The 'wealthy poor' replace the middle class

The 'wealthy poor' replace the middle class

One phenomenon of the modern economy is affluence that doesn’t feel like it. You work, earn and spend quite a lot, yet it seems you’re getting nowhere.

Some new economic analysis helps quantify just how many people might be characterized as the “wealthy poor”— and it’s a surprisingly large chunk of the overall population. A new paper by economists Greg Kaplan and Justin Weidner of Princeton University, and Giovanni Violante of New York University, finds that about 70 million Americans may live in families they describe as “wealthy hand-to-mouth” households. These are families that own assets such as homes, cars, retirement plans and even boats, yet still spend virtually every dollar of their regular income because it’s necessary to pay all the bills they’ve racked up.

Many breadwinners may feel they have no choice but to live from paycheck to paycheck, especially if they have kids headed to college and other bills that come with the duties of raising a family. Plus, monthly expenses such as mortgage payments and tuition are a form of investing, since it’s reasonable to expect some return from owning real estate or financing education (though not as much, perhaps, as we once thought).

The vulnerable 'rich'

Yet spending every dollar of regular income — even if it’s a high income — can leave affluent families as vulnerable to an economic shock as those who have no wealth at all. The problem comes when a major portion of net worth is tied up in illiquid assets such as homes, cars and other such items that can’t be translated easily into cash when necessary.

Many families learned this unhappy lesson during the 2007–2009 recession, when layoffs slammed white- and blue-collar workers alike, home values plunged and banks shuttered their lending windows. The foreclosure crisis that followed drew attention to many low-income buyers who never should have been approved for mortgages and lost homes they couldn’t possibly afford. But many high-income families suffered, too, because they had little cash cushion when the economic shock hit. From 2011 to 2013, for instance, more than 65,000 homes valued at above $500,000 went through foreclosure, according to RealtyTrac.

The latest research found that about one-third of U.S. households qualify as “hand-to-mouth” arrangements, defined as consumers who spend all their available resources in every pay period, with nothing left over. Of those, only about one-third are poor households, with no assets at all. The other two-thirds spend all their income but also have a sizable amount of illiquid wealth, with median net worth of about $50,000 for a 40-year-old who fits the profile, and $100,000 for a 60-year-old. That may not qualify as "wealthy," exactly, but it does reflect valuable assets that can't be readily used to pay bills. And some hand-to-mouth consumers have a net worth well above the median.

Those figures date to 2010 but were generally consistent for 20 years prior to that. If the same proportions hold today, that would add up to about 105 million people (including kids and seniors) who live in a hand-to-mouth household, with about 37 million being poor, with no assets, and the other 70 million having considerable assets. The other 213 million Americans live with more of a cash cushion, whether they own hard assets or not.

The issue is important because it affects stimulus programs that, no matter how controversial, have become standard policy at the onset of a recession. Most governments in the developed world, and even in up-and-coming nations such as China, try to put more money in consumers’ pockets once it’s clear the economy is contracting. The trick is giving it to people most likely to spend it, because that’s what stimulates the economy. If people get a stimulus windfall and put it in the bank, that doesn’t stimulate anything, at least not until they withdraw the money and use it to purchase something.

Giving to the "needy wealthy"

The assumption up until now has been that targeting stimulus money at the poor generates the most bang for the buck, since they’re most inclined to spend all of it and save none of it. The new findings, however, show that targeting money at wealthy hand-to-mouth households could help the broader economy just as much — maybe even more, since wealthier households are committed to higher spending levels they have to sustain. This doesn’t account for the political problem of trying to target taxpayer funds at people with relatively high living standards who might be straining to pay off a BMW or a new in-ground pool.

The findings also highlight the extent to which Americans over-commit themselves to homes, cars and other middle-class entitlements. Americans aren’t alone in their consumptivitis — other nations such as Canada, Germany and the U.K. have similar portions of wealthy hand-to-mouth households. Still, living paycheck to paycheck can become an instant hardship if that paycheck shrinks or disappears altogether — and that fancy home suddenly seems more like a noose than a palace.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.