Symposium | The Forgotten 40 Percent

Ownership and Debt: Minding the Balance Sheet

By Ray Boshara

Tagged asset-building

For the last 20 years, I’ve been part of a field called “asset building,” a clunky name for a game-changing idea. That idea is that the poor need assets—such as savings for college and retirement, or a small business or home of their own—and not just income to thrive. This may seem like common sense, but for most of the twentieth century, academics and policy-makers framed and thus tried to solve the poverty problem in terms of income and consumption, leaving savings and assets out of the equation. When Michael Sherraden launched the assets field in 1991 with the publication of Assets and the Poor, most poverty experts assumed the poor could not save and build wealth because they were poor. Asset advocates believed they were poor because no one had offered them the chance to save and build wealth.

To go from belief to proof, we spent the better part of the 1990s organizing research and pilot projects to demonstrate that the poor, if offered the opportunity, would save. They did, including the poorest of the poor. And when they did, more demonstration projects, new research centers, and bold legislation were launched in the United States and worldwide, including President Clinton’s $500 billion proposal to build retirement savings for low-income workers through Universal Savings Accounts. By 2000, while few public dollars for building assets had been secured, thousands of minds had been changed—with the field proudly taking some credit for getting wealth, and wealth inequality, on the map.

In the 2000s, the field shared President George W. Bush’s vision of an “ownership society”—a stance that caused many already suspicious progressives to worry that the assets field was being co-opted by the far right to dismantle the welfare state. But the field did not fully share Bush’s policy agenda to realize that vision, especially his proposal to privatize Social Security. We wanted to complement the social safety net, not replace it.

New research and partners also began to change the movement’s approach. The field got smart about scale and got religion about behavioral economics; our best policy thinkers began to figure out that tweaking tax returns, IRAs, and default settings (opt-in vs. opt-out) could generate new savings without new subsidies from Congress. We tried to help companies do good (help the poor) and do well (make money) at the same time, albeit not always successfully. Research was also starting to demonstrate that asset building is a lot like education, nutrition, and music: The earlier in life you start, the better.

With these lessons in mind, asset-building advocates managed to get Senators Jon Corzine, Rick Santorum, Chuck Schumer, and Jim DeMint to stand together in 2005 to introduce the ASPIRE Act, which offered a progressively funded savings account at birth for every child in America. Bush senior adviser Michael Gerson and reportedly the President himself loved the idea, but it wasn’t enough to overcome the resistance of the Bush economic team and a skeptical Congress. But Tony Blair took note and that year made the “Child Trust Fund” a reality for the 700,000 babies born in the UK every year—until the new coalition government ended the promising program in 2010 largely due to the opposition of the Liberal Democrats and Britain’s turn toward austerity.

The British example gets at the current straits of the asset-building movement. Just two decades after its inception, the field faces the challenge of advancing its agenda in the wake of the worst economic crisis since the Great Depression. In fact, asset-building advocates face a perfect storm of fiscal austerity, weak economic growth, and political paralysis—which means that those with the greatest need to rebuild their wealth will have the hardest time doing so, and that government at all levels may be unwilling or unable to restore household wealth exactly when families need it the most. Can we meet this challenge?

Yes, but it won’t be easy. To get there, our analysis must include but go beyond savings and assets. Our argument for why assets matter must be clear, powerful, and consistent. And our strategy must heed the lessons arising from the Great Recession—namely, that we need to take downside risk as seriously as the upside of encouraging working families to save and build wealth.

That downside risk is now painfully apparent. The economic crisis didn’t just devastate the labor market; it also eviscerated the wealth of millions of struggling households. According to the Federal Reserve’s Survey of Consumer Finances, between 2007 and 2010 (the latest data available) the median net worth of American households shrank by nearly 40 percent. Only the top 10 percent managed to grow their wealth over that period. Everyone else’s tanked—including the bottom 40 percent, the assets field’s target population. The bottom 20 percent lost 27 percent of their net worth, leaving them about where they were in 1992. The next 20 percent, the working poor, started seeing their net worth decline in about 2001 and then suffered a 35 percent crash after 2007—leaving them nearly 40 percent below where they were in 1992. In other words, in the two decades since Sherraden introduced his breakthrough idea, the very poor have made no gains while the working poor have actually lost significant ground.

Which raises the question: Is asset building a good idea? Well, for starters, the Obama Administration still thinks so—not “asset building” per se, but, as reflected in its advocacy of expanded Pell Grants for students, retirement savings for low-income workers, and financial safeguards for consumers through the Consumer Financial Protection Bureau. More fundamentally, though, ownership has been and remains integral to the tradition of American democracy and prosperity: Thomas Paine, Thomas Jefferson, Progressive Era reformers, and the architects of the Homestead Act, Federal Housing Authority, and GI Bill wove property ownership into America’s social and economic fabric. Tragically, those policies excluded Native Americans, African Americans, and other minorities for most of that history. However, we have gradually narrowed the gap between our ideals and reality, steadily including more and more Americans previously excluded from the American Dream. Asset building, then, is the fulfillment of the American Dream for millions of poorer Americans.

Recently, however, the cost of those assets—the price of that Dream—has been record levels of household debt: In 2007, the ratio of household debt to GDP reached levels not seen since the Great Depression, and we accumulated more debt between 2001 and 2007 than we did in the previous 45 years.

What this means, then, is that we have to look at not just savings and assets, but also debts and net worth—in other words, at a household’s entire balance sheet—as we devise paths to the American Dream. For too long the asset-building field, along with the related fields of mortgage and consumer debts, financial literacy, higher education, affordable housing, and other areas were productive but largely “siloed”—not systematically working together, thus obscuring the bigger picture. In part because of those silos, as well as misguided faith in ever-rising asset values, no one thought the balance sheets of lower-income and minority households—who disproportionately had too little savings, too much debt, and too few assets beyond housing—could bring the economy down, but they did. We learned the hard way that we must think comprehensively and proactively about household balance sheets—why they matter, and what we can do to improve them.

And matter they do, both for families and the broader economy. New York University sociologist Dalton Conley found, after controlling for parental income and education, that it’s really net worth that drives opportunity for the next generation. Stuart Butler, William Beach, and Paul Winfree of the Heritage Foundation reported that financial capital is one of the three best predictors of economic mobility in America. Brandeis scholar Thomas Shapiro observed that injecting small amounts of wealth at the right moments in life can have a transformative effect on one’s life trajectory. And Shapiro, Trina Shanks of the University of Michigan, Deborah Adams, Edward Scanlon, and William Elliott of the University of Kansas, and others have found that even small amounts of savings or assets, and sometimes simple account ownership, can have a meaningful “asset effect”—a change in attitudes or behaviors that leads to better social, economic, and educational outcomes later in life.

And the economy, too, rises and falls with the health of household balance sheets, now more than ever. Atif Mian of the University of California, Berkeley and Amir Sufi of the University of Chicago discovered that roughly two out of every three jobs lost between March 2007 and March 2009 were attributable to household deleveraging—families paying down their debts and rebuilding their savings. In fact, this is the first recession in U.S. history where deleveraging really matters, according to St. Louis Fed President James Bullard. Similarly, the IMF recently reported that it’s the combination of declining housing prices and overindebtedness that explains the severity of the contraction: In high-debt economies, household consumption falls by more than four times the amount that can be explained by the fall in house prices.

Well, if weak household balance sheets can bring and keep the economy down, then strong ones can help bring it back up again. And if unhealthy balance sheets can destroy jobs, then strong balance sheets can help create them.

So, how can we improve household balance sheets? Let me suggest three directions while leaving specific policy recommendations to the other contributors to this symposium.

First, after trying out dozens of arguments over 20 years with policy-makers of all stripes about why “asset building” matters, I believe that the key frames are economic mobility for families and economic growth for our nation. If, as many believe, the debt-ridden American consumer can no longer drive economic growth, what can? Figuring that out is one of the fundamental economic challenges of our time, which the assets field can help meet through its promotion of stronger balance sheets for a broader swath of the American population. Whether it’s President Bush’s “Ownership Society” or President Obama’s “Save and Invest Economy,” we’re talking about a similar idea: the centrality of healthy balance sheets—the ability to save, own, and invest—for growing our economy.

And the idea of economic mobility—moving up the economic ladder in America—unifies people across the political spectrum as well. However, too many Americans on the lowest rungs of that ladder aren’t moving up enough: Pew’s Economic Mobility Project reports that 43 percent of Americans raised in the bottom quintile remain stuck in the bottom as adults, and 70 percent remain below the middle. Research shows that higher levels of savings, assets, and net worth, as well as lower levels of debt, are among the key factors driving economic success. Still, more research into why balance sheets matter for economic mobility and growth is necessary to strengthen and sharpen our arguments.

Second, while we have done a great job selling the upside of ownership, we have not taken the downside as seriously as we should have. Over the last couple of decades, downside risk didn’t matter—until it did. Struggling and deleveraging families may now be in no mood to invest in assets, preferring the security of a 1 percent interest rate (or lower) on their passbook savings instead. But they must: With wages and incomes flat-lining and public support declining, millions of families cannot afford to live just on what they earn; they’ll need to own as well to survive and thrive as the old economy is creatively destroyed around them.

However, should they be expected to assume all of the risk? Social insurance programs already expend billions annually pooling the risk of income loss for vulnerable populations. Well, why not the risk of asset losses as well? As the Corporation for Enterprise Development (CFED) and others have shown, the federal government allocates some $400-500 billion per year to help the nonpoor accumulate wealth, mainly in the form of tax breaks for retirement savings and home ownership. If policy-makers are not politically willing or fiscally able to offer similar incentives for lower-income families—as they should—shouldn’t they at least consider ways to pool some of the risk of losing their wealth? Granted, this idea, while likely less costly than subsidies, raises tough moral hazard questions. But it is essential that we figure out more equitable distributions of downside risks. To help accomplish this, the assets field should partner with scholars such as Barry Bluestone at Northeastern, who advocates a form of “home price insurance,” and Robert Shiller at Yale, who has pioneered novel forms of private and public insurance for risks such as livelihoods, bankruptcy, inequality, and intergenerational poverty.

Third, let’s get more serious about building or reorienting institutions so that they enable bottom-half families to accumulate wealth. Thankfully, research, history, and growing armies of behavioral economists are moving us in that direction. As Philip Longman and I point out in our book, The Next Progressive Era, Progressive reformers stemmed the wealth-strippers of their day and nurtured a generation of savers by creating institutions such as credit unions, thrifts, school-based savings programs, and the Federal Deposit Insurance Corporation.

And institutions are integral to the strategy of the asset-building field, whose central (and hopeful) insight thus far is that income, race, gender, and the like don’t really matter in predicting who saves and builds wealth—institutions do. Yet the institutions households encounter seem to vary by income: The higher your income, the more the institution “behaves” for you to accumulate wealth, such as an employer who defaults you into a retirement savings plan. The lower your income—and the lower your ability to manage financial decisions—the more you have to behave to build wealth, such as resisting the simplicity and convenience of wealth-depleting institutions like payday lenders and check-cashing outlets. That’s crazy, so let’s get beyond thinking that more financial education alone will do the trick for poor people—it won’t. Today, the institutions that matter aren’t just banks, credit unions, employers, local nonprofits, and tax policies; they’re cell phones, prepaid cards, retailers like Target and Wal-Mart, the Internet, social networking sites, games, and the like. Let’s see if we can get more of these old and new institutions to behave as well for the bottom half as they have for the upper half of the population.

One of the signature accomplishments of the twentieth century was the democratization of credit, which made property ownership and the American Dream possible for generations of families. Clearly, though, that democracy project went too far, extending credit to people who couldn’t handle it, leading to unprecedented levels of household debt and a diminishing American Dream for millions over the last several years. While access to fair and quality credit will always remain essential for upward mobility, our goal for the twenty-first century should be to democratize capital, precisely the objective of the assets field over its first 20 years. Without more capital, family balance sheets will be unbalanced, and too many aspiring families will never realize the American Dream. The asset-building field, somewhat cozy and “boutique” thus far, is now ready for prime time—and the nation, following a massive decline in household wealth and retooling for a new economy, needs to know what it has learned.

This symposium was supported by the Corporation for Enterprise Development (CFED), which hosted its biennial Assets Learning Conference on September 19-21 in Washington, D.C.

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Ray Boshara is senior advisor at the Federal Reserve Bank of St. Louis. Before joining the Fed, he was vice president of the New America Foundation. He has advised several administrations and leading policy-makers worldwide, and has published extensively on asset-building issues. The views expressed in this essay are his own, and not necessarily the views of the Federal Reserve Bank of St. Louis or the Board of Governors of the Federal Reserve System.

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