The insatiable appetite for dour data about a decent economy

“…suggest $400 statistic be used with caution. For instance: A footnote in the survey highlights 2016 research that found 76% of households had at least $400 in liquid assets, far higher than the 56% in 2016 who said they would cover a $400 expense with cash or its equivalent. (Reasonable to assume that first number is higher today.) Moreover, the fact that some people choose to hold both high-interest credit card debt and cash that could be used to pay down that debt has been termed the “credit card debt puzzle.” It’s a thing. Indeed, only 12% said they wouldn’t use any means to pay that expense. (A great thread by National Review’s Robert VerBruggen notes, among other things, that 25% of those billed as being unable to cover $400 with borrowing or selling make more than $75,000 a year.”)…”

James Pethokoukis, "The insatiable appetite for dour data about a decent economy," American Enterprise Institute, May 28, 2019, https://www.aei.org/pethokoukis/the-insatiable-appetite-for-dour-data-about-a-decent-economy/

The insatiable appetite for dour data about a decent economy

If you look at the national unemployment rate of 3.6% — the lowest in more than 50 years — American capitalism doesn’t appear to be terribly broken. And as the economy has rebounded from the Great Recession and Financial Crisis, real wages continue to rise, especially so for lower-income Americans. Another seeming sign of non-brokenness.

Or to approach things a different way: A recent Federal Reserve survey finds 75% of U.S. adults say they are either “doing okay or living comfortably,” 56% say they are better off than their parents were at the same age (vs. 25% saying “about the same” and 19% “worse off”), and 64% rate their local economic conditions as “good” or “excellent.”

But none of those upbeat Fed survey findings were given the media attention of this one: Many adults are “financially vulnerable and would have difficulty handling an emergency expense as small as $400.” Specifically — and here I will use The Washington Post’s description of the survey results — “Almost 4 in 10 people (39%) said they wouldn’t be able to scrape together the cash to meet a $400 emergency expense” while 61% say they would cover it with cash, savings, or a credit card paid off at the next statement.

Instead, this group would resort to a number of alternate options, including putting the expense on a credit card and paying it off over time, borrowing from family members, and selling something to raise cash. (People could choose more than one option.) Proof positive, apparently, of a deep vein of financial fragility running through this economic boomlet.

But people are funny about money, and those behavioral quirks suggest $400 statistic be used with caution. For instance: A footnote in the survey highlights 2016 research that found 76% of households had at least $400 in liquid assets, far higher than the 56% in 2016 who said they would cover a $400 expense with cash or its equivalent. (Reasonable to assume that first number is higher today.)

Moreover, the fact that some people choose to hold both high-interest credit card debt and cash that could be used to pay down that debt has been termed the “credit card debt puzzle.” It’s a thing. Indeed, only 12% said they wouldn’t use any means to pay that expense. (A great thread by National Review’s Robert VerBruggen notes, among other things, that 25% of those billed as being unable to cover $400 with borrowing or selling make more than $75,000 a year.”)

The survey itself poses the question: “Although so many incurring additional costs for a modest expense is disconcerting, it is possible that some would choose to borrow even if they had $400 available, preserving their cash as a buffer for other expenses.”

Like I said, people are funny about money — and that includes answering surveys about money. (Question wording might be key here, such as “would” vs. “could.”) My AEI colleague Andrew Biggs notes on Twitter that while the Fed survey finds only 36% of non-retired adults think their retirement saving is on track, the reality of retirement finances suggest far more should be confident. As Biggs wrote in The Wall Street Journal earlier this year:

Eight in 10 retirees tell Gallup they have enough money to “live comfortably,” and 6 in 10 working-age households say the same. Seventy-five percent of retirees tell the Federal Reserve’s Survey of Consumer Finances they have “at least enough to maintain standard of living,” up from 61% in 1992. Census Bureau research that uses Internal Revenue Service data to measure retirees’ incomes found that the over-65 poverty rate was only 6.7% in 2012, down from 9.7% in 1990 and lower than any other age group…. According to Fed data, the median retiree household’s income grew by 56% above inflation from 1989 through 2016, versus only 4% real growth for working-age households. Incomes grew faster at the poorest fifth percentile retirees than at the 95th percentile of the working-age population.

The $400 statistic is certainly interesting and worth reporting in context, but no more so than other data on wages and mobility showing American capitalism might be doing better than you think.