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 [their] 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.

Published in Economics
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  1. Stina Member
    Stina
    @CM

    I think I’m coming to the conclusion we all need a little more Dave Ramsey in our lives.

    • #1
  2. James Gawron Inactive
    James Gawron
    @JamesGawron

    James Pethokoukis: 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.”

    Jim,

    Rather than an underlying cause of anything, don’t you think this is a result of decades of a weak economy coupled to a perverse social environment? A rolling stone gathers no moss. Get married & have some children, that is still the formula that breeds savings and conservative economic life choices. Link that to a full employment economy that steadily provides the opportunities for strong employment and you’ve got solid success. We’ve only had 2 years of this good economy and we still can’t turn the corner socially. Aborting babies and SSM won’t do the job. Putting down roots is what it used to be called. Salvini in Italy has the right idea.

    Regards,

    Jim

    • #2
  3. J Climacus Member
    J Climacus
    @JClimacus

    James Pethokoukis:

    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. 

    I’m so tired of this statistic. This number is kept artificially low by excluding both the short and  long-term unemployed – which they didn’t do 50 years ago. So comparing that 3.6% to 50 years ago is comparing apples to oranges. If we want to compare apples to apples, the unemployment rate is 7% or much higher, depending on which categories of discouraged workers we include.

    You just need to look at the labor force participation rate since 2008 (from the Bureau of Labor Statistics)

    • #3
  4. TBA Coolidge
    TBA
    @RobtGilsdorf

    Being able to cover X debt is a matter of having money or credit set aside. 

    That’s been out of style for decades, along with the reflexive frugality that people practiced when life was dicier.  

    • #4
  5. Stina Member
    Stina
    @CM

    J Climacus (View Comment):

    James Pethokoukis:

    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.

    I’m so tired of this statistic. This number is kept artificially low by excluding both the short and long-term unemployed – which they didn’t do 50 years ago. So comparing that 3.6% to 50 years ago is comparing apples to oranges. If we want to compare apples to apples, the unemployment rate is 7% or much higher, depending on which categories of discouraged workers we include.

    You just need to look at the labor force participation rate since 2008 (from the Bureau of Labor Statistics)

    Any way to normalize for similar participation rates?

    So if we had the same participation rate as then, what would the unemployment rate look like?

    • #5
  6. Dbroussa Coolidge
    Dbroussa
    @Dbroussa

    J Climacus (View Comment):

    James Pethokoukis:

    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.

    I’m so tired of this statistic. This number is kept artificially low by excluding both the short and long-term unemployed – which they didn’t do 50 years ago. So comparing that 3.6% to 50 years ago is comparing apples to oranges. If we want to compare apples to apples, the unemployment rate is 7% or much higher, depending on which categories of discouraged workers we include.

    You just need to look at the labor force participation rate since 2008 (from the Bureau of Labor Statistics)

    Labor Participation is important, but it also is starting to show the retirement of the Boomers from the work force.  What isn’t clear is how much of that decline from the 66+ range to the 62-63 range from 2008 onwards is a result of the start of that trend and how much is the poor economy.  The common refrain during the Obama years was that it was all the retirement trend.  However, now that we see that curve stopping and even slightly increasing since 2015 it would appear that much more was simply a dearth of work and people giving up on finding a job.

     

    Looking at the U-6 rate though, it is currently under 7%, down from 8.8% in January and down from the 2010 high of 17%.

     

    By any measure the recovery from the economic recession of 2008 has finally hit the job market.  That this didn’t happen until 2016, to me at least, is a measure of how poor the policy decisions were of the Obama administration, mostly due to the ACA.

    • #6
  7. Brian Clendinen Member
    Brian Clendinen
    @BrianClendinen

    I agree real econmist would quote u6 unemployment. Not u3.. However you are wrong u3 has been caculed pretry much the same way for a 100 years. However we should of mostly stopped using it when we got a better stat. It journalist and politicians that keep it alive luke the DJI average. However you are right on u6 they stoped including discourage long-term works. It only includes short-term  since 1994.

    • #7
  8. Old Bathos Moderator
    Old Bathos
    @OldBathos

    If there is a factually grounded perception that more people are doing better, those doing badly will feel even worse because of the larger happiness disparity.  Misery is easier to bear if it is widely shared.  That is why we need Bernie and a progressive wave in 2020.

    For whatever reason, people who deliver good news are considered less smart than people who deliver bad news.  Good news leads to affirmation.  Bad news leads to judgment, accusation and intervention all of which offers a transfer of political power–to the bad news purveyor and his ilk.

    Few remember Julian Simon The Ultimate Resource, Hoodwinking the Nation, compared to the complete hack Paul Ehrlich The Population Bomb  who is still treated as a respected guru despite being not only spectacularly wrong but openly genicideal in his policy preferences.  His protege John Holdgren was a top Obama advisor. 

    Simon essentially urged us to maximize economic freedom while Ehrlich called for massively intrusive global governance.  The appetite to (a) indict reality and thus (b) obtain power to direct all outcomes always means that bad news purveyors will be well-received no matter how demonstrably wrong.

    • #8
  9. Unsk Member
    Unsk
    @Unsk

    Au Contraire….

    The present 3.6% unemployment rate as others have pointed out is deceptive.  As Climacus points out the labor participation rate has taken a huge dump since Obama was elected. Back in 2008, 78 million of working age adults were not in the workforce, by  2016 that number had ballooned to 96 million with little change since despite the job gains of the Trump Administration. At the end of Obama’s term Male employment and Black employment were at their lowest levels ever.

    • In 2007 the median household net worth was in excess of $137,000, by 2014 that number had fallen to just over $82,000 with not a lot of growth since. 

    • Workers share of national income fell from approximately 66% in the year 2000 to approximately 60% now. 

    • Median family income since 2006 has hardly budged from approximately $48,000 to approximately $52,000, despite whopping increases in healthcare insurance ( 3 1/2 times what it was in 2000) , housing prices and rent, food and things like college tuition. 

    Economist Charles Hugh Smith has a definition of “what does it take to be middle class?”: You can check it out for yourself, but it is safe to say many no longer qualify as “middle class’.

    1. Meaningful healthcare insurance ($5,000 deductible plans don’t qualify, and neither does government-provided low-income coverage such as Medicaid.)

    2. Significant equity (25%-50%) in a home or other real estate

    3. Income/expenses that enable the household to save at least 6% of its income

    4. Significant retirement funds: 401Ks, IRAs, etc.

    5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job

    6. Reliable vehicles for each wage-earner

    7. If a household requires government assistance to maintain the family lifestyle, their Middle Class status is in doubt.

    8. A percentage of non-paper, non-real estate hard assets such as family heirlooms, precious metals, tools, etc. that can be transferred to the next generation, i.e. generational wealth.

    9. Ability to invest in offspring (education, extracurricular clubs/training, etc.) without going into debt to pay for the extracurricular activities.

    10. Leisure time devoted to the maintenance of physical/spiritual/mental fitness.

    11. Continual accumulation of human and social capital (new skills, networks of collaborators, markets for one’s services, etc.)

    12. Family ownership of income-producing assets such as savings bonds, etc.

    His argument is that these time honored traits of the middle class no longer apply to most of the population.  It is a qualitative measure not a quantitative one – you can throw all the low employment stats at it all you want but many of what used to qualify as a middle class lifestyle is no longer affordable to most Americans, particularly in the areas able to fund out of control debt, adequate savings, ability to afford Healthcare, ability to afford a home and the ability to send your kids to college.

     

    • #9
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