There Are “Wealthy” Among Us Living Hand-to-Mouth

About one-third of Americans are currently living hand-to-mouth. About one-third of those people have few, if any assets, but the other two-thirds of those people living hand-to-mouth are not technically poor because they have assets, albeit illiquid ones like equity in their homes.  It turns out that these people respond to stimulus policies in much the same way as those with no assets at all.

In “The Wealthy-Hand-to-Mouth,” authors Greg Kaplan of Princeton University, Giovanni Violante of New York University and Justin Weidner of Princeton University find that both the wealthy hand-to-mouth (those with little or no liquid wealth but substantial holdings of illiquid assets – those that carry a transaction cost to access, such as housing, large durables, or retirement accounts, as opposed to liquid cash, checking, and saving accounts), and the “poor-hand-to-mouth” behave similarly: both groups have “large marginal propensities to consume out of small income changes – a key determinant of the macroeconomic effects of fiscal policy,” they write. The wealthy-hand-to-mouth choose to weather income fluctuations rather than dipping into their assets to smooth shocks , because smoothing shocks would entail holding large balances of cash and foregoing the high return on their illiquid assets.

The research shows that around one-third of all US households live hand-to-mouth (around 38 million households in 2010, based on 117 million households in 2010, Census Bureau), and of that group, over two-thirds are indeed wealthy-hand-to-mouth. While poor-hand-to-mouth households are most frequently young with low incomes, the wealthy-hand-to-mouth are older (peaking around age 40), have high incomes (similar to the non-hand-to-mouth) and hold substantial illiquid assets (at age 40, around $50,000 on average). In addition, wealthy-hand-to-mouth households hold portfolios that are very similar to the non-hand-to-mouth in terms of their shares of illiquid wealth held in housing and retirement accounts. Unlike the poor hand-to-mouth who tend to stay in this state for long periods of time, wealthy-hand-to-mouth status is transient, lasting an average of only 2.5 years.

Source: Brookings Institute

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