The median net worth reported by the bottom fifth of households by income was only $6,400 in 2013. Among this group, representing about 25 million American households, many families had no wealth or had negative net worth. The next fifth of households by income had median net worth of just $27,900.But even these numbers are in a sense overstated, since much of the "net worth" is in home equity, thus not easily available
Home equity accounts for the lion's share of wealth... for lower and middle income families, financial assets, including 401 (k) plans and pensions, are still a very small share of their assets.This matters because,
for many lower-income families without assets, the definition of a financial crisis is a month or two without a paycheck, or the advent of a sudden illness or some other unexpected expense. .... According to the Board's recent Survey of Household Economics and Decisionmaking, an unexpected expense of just $400 would prompt the majority [!] of households to borrow money, sell something, or simply not pay at all.["Majority" meaning 51% of all households seems like a lot, if the bottom 2/5 has $27,500. But I didn't look it up.]
This all brings to mind several thoughts.
Naturally, I'm delighted any time I spy broad consensus across the economic spectrum. Charles Murray bemoaning Fishtown might make the same comment. The idea that all households should be saving, building assets for retirement and for a rainy day, is not just held among curmudgeonly conservatives.
But, if we want to understand the predicament of low-income households, and if we want to understand the decision-making that in part gives rise to that predicament -- rather than the usual liberal idea that poor people are fundamentally like children, buffetted by events and needing the benevolent direction of the aristocracy -- it seems a bit superficial to leave out the role of the government.
Left out of "assets" and risk planning here, is the present value of social security, medicare, and the income- contingent value of government programs. Those are substantial. Households who find the prospect of social security and medicare adequate reassurance against the prospect of old age, don't save as much. Households who can, or already do, rely on food stamps, unemployment, disability, medicaid, rent and housing subsidies, and so forth, in times of need, are somewhat protected against income shocks, and in turn have less incentive to save in precaution against such shocks.
To be sure, their lives are tremendously difficult. But not nearly as difficult as they would be if people died in the gutter. And that fact surely colors their decisions to some extent.
But we agree, more saving would be good. Or do we agree? As I look across the broad Keynesian policy consensus, I hear cacophony on that subject. Larry Summers is worrying about a "savings glut" leading to "secular stagnation." More saving, in his view, would be a terrible thing for the economy as a whole. Amir Sufi and Atif Mian's House of Debt links housing values to the economy through spending, not asset building. They want people to spend housing equity, and view the major problem of the recession that people with less housing equity stopped spending.
The Fed itself has been promoting exactly the opposite of "asset building" on a macro level. It wants spending, lots of spending, and now. Negative 2 percent real interest rates for 5 years are not exactly a clarion call to get people to save more.
So, does the Fed really want more saving, or more spending? Or, somehow, more of both? Or for people to save more and the economy to save less somehow? Uh-oh, I'm about to get vilified again for pointing out the existence of budget constraints.
Perhaps this is why Ms. Yellen chooses to use the word "asset building" not "saving," which is Keynesian poison. But I'm hard pressed to know how one can do the former without the latter. (Once again, little Orwellian language choices matter a lot!)
More common sense from Ms. Yellen:
The housing market is improving and housing will remain an important channel for asset building for lower and middle income families. But one of the lessons of the crisis, which will not be news to many of you, is the importance of diversification and especially of possessing savings and other liquid financial assets to fall back in times of economic distress....
A larger lesson from the financial crisis, of course, is how important it is to promote asset-building, including saving for a rainy day, as protection from the ups and downs of the economy.Which leads to the natural question, why should housing remain "an important channel for asset building?" Why should Federal Policy so strongly promote and subsidize this idea? Owner-occupied housing is a lousy asset. Bob Shiller, hardly a right-winger, has been loudly producing facts on this point for two decades. The average rate of return is awful, it's horribly illiquid, it's full of idiosyncratic risk. People reading this likely live in overpriced houses that seem great in retrospect. But our average low-income household in trouble "built assets" in houses in places like Detroit.
The best possible thing financial policy and "consumer financial protection" should do is move heaven and earth to get low income households to rent, and invest their savings in a nice balanced passive mutual fund instead. Obviously, Ms. Yellen isn't going to stand up and say that. But we can ask the question.
The only thing I found a bit to criticize in this speech is the last part:
The Federal Reserve's mission is to promote a healthy economy and strong financial system, and that is why we have promoted and will continue to promote asset-building. One way we do this is through the Community Development programs at each of our 12 Reserve Banks, and through the Federal Reserve Board's Division of Consumer and Community Affairs in Washington. As a research institution, and a convener of stakeholders involved in community development, I believe the Fed can help you in carrying out your mission, to encourage families to take the small steps that over time can lead to the accumulation of considerable assets.I thought the Fed's mission was inflation, employment, and financial regulation. Is "promoting asset-building" really the Fed's job? Is the Federal Reserve now a "convener of stakeholders involved in community development???" I didn't see that in the Federal Reserve act. I thought it was a central bank.
What happens if the Fed takes any of this seriously? If the Fed gets serious about "promoting asset building" one big place to start are the horrendous disincentives to asset building in Federal social programs. You want to promote asset building? Remove asset tests from so many subsidies! We're not going to get serious about asset building without that. But since this is absolutely not the Federal Reserve's job, it seems foolish to get involved at all.
The Fed is in danger of mission creep, that will not long be tolerated from a politically independent central bank. A lot of Republican Congresspeople might take objection to the idea of the Fed even saying it is a "convener of stakeholders involved in community development" -- or more generally a completely independent agency entitled to do anything it wants to "promote a healthy economy." I wish for the day I hear any Fed official say "here is a terrible problem, and I think our Federal Government should do something about it, but it's not the Fed's job."