Kamala Harris recently unveiled her “LIFT the Middle Class Act “, which would provide a tax credit of up to $3,000 for single tax filers and $6,000 for families. Harris’s basic rationale for the LIFT Act is that many Americans are too financially stressed to save, so the federal government has to step in. As she explains on her website:
“The latest Federal Reserve report on the economic well-being of Americans indicated that four in ten adults still say they don’t have enough savings to cover a $400 emergency expense…The advance credit each month would also provide families an alternative to taking out predatory payday loans.”
Let’s look at that Fed report, specifically the Report on the Economic Well-Being of U.S. Households in 2017 (released May 2018). Yes, the Fed did say 4 out of 10 Americans reported their savings wouldn’t be enough to cover a $400 emergency expense. But that doesn’t mean they can’t pay for the expense. Per the Fed, 43% of those who said they lacked sufficient savings to pay for the emergency expense would pay it off with a credit card. Around 5% would cover the expense using a “payday loan, deposit advance, or overdraft “.
In other words, less than 5% of Americans with insufficient savings to pay for a $400 emergency turn to “predatory” payday loans. That translates to less than 2% of all Americans (.05x.4). Once again, we have a very broad and expensive progressive proposal to address a problem affecting a relatively small part of the population. What’s wrong with a targeted approach to helping this financially stressed subgroup?
It is true, however, that Americans aren’t saving like they used to. The following chart pretty much tells the story:
So what happened - especially between 1970 and the early 2000s when the savings rate bottomed out? It wasn’t because Americans increasingly couldn’t afford to save; it was because they increasingly choose not to. Consider:
During the period of 1973-2003, the share of US household expenditures going to food decreased by 6% and the share going to “discretionary” spending went up 8%.
In 1972, Americans in the lowest income bracket spent 3.6% of their money on food away from home.
By 1986, the lowest income bracket spent 6% of their money on food away from home. In 2017, it was 6.1%.
In 2017, Americans in the bottom 10% of income spent an average of $1501 on food away from home. - about $125 a month.
On average, it is about four times more expensive to buy out than cook in for the same food items.
Putting it together: American household savings plummeted in sync with increased spending on non-essentials. What happened? Lots of things, among which: credit cards. In 1970, just 16% of Americans had credit cards. By 2000, 70% of US households had at least one credit card. What do you do to prepare for an emergency these days? Make sure you have access to easy credit. Works almost as well as saving for a rainy day.
Of course Americans should be encouraged to save more. But our savings rate doesn’t reflect that something is rotten at the core of the US economy. If anything, it reflects excessive optimism that things will turn out ok without need for a rainy day fund. As the above chart made clear, the US savings rate goes down when the economy is booming. That’s why the rate was so low in the early 2000s and has been declining recently. Americans save less when they’re more confident about their financial futures.
References:
100 Years of U.S. Consumer Spending/US Bureau of Labor Statistics