This week American prosperity entered uncharted territory: a record 107th month of non-stop economic growth. It is widely assumed the Federal Reserve Board raised interest rates this week to slow things down a bit. The so-called "wealth effect," the reasoning goes, threatens to reawaken inflation, as average Americans tap their ballooning stock profits to binge on big-ticket consumer goods.

Boom time?

The implication of this "long boom" is that the New Economy has delivered widely shared prosperity. In its current issue, Newsweek heralds "The Boom Generation," repeating the familiar mantra that the number of millionaires doubled in a decade and that half of all households now own stock. Families without six-figure 401(k) or brokerage accounts must feel foolish indeed.

They needn't. While this truly is the best economy since the 1960s, the "wealth effect" is not an experience shared by the vast majority of American families -- most of whom remain asset poor. Workers certainly are more fully employed and better paid than they have been in two decades, but when it comes to wealth, the United States is becoming more of a "barbell society" -- with a small minority who own most of the nation's financial assets at one end, and the bottom 80% of wage earners living paycheck to paycheck at the opposite end.

Last week the Federal Reserve released its triennial Survey of Consumer Finances (SCF), an in-depth estimate of what we own and what we owe. The media focused on the good news. Business Week speculated that Americans are not clamoring for a tax cut because they "are too busy counting their money." It emphasized the survey's finding that the median net worth of all U.S. households rose 18% over three years, from $61,000 in 1995 to more than $71,000 in 1998. Moreover, the percentage of families owning any stock climbed to 49%, a major broadening of ownership compared to 1989, when only 32% reported equity holdings.

Inside the numbers

While these aggregate numbers are positive, they also are misleading and mask some less exuberant trends among the majority of households.

First, it is simply not true that a far greater share of the public became stockholders during the 1990s. The reason is that the 49% stock-ownership figure cited by the media includes 401(k)-type retirement accounts. Over the past 15 years, 401(k)s have been replacing traditional defined-benefit pension plans, which are not counted. Back in the 1970s, more than 40% of full-time workers owned stock through traditional pension trusts; now only 20% do. As companies shifted from pension trusts to individual 401(k) accounts, the Fed recorded this shift as an increase in individual stock ownership.

This suggests that most of the broadening of stock ownership hailed by conservatives is really a definitional fluke. For example, the percent of families owning individual stocks has increased by only 2% since 1989, to 19% in 1998 -- hardly the stampede one would expect in a nation intoxicated by "irrational exuberance" and plugged into online brokers.

In fact, because average 401(k) asset accumulations are so low, it is quite possible that the typical middle-income family has less retirement wealth now than ever. The SCF shows, for example, that among the 49% of U.S. families with any retirement assets, household heads in their prime saving years (age 45 to 64) hold only $40,000 in their accounts. An account that size could buy a retirement annuity that pays about $200 per month -- replacing less than 10% of the average worker's final earnings in retirement.

The second problem is that, on average, the top and bottom are becoming more and more unequal. According to the SCF, the top 10% of households by assets own more than twice as much financial wealth (a median $457,000) than the other 90% of Americans combined.

In contrast, the typical family in the bottom 40% of the income distribution had less than $5,000 in financial assets by 1998, $1,000 less than they had in 1995. This group's median net worth, which includes home equity, fell 20% since 1995 (to $25,000) as they took on more debt. Even these figures exaggerate the assets of low-income families, since households earning under $25,000 include most retirees, who are low in income and living off assets. Other data suggest that the bottom 40% of working families have negative net worth -- more debt than assets.

Inequality aside, being asset poor means insecurity, because even $5,000 is only enough liquidity to pay the bills for a few months in case of unemployment. Nor is the middle-class accumulating significant stock holdings. The SCF shows that the typical family earning less than $50,000 (70% of all households) has a net worth less than the equity they own in their primary residence. This means most American families have more consumer debt than financial assets -- and their positive net worth is primarily due to home ownership.

Unfortunately, not even home ownership is steadily pulling up the net worth of low earners. During the 1990s, while overall home ownership reached a record-high 66%, home ownership rates fell by 3% among the bottom 40% by income. It appears that the primary beneficiaries of reduced down payments and lower interest rates were yuppies who could afford to buy a few years sooner.

Of course, some degree of inequality is the inevitable by-product of a competitive, free-market economy. Most Americans accept that. The problem is that in the emerging digital economy, more than in the old industrial economy, the increasing returns to both asset ownership and to higher education are leaving the less advantaged behind.

A future backlash?

Stephen Roach, chief economist of Morgan Stanley Dean Witter, wrote in a recent client commentary that over the first 34 quarters of the current economic expansion, gains in labor productivity averaged 2.1% -- fully 75% faster than the 1.2% average increases in real hourly compensation over this same interval. This has allowed corporate profits -- and stock prices -- to grow at double-digit rates. He notes that the share of national income going to worker compensation "plunged from a high of 67% to a low of 62%" by the late 1990s.

Roach titled his commentary "Visions of Worker Backlash," suggesting that it might explain some of the militancy shown by labor in the Seattle protests against globalization. He noted that some believe "a sustained, positive wealth effect is the essence of the case against worker backlash" -- that workers will be happy with less cash compensation as they become shareholders and see their asset holdings swell with stock gains.

He also warned, however, that if the wealth effect fades, workers "may suddenly become less docile in shaping the wage determination process." If the Fed's survey is to be believed, the continued failure to find ways that allow the vast majority of families to share in wealth creation may become politically unsustainable. New incentives that help all Americans gain skills and build assets may be the better path to broadly shared prosperity.