The Atlantic’s cover story this month is a piece by writer Neal Gabler in which he relates his personal tale of financial distress, using it as a frame for what he takes to be widespread insecurity across the broad middle class. “Nearly half of Americans would have trouble finding $400 to pay for an emergency,” goes the subhead. “I’m one of them.”
The writer’s story sounds tragic in many ways, yet the fact that he doesn’t fully own up to his bad choices makes it difficult to have sympathy. True, Gabler says that he is “responsible” for his “quagmire,” and that he “screwed up, royally.” But about choices he also writes: “We don’t make them with our financial well-being in mind, though maybe we should. We make them with our lives in mind. The alternative is to be another person.”
Gabler also casts blame squarely on the economy, which he thinks no longer supports middle-class Americans like him and pushes them into similarly dire straits. He is unique only in his bravery in revealing the “secret shame” pervading the financially strapped middle class. The generalization of his personal experience to a supposedly teetering citizenry is what makes the piece especially problematic. It is not so much that Gabler’s is an unsympathetic story; it’s that it’s just not that common.
The case he makes is deeply flawed. The number of people who can’t immediately afford $400 in an emergency is smaller than Gabler thinks, and many of them aren’t as bad off as he thinks. The economy is not failing people like he believes it has failed him. He is — much as he might not want to believe it — an outlier. There is no widespread financial “shame” that middle-class Americans are keeping secret.
There is no widespread financial ‘shame’ that middle-class Americans are keeping secret.
Citing a Federal Reserve study, Gabler writes: “The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all” (emphasis in original). Note, first, that the survey is asking how people “would” cover the expense, not whether they “could.” Nor does this result indicate that the 47 percent “would have trouble” covering the expense, as The Atlantic’s subhead puts it.
The survey asks those who say they “would” cover the $400 only by borrowing or selling a follow-up question that indicates that 22 percent of them could cover the cost immediately. So the share of adults who could cover $400 immediately without borrowing or selling anything is actually 63 percent, and the share who could not is 37 percent (not 47 percent).
Whether or not these figures indicate that we have a crisis of inadequate savings is not so obvious as Gabler contends. But before getting to that, it is worth pointing out that even if there is such a crisis, the cause is not obvious. If too few people have $400 in emergency funds, it might mean that the economy is doing poorly by them. But it might also mean that too few of us have internalized the virtue of thrift. We should want to both promote responsible choices and have an effective economy; we cannot simply presume that more economic growth would promote thrift. The reverse could very well be true.
Do the Fed-survey figures suggest that we have a savings crisis? It’s a bit shocking that over one-third of adults can’t pay a $400 emergency bill with (more or less) cash on hand, but many of these people have sources of wealth from which they can draw down income. Some — especially higher up the income ladder — have retirement or educational savings accounts they can tap. Some have home equity. These are forms of saving that are different from checking and savings accounts only in being somewhat less liquid or subject to tax penalties.
Not only are there fewer people who can’t afford a $400 emergency than Gabler thinks, but the number who can’t afford such an emergency and who also experience one is even smaller. For instance, 24 percent in the Fed survey had unexpected major medical costs they had to pay out of pocket (and not necessarily costs totaling $400). The Pew Charitable Trusts figures that Gabler cites indicate that one in three adults had an unexpected expense that “made it harder” for their household to “make ends meet for a while.” Note that the wording is “harder,” not “hard.” That’s why, among those adults with an income of $100,000 or more who experienced a shock, one-third said it had made it “harder to make ends meet.”
There is a bigger point here. Public and private policies and institutions actually reduce the likelihood that we face emergency costs of $400 or more. The number of Americans experiencing an unaffordable medical shock would be higher than 24 percent if not for employer- and government-provided health insurance. Such insurance can be viewed as a form of forced savings, in that it is financed by employees and taxpayers through lower wages and higher taxes.
In reducing the frequency of emergencies, policies and institutions affect how much we need to save. Along with various forms of private insurance, a more general insurance system is constituted by 401(k) loans and distributions, home equity, credit cards, the public safety net and social insurance, bankruptcy courts, legally mandated emergency-room care, marriage, family, and friends. Individually, we’d save more money if this elaborate insurance system were less effective; with it, we’re correspondingly less likely to be able to immediately cover emergency expenses out of pocket.
Gabler is struck by the number of middle-class people who tell surveyors that they can’t immediately come up with $2,000 in cash. But this is less surprising when you realize that the system of insurance to which we have access makes it less necessary to have two grand in your wallet. To those further down the income ladder, the same is true about having $400 readily available.
Consider that, according to the Fed survey, 27 percent of adults with household income over $100,000 would not cover a $400 emergency bill immediately. Clearly, the vast majority of these respondents could do so. That makes the fact that 44 percent of middle-income adults would not cover the cost immediately quite a bit less frightening. I worry much more about the 69 percent of lower-income adults (basically the bottom third) who would not cover the cost of emergency expenses immediately, but even some of these folks could do so.
Nationally, 20 percent of adults in the Fed survey said they spent more than they saved in the past year, and 57 percent spent at least as much as they saved. Are those figures high? Well, among adults with more than $100,000 in income, the figures were 15 percent and 44 percent. I doubt that this level of dis- or non-saving reflects much in the way of hardship among Americans with six-figure incomes. For those with $40,000 to $100,000 in income, the estimates are 18 percent and 55 percent. Clearly, a lot of this reflects individual preferences to spend rather than save, or else we’d expect to see a bigger gap between the middle-income and upper-income group. And these preferences are affected by our institutions and by the extent of public and private insurance mechanisms.
Things look significantly worse for the lower-income group, among whom 27 percent spent more than they saved and 70 percent spent as much as they saved or more. Much — though not all — of that is likely to reflect hardship. This group merits our concern, but it is essentially the bottom quarter of the population. It is not the broad middle class.
Given the low risk of financial catastrophe faced by most Americans, the sources of insurance we can draw on in the event of one, and the value we place on current consumption, many middle-class families will find it doesn’t make sense to keep, say, three-months’ savings in liquid bank accounts. There is always the chance that something like a medical emergency could essentially bankrupt any of us. I favor public policies to mitigate that risk. But we can’t save for every possible risk that could befall us, and public policy can’t guarantee no one will face economic risk regardless of the choices he makes. The fact that most people don’t save for risks that are relatively unlikely isn’t necessarily a problem.
Misleading economic analyses encourage dependence on government solutions that are not matched to the true (more managable) scale of our economic challenges.
What is a problem is the resilience of misleading economic analyses that scare the middle-class into thinking that the economy is failing them. These analyses encourage dependence on government solutions that are not matched to the true (more manageable) scale of our economic challenges.
Which brings us to Gabler’s various empirical claims that we are all doomed. Many of the statistics he cites on “financial fragility” — whether Americans could come up with emergency funds if necessary — are vulnerable to the same problems with the $400-in-savings statistics, or they indicate that true inability to cover emergencies is confined to a smaller minority of the population than Gabler believes.
He cites the drop in the personal savings rate as problematic. But this is largely caused by three issues that Gabler ignores. First, when retirees draw down their retirement savings, that is counted as negative savings. Since the Boomers have been retiring, that puts downward pressure on the savings rate. Second, business savings are omitted from these estimates. And third, capital gains substitute for savings; for instance, when home values rise, owners can afford to save less because they have additional wealth from which they may draw down.
Gabler cites trends in net worth that indicate large declines for the middle class from 1983 to 2013. The Federal Reserve Board (here’s a big spreadsheet) confirms a decline in wealth, though much smaller than that suggested by Gabler. The inflation-adjusted median net worth of the middle fifth of households (ranked in terms of their income) fell by 11 percent between 1989 and 2013. The next-highest fifth (solidly middle class to upper middle class) saw its median net worth rise by 44 percent. The second fifth (working class) saw a decline of 44 percent, but the net worth of the bottom fifth doubled.
The trends look much better if one compares 1989 to 2007 — a more informative analysis because both are business-cycle peaks. The net worth of the middle fifth was 27 percent higher in 2007 than in 1989, that of the next-highest fifth was 86 percent higher, and that of the bottom fifth was 170 percent higher. The second fifth saw a decline of 6 percent. The financial crisis and Great Recession destroyed a lot of wealth, but before that, Americans’ net worth was as high as ever. In fact, these net-worth figures count college debt as a liability but do not count as an asset the more valuable human capital acquired through higher education. So, perversely, higher rates of college-going make us look less wealthy in the data.
I don’t know why the figures Gabler cites from economist Edward Wolff are so different. Part of the explanation is that Wolff probably used a cost-of-living adjustment that exaggerates inflation. Regardless, Wolff is simply wrong when he says that Americans are in “desperate straits” because they “have been using their savings to finance their consumption.” Incomes have risen substantially — after accounting for the rise in the cost of living.
Gabler laments that he might have avoided his fate if his “income had steadily grown the way incomes used to grow in America.” But, he says, “it didn’t, and they don’t.” He claims that inflation-adjusted hourly wages peaked in 1972. That is flat-out wrong. The liberal Economic Policy Institute says that the median hourly wage peaked in 2009. My re-analyses of its estimates — which use a better inflation adjustment — indicate that last year, the median hourly wage was 17 percent higher than in 1973. Among women, it was 39 percent higher; among men, only 5 percent higher. If you take benefits into account, median hourly compensation was 25 percent higher in 2015 than in 1973, 49 percent higher for women and 13 percent higher for men. Median hourly compensation will soon be back to its historical peak.
Economic life is perhaps somewhat less secure than it once was, but it is far more secure than Gabler and other doomsayers suggest.
Gabler also claims that between 1967 and 2014, household income rose by just 23 percent among the middle fifth of households and 18 percent among the bottom fifth. My analyses of non-Hispanic fortysomethings — which control for the aging of the population and immigration — indicate that median household income, adjusted for the declining number of adults per household and falling taxes, rose by 60 percent between 1969 and 2013. It has risen by a third since 1979. This median, too, is also nearing its all-time peak after falling during the recession.
The American middle class, in short, was richer than it had ever been before in 2000, and it is essentially no worse off today, less than eight years after we narrowly avoided a worldwide depression. It is far better off than it was in the glory days of the 1950s and 1960s that Gabler misses (which were not so great for married women, African Americans, or would-be immigrants, to name just three groups that are much, much better off today). Economic life is perhaps somewhat less secure than it once was, but it is far more secure than Gabler and other doomsayers suggest. The irony is that by obscuring these facts, Gabler and his ilk create greater anxiety and pessimism about the American economy than is warranted.
There is a reason that “data” is not the plural of “anecdote.” Individual stories may or may not reflect what is typical for most. Gabler wants to believe that his experience has been little different from that of his peers. It brings me no joy to inform him that’s not true. But the alternative is to let the anecdotalists drag the vigor of American consumers, investors, and employers downward, potentially creating the dystopia where they believe we already reside.