Senate Majority leader Mitch McConnell (R-KY) said that an economic stimulus bill will be a top priority after the election. Such a bill could contain money for struggling families and businesses and possibly some assistance to state and local governments. A quick, substantial boost to people’s incomes is necessary, but the pandemic has shown that families also need meaningful savings in the future. After all, the last decade has seen sharp increases in wealth inequality with large swaths of American households ending up with little or no wealth at the start of the recession. With few savings to fall back on and congressional action on financial assistance to families unpredictable and unreliable, millions of families quickly started to struggled in paying their bills. And these financial woes can worsen the recession and slow the economic recovery.
Household wealth is the difference between what families own, for instance, their savings and checking accounts, retirement savings, houses and cars, and what they owe on credit cards, student loans, mortgages, among other debt. Wealth allows families to weather a financial emergency such as a layoff or a family member falling ill. It also provides families the means to invest in their future by supporting their children’s education, starting a business, moving when new opportunities arise and buying a house. The pandemic has raised the importance of wealth at a time, when many have little or none of it.
Wealth inequality has risen over the past few decades. The wealthiest households have amassed ever-larger fortunes while many Americans have very little wealth. The wealthiest one percent owned 31.2% of all wealth at the end of 2009, just before the recession hit. In comparison, the bottom half owned 1.8% of all wealth in the country. Calculations based on the Federal Reserve’s Survey of Consumer Finances show that median wealth for all households was $121,760 in 2019, which was an improvement over the $103,475 in 2016, but still below the median wealth levels in the years before the Great Recession. By 2019, though, average wealth soared to $746,822 after it had already surpassed all previous levels in 2016. Middle-class families struggled to regain lost ground while the wealthiest few saw their fortunes quickly expand before the pandemic.
Many households struggle in the pandemic as jobs disappear, health care risks and costs rise and they do not have enough money to fall back on to pay their bills. Calculations based on Census data, for example, show that about 16% of renters were not current on their rent in August and September 2020. Similarly, 9% of homeowners indicated that they were not current on their mortgage at that time. And almost one-third of households, 32.9%, took out loans or borrowed money from friends and family to pay their bills at that time, the same data show. Large shares of households quickly fell financially through the cracks as the recession continued and federal government assistance stopped.
Many also did not have money to make necessary investments in their own future. Families, for example, needed to have reliable internet and devices available as schools moved to remote schooling. Yet, 16% to 17% of households did not have reliable internet and electronic devices available in May and June 2020, Census data show. The shortfall is even larger with 25% among renters, who typically have less wealth than homeowners do, and thus are less likely to be able to make the additional investments. These gaps often reflect a lack of wealth and can translate into wider achievement gaps, most notably by race and ethnicity, over fairly short periods of time.
This recession shows the importance of wealth – a store of money to fall back on. When incomes decrease or disappear and public assistance is unpredictable and unreliable, private savings take on an outsized role for families’ current and future financial security. The lack of enough wealth for millions of families in turn worsens a recession since families have to cut their spending more than they otherwise would have to. It also slows the economic recovery as families will have more debt and shattered finances. For example, 46.1% of renters, who were not current on their rent in August and September, said that eviction was extremely or very likely in the following two months. And 19.7% of those, who were not current on their mortgage said that foreclosure was extremely or very likely in the coming two months. This would imply that more than one percent of all homeowners could face foreclosure in the near future since about two-thirds of homeowners owe a mortgage. The effects of the recession will linger for some time because of the lack of wealth for millions of families at a time when they really needed that money.