Watch out: fake news
An economic urban legend too good to renounce
Here’s a statistic you have almost certainly encountered: A shockingly high percentage of American adults wouldn’t be able to cover an unexpected $400 expense.
This has been a popular talking point for nearly a year, cited by many pundits, professors, and politicos. Here are half a dozen examples from just the past few weeks:
“A recent report from the Federal Reserve finds that 39% of Americans do not have enough savings to cover a $400 emergency” - Mark Rank, professor of social welfare at Washington University, writing in the St. Louis Post-Dispatch.
“. . . the stunning fragility of an economy where 40% have reported they don’t have even $400 saved if an emergency hits” - Philadelphia Inquirer columnist Will Bunch.
“[S]o many American workers lack the resources to cope with even a brief period without work. A Federal Reserve survey last year said four in 10 workers would struggle to find $400 in an emergency” - The Guardian.
“With the economy imploding, many Americans are willing to toil at an Amazon warehouse. Almost 4 in 10 would have difficulty covering a sudden $400 emergency expense, according to a survey on economic health released in May by the Federal Reserve” - Bloomberg.
“[M]ore than 47 million Americans [may become unemployed] at a time when 40% of US households can't write a $400 check in an emergency” - CNN anchor Julia Chatterly.
“We know that many, many Americans don't even have the $400 to afford an emergency room bill right now” - Senator Amy Klobuchar, interviewed on ABC’s “The View.”
It’s a shocking datum, no question about it. In a nation as affluent as the United States, where unemployment as recently as six weeks ago was at a 50-year low, it is mind-blowing to think that tens of millions of Americans, even in an economic boom, would be thrown into “complete upheaval” (to quote Senator Kamala Harris) by an unanticipated $400 expense. If true, it is a damning revelation about American economic inequality and social insecurity.
It isn’t true.
The claim has its origin in the 2019 Federal Reserve report, released last May, on the economic well-being of US households. The report was based on a survey of more than 11,000 respondents, who answered a battery of questions, including this one: “Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?”
Well, how would you cover such an expense? If you’re like the overwhelming majority of Americans, you would either pay for it with cash, a check, a debit card, or a credit card: According to the Fed study, that is what 77% of individuals said they would do. Another 10% said they would borrow the $400 from a friend or relative; 6% said they would sell something; 3% would tap a line of credit; and 2% would rely on a payday loan or deposit advance. Only 12% - not 40% - said they would not be able to come up with the emergency $400 “right now.”
In a follow-up question, the Fed survey asked: “How would a $400 emergency expense that you had to pay impact your ability to pay your other bills this month?” Only 14% of respondents said it would prevent them from paying all their monthly bills in full; 85% said they would still be able to cover all their regular costs.
In other words, the government report that has been cited over and over as showing that 4 in 10 American adults couldn’t come up with $400 in an emergency actually said nothing of the kind. What it did say was that 61% would use “cash or its equivalent” to cover such an expense. Perhaps, if we’re being charitable, that confused some politicians and journalists into the mistaken conclusion that the remaining 39% would have no recourse at all.
More likely, as Michael Strain suggested last year in a Bloomberg column debunking the myth, they chose not to look at the data too closely, lest they be forced to relinquish a politically convenient economic urban legend:
Why does the conventional wisdom about the $400 expense refuse to die? The easy answer is because it riles up voters and attracts readers. That raises a different question: Why is there an appetite for this finding?
I’d speculate, in part, that this faulty interpretation resonated during the slow and painful recovery from the Great Recession. The recession was traumatic, and affected how many people think about their personal finances, their employment relationships - their economic security.
If Strain is right, this genuine example of fake news is likely to live on. With the current coronavirus restrictions plunging the nation into a fresh recession, plenty of commentators will find it more useful than ever to portray Americans as teetering on the edge of financial ruin, and thus in need of more and more largesse from the government. If we are lucky, the pandemic-fueled downturn will be “V-shaped” - i.e., a sharp but brief fall will be followed by a quick and sustained recovery. It is probably too much to hope that the politics-fueled rhetoric of decline and dependence might be equally short-lived. The “$400” factoid is a fallacy, but a lot of people sure do find it handy.
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Originally posted at otkaznik1.dreamwidth.org