'The consumer isn't overleveraged -- the middle class is'

The well-heeled might be able to save the U.S. economy from a long period of dismally weak consumer spending -- if only we don’t jack up their taxes.

That’s one conclusion to draw from a new Bank of America Merrill Lynch report this week, "The Myth of the Overlevered Consumer."

The report hammers home what you might already suspect: The consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class families’ spending power for perhaps years to come.

By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth. Those people should have ample spending power to help fuel an economic recovery.

Using 2007 data from the Federal Reserve, BofA Merrill defines the middle class as people in the 40%-to-90% income percentiles. It defines lower-income folks as those in the zero to 40% income percentiles, and the wealthy as those in the top 10%.

Lower-income families account for 40% of the population but just 12% of total consumption, BofA Merrill estimates. The middle class is 50% of the population and nearly as large a share of consumption, at 46%.

That leaves the wealthy to account for a hefty 42% of consumption.

In terms of their debt burdens, neither lower-income families nor the wealthy are constrained the way the middle class is constrained, the report asserts.

It estimates that middle-class families’ debt as a percentage of disposable income was 205% in 2007, a function of the level of trading-up during the housing boom and of the cash people pulled from their houses via home-equity loans.

By contrast, lower-income families’ debt-to-disposable-income ratio was a much less onerous 133%. And for the wealthy the percentage was lower still, at 116%.

Thus, the need to pare debt is most urgent now for middle-income earners.

What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets -- stocks, bonds, etc. -- which have mostly bounced back significantly this year.

Here’s how the report sums up the potential spending power of the three income groups in an economic recovery:

--- "The lower-income contingent makes up a relatively small proportion of income and suffers from a disproportionate share of unemployment, which typically lags the [economy] coming out of a recession.

--- "The overleveraged middle class -- heavyweight in share of total consumption -- is burdened by real estate losses that may not be recouped immediately, leaving them unable to lead a consumption rebound.

--- "That leaves it to the wealthy -- with modest leverage, full employment and witnessing a quicker rebound in their wealth -- to lead consumption higher."

Except, BofA Merrill says, if states and the federal government target upper-income-earners for higher tax rates that drain away disposable income.

What the report doesn't address is the question of what kind of recovery would be preferable, if we're able to choose: If you want a more broad-based rebound in consumption -- as opposed to heavy spending by the wealthy on what might be a relatively limited range of big-ticket goods and services -- doesn’t it make more sense to favor economic and tax policies that bolster the finances of middle- and lower-income folks, even if that’s at some cost to the better-off?

-- Tom Petruno

Comments

[pugtv]

IMHO, there is nothing wrong with tightening our middle class belts. We overspent the last few years. We should save in the next few years to get our balance sheets back to health. Once we've saved enough, we should consider investing our money instead of spending it.

If the higher income bracket wants to spend what they have, more power to them. Their spending will help the economy and ultimately aid the middle class rebound.

[Robert Chatman II]

I agree with pugtv. Big business wasn't very concerned for the middle class when they farmed out all of jobs overseas, and when they were spoon feeding us credit lines that were almost impossible to repay. Finally, "Joe 6-pack" is trying to take care of their own financial destiny...the question is, will they be able crawl to out of the financial abyss that they, and government has and continues to create?

[DR]

"By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth"

This has always been the case-how is it different now?

"Also, the wealthy naturally had a much larger and more diverse portfolio of assets -- stocks, bonds, etc. -- which have mostly bounced back significantly this year..............Except, BofA Merrill says, if states and the federal government target upper-income-earners for higher tax rates that drain away disposable income."

Wow if there was ever an apologetic statement defending a privilege elite.! I guess soon we are going to see a push of a new economic theory-Trickle Down Consumption! Don't tax capital gains cause the wealthy are going to spend it and create jobs for all the rest of us!

[Urban]

Middle class consumers would be better off if the Fed skipped the middle man and lent to them directly, through the IRS, maybe. If outstanding consumer debt, including mortgages, was transferred from private banks, particularly the regional money centers, to the federal government consumers would save substantial amounts in debt service which would then be redirected to broad based economic stimulus. In addition, the government would earn higher returns than what they are getting from the regional money center banks.

The sooner those vampires are put out of business the better off our economy and our country will be.