%. And the typical (median) American who does own shares has less than $25,000 worth of stock.

So, for the vast majority of working-age Americans, stocks are simply not a factor in household budgets. Most of us live on paychecks, not dividends and capital gains.

Moreover, ordinary people who do hold stocks have their holdings mostly tied up in IRAs, Keogh plans, 40 1 (k)s and other forms of retirement savings that canl be spent now without severe tax penalties. So a paper loss in these assets doesn't affect current consumption.

All of this helps explain why consumer spending has held up despite the market plunge.

There are two exceptions to this story.

One, as noted, is very wealthy people. However - , the wealthiest Americans don't spend most of their earnings in any event. So a plunge in share prices is largely a paper loss with little effect on the daily spending habits of the wealthy.

The other exception is retired people or people near retirement age.

This is a very different story. If there is one group of Americans disproportionately hurt by the stock market meltdown, it is people over age 65.

For people in retirement, IRAs, Keoghs, 401(k)s and ordinary savings invested in stocks and bonds are a big part of one's income. And recent shifts in the market have hurt elderly people in multiple ways.

For one thing, during the last decade corporations reduced dividend payouts relative to corporate profits. With senior executives being personally rewarded through stock options and bonus plans based on the company's share price, corporate strategists have used more of company earnings to buy back stock rather than pay out dividends.

Stock buybacks tend to boost share prices--and executive compensation.

As long as stock prices kept going up, retirees didn't mind the reduced dividends because they had capital gains. With share prices appreciating handsomely, you could always sell some stock. But with stock prices going down, it's no time to sell, and the depleted dividend checks are a major income loss.

In addition, very low interest yields leave retired people with skimpy earnings if they shift to bonds. And with almost no inflation these days, annual adjustments in Social Security checks are pitifully low.

But while this is a severe hardship for many retired people, it's not enough to sink the entire economy.

For one thing, people over 65 are only about 12% of the population. For another, the biggest single source of retirement income for most retired people is Social Security. Despite conservative privatization schemes, Social Security, thankfully, is still insulated from stock market gyrations.

People in their 50s and early 60s contemplating retirement are also hit harder than younger workers because they have more stock holdings, and their ability to retire on schedule depends on their financial assets. A younger worker can wait for the market to come back; a retiree can't.

Nonetheless, even among people 55 to 64 the average value of stocks held is less than $50,000. For most people in this age bracket, the biggest form of savings is the equity in one's home.

A collapsing stock market does have psychological effects, which in turn have real economic effects. People are now saving more and spending less. Businesses are trimming capital spending. Bank balance sheets are deteriorating. Foreign investors are pulling back from U.S. financial markets. All of this contributes to economic slowdown.

But government spending keeps a stock market rout from becoming a full-blown economic disaster. And so does capitalism's dirty little secret--most people are just not big-time investors.

This, of course, is nothing to boast about.

The widening disparity between the pay levels of executives and those of ordinary workers is a national disgrace. So are tax giveaways to the rich at the expense of social outlays with broad benefits. And if pension plans were less stingy and pay packages were more generous, more Americans could afford to join the investor class. But for now, ironically, it's a mercy for the economy that they aren't in it.