Not a $400 expense away from disaster. Sens. Kamala Harris, Bernie Sanders, and Elizabeth Warren have all made the claim that a large portion of Americans are unable to pay a $400 emergency expense. That’s just not true, writes Michael Strain:
It turns out the claim that nearly half of Americans are a flat tire away from financial crisis is largely based on an inaccurate reading of one survey question.
The question comes from the annual “Report on the Economic Well-Being of U.S. Households” by the Federal Reserve. The reportfinds, in 2018, that 61% of adults would cover a $400 unexpected expense using cash (or its equivalent). Politicians and many in the media seem to be subtracting 61 from 100, and concluding that 39% of people, to use Warren’s phrase, “can’t come up with” the money they’d need to handle this situation.
Instead, as the Fed report makes clear, though “the remaining 4 in 10 adults” “would have more difficulty covering such an expense,” many of them would be able to make it work by carrying a credit card balance or borrowing from friends and family. (Presumably some of these adults are 18-year-olds borrowing from their parents, but I’m not sure about that.)
The report states: “Twelve percent of adults would be unable to pay the expense by any means.” I’m dubious about that as well. In any event, 12% is a lot less than 39%.
The report also goes out of its way to make clear that some of the 39% who wouldn’t use cash might still have $400 in the bank: “It is possible that some would choose to borrow even if they had $400 available, preserving their cash as a buffer for other expenses.” In a footnote, the report even cites a 2016 study finding that 76 percent of households had $400 in liquid assets, even after taking into account monthly expenses. […]
The common misinterpretation of this finding in the study is particularly strange in light of two other questions on the same survey. The Fed asks respondents whether they are able to pay all of their bills in full. Only 17% say they can’t pay some bills. Again, 17%, not 39%.
The Fed also asks respondents how a $400 emergency expense that they had to pay would affect their ability to pay their other bills. Eighty-five percent report that they would still be able to pay all their bills. Only 14% say that the emergency expense would result in their not being able to pay some bills.
[Michael R. Strain, “Americans May Be Strapped, but the Go-To Statistic Is False,” Bloomberg, June 4]
And, as we know, the Fed always tells the truth.