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Steve Fazzari, Plenary One Discussant: A Micro and Macro Look at Younger Americans' Balance Sheets

May 8, 2014

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   James Bullard, Federal Reserve Bank of St. Louis (5:54)

Keynote Address

- Introduction
   Ray Boshara, Federal Reserve Bank of St. Louis (4:05)

- Keynote Address
   Neil Howe, Founding Partner and President, LifeCourse Associates and President, Saeculum Research (36:03)

   Keynote Q&A (11:04)

   Extended Interview with Keynote Speaker Neil Howe (28:43)

Plenary One — A Micro and Macro Look at Younger Americans' Balance Sheets

- The State of the Balance Sheets of Younger Americans
   Lisa Dettling, Board of Governors, Federal Reserve System (14:25)

- Links Between Younger Americans’ Balance Sheets and Economic Growth
   William Emmons, Federal Reserve Bank of St. Louis (21:40)

- Discussant:
now playing   Steve Fazzari, Washington University in St. Louis (18:14)

   Plenary One Q&A (15:06)

Plenary Two — Student Loans

- Student Loans and the Economic Activity of Young Consumers
   Meta Brown, Federal Reserve Bank of New York (21:12)

- Does Parents’ College Savings Reduce College Debt?
   Melinda Lewis, University of Kansas (18:11)

- Discussant:
   Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

   Plenary Two Q&A (18:22)


   Michael Sherraden, Washington University in St. Louis (2:52)

   Clint Zweifel, Missouri State Treasurer (6:26)

   Tishaura Jones, City of St. Louis Treasurer (6:14)

Concurrent Session I

- Moderator:
   Julie Birkenmaier, Saint Louis University (4:36)

- Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults’ Asset Diversification and Accumulation
   Terri Friedline, University of Kansas (22:23)

- Financial Decisions of Young Households During the Great Recession: An Examination of the SCF 2007-09 Panel
   Wenhua Di, Federal Reserve Bank of Dallas (19:00)

- Discussant:
   John Sabelhaus, Board of Governors, Federal Reserve System (14:38)

   Session One Panel Response (6:57)

   Session One Q&A (5:41)

Concurrent Session II

- Impacts of Child Development Accounts on Change in Parental Educational Expectations: Evidence from a Statewide Social Experiment
   Michael Sherraden, Washington University in St. Louis (13:09)

- Trends and Patterns in the Asset Holdings of Young Households
   Ellen A. Merry, Board of Governors, Federal Reserve System (15:19)

- Discussant:
   Trina Williams Shanks, University of Michigan (7:06)

   Session Two Q&A (28:58)

Plenary Three — Homeownership

- Moderator:
   Todd Swanstrom, University of Missouri–St. Louis (5:54)

- Homeownership and Wealth Among Low-Income Young Adults: Evidence from the Community Advantage Program
   Blair Russell, Washington University in St. Louis (15:57)

- Aggregate and Distributional Dynamics of Consumer Credit in the U.S.
   Don Schlagenhauf, Federal Reserve Bank of St. Louis (21:53)

- Discussant:
   John Duca, Federal Reserve Bank of Dallas (13:59)

   Plenary Three Panel Response (6:40)

   Plenary Three Q&A (8:46)

Plenary Four — Economic Mobility

- Moderator:
   Jason Purnell, Washington University in St. Louis (2:00)

- The Balance Sheets and Economic Mobility of Generation X
   Diana Elliott, Pew Charitable Trusts (17:58)

- Coming of Age in the Early 1970s vs. the Early 1990s: Differences in Wealth Accumulation of Young Households in the United States, and Implications for Economic Mobility
   Daniel Cooper, Federal Reserve Bank of Boston (17:11)

- Discussant:
   Bhashkar Mazumder, Federal Reserve Bank of Chicago (16:15)

   Plenary Four Panel Response (3:14)

   Plenary Four Q&A (19:02)

Closing Reflections: From Research to Policy

   Michael Sherraden, Washington University in St. Louis (15:59)

   Ray Boshara, Federal Reserve Bank of St. Louis (9:30)

Thank You / Adjourn

   Julie Stackhouse, Federal Reserve Bank of St. Louis (5:59)


Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

Dave Wheelock: Our discussant who will pull these two papers together is Steve Fazzari of Washington University. Steve?

Steve Fazzari: Thank you. And thank you to the St. Louis Fed and to the Center for Household Financial Stability for once again organizing a really interesting conference. It’s already been fascinating. Neil’s lecture to start things off really, really got me thinking that someone who’s been—you’ve taught a course related to the American dream. This is a very interesting discussion and I’ll be, you know, following it up with data in this session.

So I just have a few comments about these papers, hopefully drawing them together to some extent as we move forward. I liked reading both of them, reading the paper from Lisa and Joanne and looking at all those slides from Bryan and Bill. Pretty interesting stuff. I’ve learned that the young are different. I kind of knew that, but good to know again. Okay. So I think if you wanted to think about the broad, broad issues here—I’ll have to have my glasses to read this—that we have had some significant economic problems recently.

And in some respects this session is about the extent to which those economic problems have compromised the relative position of young adults. There are many other themes running through this, but I would say that was one that unifies both papers and to some extent Neil’s keynote presentation as well. So there’s this idea of the lack of financial independence and you hear in the typical radio NPR kind of discussion on the ideas of young people moving in with Mom and Dad.

And in many respects we would expect that 2010 would have been a rough time. I’m thinking in particular in terms of Lisa and Joanne’s data looking at the—conserving consumer finance. So you have this post-Great Recession observation in 2010 you’d expect it to be rough. They key question is whether it’s rough in some relative sense. Is this in some ways worse for the young? So let me talk a little bit about—just survey some of the main results as I saw them from Lisa and Joanne’s paper. It’s an in-depth look at the balance sheet conditions of young adults.

They’re looking primarily at survey consumer finance data from the millennial generation from 2001 to 2010, and the age group is ages 18 to 31. And there’s two dimensions of comparison. One is to what they call middle adults, ages 35 to 50, and also just for one year, but because of the limitation of the data, but a comparison to the generation X group when they were the same age, so going back to the first usable observation in the survey of consumer finance in 1989.

Okay. So what about the key findings? A 2010 decline in—that should be net worth on my slide—at the 75th percentile primarily. There is a decline at the median, but the numbers are actually fairly small in this. If you look at the median percentage terms, a rather large decline at the median. But the bottom line is median young adults don’t have, you know, very much net worth, and so relatively small fluctuations, $1000 or two, will be fairly large in percentage terms.

There is also a likely correlated decline of the net worth for college-educated young adults, again probably because they have more money to start with. There’s virtually no effect to the median. And the net worth percentiles are much worse—that is, the level of net worth held—in 2010 than they were in 1989, so that the current young adults are worse off at this stage of their life than the comparable age people were back around 1989.

Debt is substantially higher during the peak of the housing boom in the middle 2000s, but again just at the 75th percentile. You don’t see too much action at the median. Student loans, as is well-known, is a big increase in student loan debt as we go through these data. Now I want to ask the question here, is this mostly about housing? We see the big rise in the share of home ownership during the bubble years for these young adults. I’ve got the numbers up there, at least as I could take them off the chart.

So in 2001 the home ownership rate was 28 percent, 2007 up to 42 percent. So a dramatic rise in just—well, and it’s only just six years in the home ownership share among young adults. And then you see a backing off once the recession hits. The most interesting variation in the financial data is at the 75th percentile or higher. They provide a little bit of information at the higher percentiles. About 35 percent of young adults own homes in this group, in this age group. So it’s not so surprising that we’re seeing these effects happening really at the higher percentiles.

And so I guess one thing that we could look at that might be helpful to look at is to do these same—some of these same calculations but split things by home ownership status to see is really the action and the data coming from home ownership. I guess if you ask and some of the things in Bill and Bryan’s paper suggest also that this is happening on these lines. But this is something that I think would be interesting to check in the context of this paper.

Okay, I just want to have a quick data question here—and just to make you aware of it, Lisa did not emphasize this in her presentation—that they are doing a kind of scaling for all these data that they’re divided by the number of people in a household. So if I understand the procedures correctly, a two-person household, say, a cohabitating—two cohabitating spouses, you just divide the actual numbers of net worth and other kinds of measures by two.

It’s probably really for the most part either single-person households or two-person households—it’s the number of adults, not the number of kids—that are going to be relevant in this case. So the question that one has to think, if you take a measure like net worth or debt or other kinds of things, is effectively a two-person household at half as much as a one-person household in this context when you do this. And I think the answer to that question depends on why we care about net worth.

If you’re thinking about both home purchase and retirement, dividing by N may be a bit in a sense deflating this too much by the size of the household. I believe in some CBO data that I’ve seen that they actually divide by the square root of the number of people in the household. And you could imagine that might be a more—maybe a more representative way for something like, you know, a home or retirement where there’s going to be a fair amount of shared expenses in the household.

If you’re thinking about automobiles then, you know, if you have the at least middle-class suburban lifestyle, the typical American dream lifestyle of the old days, then actually N may be about right—one car per person. If you’re thinking about college saving, then you might argue that if you have a cohabitating couple that is likely to have children or does have children, then they might be more than proportional amount of net worth if college is in the future for their kids.

So it depends a little bit—obviously, how you do this depends on the question. But I think it might be helpful in this paper to see the robustness of the results to change the net assumption to some extent. My guess is it won’t change very much, but it would be nice to know.

Okay. So let me move on to Bill and Bryan’s paper. Young people are more reckless and impatient. Big news, right? Young people make more financial mistakes. Now I don’t—the slides don’t necessarily suggest causation here, but I always want to move there a little bit. Is that—do young people make more financial mistakes because they are more reckless and impatient? They’re also less experienced. The kind of experience curve that Bill showed in the maximum—what, are we maximizing our competency at age 53?

Male: 53.

Steve Fazzari: Yeah, that was bad news for me. So I was thinking they’re saying, well, my discussion comments aren’t quite as good as they would have been five years ago. (Laughter.) So, also, the young are in some sense less reliable or have higher income variance. In some sense they’re just riskier in terms of their lending, so that some of the data that, for example, young people have higher interest rates might be related to some of these other kinds of things—making more mistakes related to experience as opposed to being reckless and impatient.

Again, causation wasn’t necessarily suggested by the presentation. But it’s a natural question to ask and I think an interesting one. Young people are more leveraged, less liquid, and have greater housing share of assets. I think that it’s not surprising to see those numbers at all. But maybe the question to be asked there though is, “Is this really a problem?” What in some ways would you expect, that people are starting their life off, they don’t have much in terms of retirement accounts, so at least that share of assets is going to be small.

You know, we have home ownership relatively early in this country, and so you’d expect the debt to be related to home purchases, and that changes as you amortize those home loans over the life cycle, and that’s going to go down. So I certainly think the data seem to be correct. The question in some sense is, you know, “Is it surprising? What do they mean?” and things along those lines. And Bill and Bryan do take that issue on to some extent.

Now what about home ownership and finance? I think this is really quite interesting. The data that come through here are worth thinking about. The rise in home ownership was greatest—the home ownership rate was greatest among the young between 1994 and 2006. Now in one sense I’d say, “Well, is this really surprising?” Maybe not when you think about it, but it’s interesting to put it in the context of this period. Now the home ownership rate is clearly lower for this group, especially at the beginning of the period, which means there’s more room to grow.

But what we know happened was we had this period of financial reform during the housing finance boom, that credit became much more accessible. It became much easier for people in general to access finance for home ownership. And so, in a sense, I think that’s the key point, that the financial reform, that broad shift in the supply of credit available for housing, that ex-post may have been harmful for a variety of reasons to the macroeconomy and for reasons that Bill talked about in his presentation. And it actually did affect the young more, because this is in a way where it was concentrated.

This was the fertile market for a lot of this new access to credit. The older people were already getting this. There was much more room to expand for the young. And in that sense, you can see the other side of this, the demand side, supply side, that the young created a market that contributed to making this aggressive housing finance during this period—this more aggressive housing finance—profitable. So there is this interactive effect where the young I think probably were quite important. I think that’s an interesting and significant issue to be pointed out in this research.

And then again, that if you have a high share of young people in a region in some ways because of this, that region becomes more volatile. So that’s an interesting and creative way to take this work. I also found the generational income comparisons really interesting. The result here is that the best time to be born for both income and wealth was probably between 1930 and 1950. And so the question then comes in terms of why that’s the case. And the first thing that came to my mind was the idea of this robust economy in the early earning years. And that will be related to my final comment I’ll make in a minute or two.

So you start off at a pretty high level and that continues, you know, through the life cycle. Growth profiles will preserve those initial level differences. And so the postwar boom was a good time to be young in some sense, at least from an economic point of view. Also, it seems sensible that you may have been accumulating assets earlier. I don’t know if we know that for a fact, but that would be something interesting to explore. One other thing that I think actually came up in Neil’s talk is this issue of inflation and how it played out specifically in a generational context.

And as the representative baby boomer here—I was born in late 1955—I remember my mother complaining a lot about inflation, complaining about the price of hamburger in particular, in the middle 1970s. At the same time they were sitting there with that nice fixed-rate mortgage they had gotten in the probably late 1960s or early 1970s, which was being rapidly eroded in real terms by the inflation. This was a pretty huge wealth transfer to my parents’ generation in that context, the unexpected inflation during this period of time.

So that’s of course a historically idiosyncratic factor, but it might be interesting to think about how that plays out in these generational wealth and income contexts. Okay, there we go. So this is my final slide. Did the Great Recession compromise the finances of the economic situation more broadly in young adults? What are these results really telling us? Well, I do think that we see some significant effects on debt and financial fragility.

We know financial—I would say we know—in some of my research with Barry Cynamon, I was moving in the direction that there were important effects of financial fragility in macroeconomic dynamics and on household welfare over this period of time of the last several decades, and then with the problems being evident after the Great Recession. And I think this—I just lost my screen here. Did I do that? Now we’ve all lost screens. Okay. Oh, there we go. Things are coming back. Maybe not really. Well, I’ll just wing it. Can I move forward? All right, let’s do it.

So one question that I would maybe, again, direct this a little bit to Lisa and Joanne, is to look at who holds the debt. So we have, you know, a lot of statistics on debt. We might look at things like debt due to come or loan-to-value ratios to determine, you know, where things are going here to see in a little bit more sense the way that financial fragility specifically was concentrated in this younger group.

And I also want to comment briefly on the idea of leverage and risk—I think this came up in a number of the presentations already—that, you know, during the bubble period in the housing market, young people bought proportionally more housing—I know house on margin is the way I put it out on here. And so think about it this way. We know that in the context of—a kind of classroom example on this would be to think about a stock portfolio and think about, you know, somebody investing $10,000 in stock.

And you can buy, you know, shares of the company you think will do pretty well with $10,000 and own $10,000 worth of stock. And if, you know, the company’s stock price falls by 10 percent, you lose $1,000. What happens if you buy on margin? Well, if you use leverage, you can take that $10,000 and I’ll borrow another $10,000 and buy $20,000 worth of stock with your initial $10,000 of investment. Unfortunately for you, with this leverage, if the stock price falls by 10 percent, you lose $2,000 rather than one, even though you put in the same $10,000. So you lose 20 percent rather than 10 percent.

So think about how that fits to the housing context. It’s not quite as obvious. But I would think about this as buying more house, that the access to greater credit let people buy bigger and more expensive homes. So leverage has been out there—and, you know, probably at this—we finance housing with leverage in this country—all along.

But what may have been quite different about this idea is that people could go further, could take it further. The credit markets let them take it further in that sense. So they were in a more risky position in this context. And so in that sense, the Great Recession and the associated financial fragility dynamics leading up to it would have had a bigger effect on young people than maybe it would have been the case in other areas.

Now, maybe the most significant thing I might say today is this issue about balance sheet versus income statement. So this is a session—maybe the whole conference, but in particular this session very much focused on the balance sheet. Bill and Bryan’s paper did talk a little bit about incomes, and it will be consistent with what I’m about to say. So in my conversations with Barry Cynamon, my coauthor, about these things, we talked about, “Well, what about stocks versus flows?” And one thing that seems to be pretty clear, yes, young people are different, as Bill says.

And how are they going to be different in the financial dimension? Well, one way is that if you think in terms of the resources available to them over their lifetime, it’s going to be more concentrated in their expected future earning power than in the balance sheets and assets they have at a point in time. So I’ve been thinking in particular the kinds of data that Lisa and Joanne pulled together—and you see in fact that Lisa has made it explicit in her remarks—saying, well, the young people are doing relatively, you know, kind of okay anyway, a little bit of a drop in median net worth after the Great Recession.

But it doesn’t look so bad compared to somewhat older people who are—you know, who may be more affected by the housing crisis, as we heard from other discussions. But there’s another aspect of where the young are sitting, which doesn’t show up on their, you know, accounting balance sheet, and that is their expected future earning power. So to the extent that things like secular stagnation, rising inequality, and other issues are affecting the growth of income over the future, that may not show up in net worth in terms of the tangible balance sheet, but it’s quite significant to the life course prospects of this group.

And I did one quick calculation. And I’ll end up—I just—so the kinds of variations in Lisa and Joanne’s paper, the median are often quite small. The 75th percentile might be 10, 20, maybe at most $30,000. So, no, not trivial, at least for some fraction of young adults. But if you were to look at the present value of 40 years of earnings, starting at, you know, a modest $30,000 a year and growing at one percent versus two percent, the present value change of that is over $200,000. So high unemployment and slow wage growth are probably the biggest economic challenges that young adults face, won’t be quite as evident with the standard kind of balance sheet calculations. Thank you very much.