Wilbur Ross Is Right to Be Confused!

Recent media stories have popularized an estimate (citing a 2018 Fed report) that 40% of Americans can't cover a $400 emergency expense.

From Karen M. Pence (2011):

To gauge the share of household who, according to the SCF [Survey of Consumer Finances] data, could not come up with $2,000 in an emergency, I tabulated several measures of financial capacity.  I began with two measures of whether households have $3,000 or less in savings.  (I assume throughout that a $1,000 buffer is needed beyond the $2,000 shock.)  The first measure is liquid savings:  checkings, savings, and money market accounts as as well as call accounts at brokerages.  A second measure of "broader savings" adds to liquid savings the sum of mutual funds, stocks, bonds, the cash value of whole life insurance, and one-third of the value of home equity, certificates of deposit, and "liquid" tax-favored retirement accounts such as 401(k)s that the account holder can borrow against.  To assess households' access to the credit markets, I tabulate the share of households who have $3,000 or less of unused capacity on the credit cards, as well as the share who may have more limited access to the formal credit markets, as measured by having been turned down for credit or discouraged from applying for credit in the last 2 years.  To assess the extent of support from friends or family, I tabulate the share who said they could not borrow $3,000 or more from friends or family in an emergency.

The kicker:

The share of SCF households who could not meet a shock from either savings, mainstream credit, or friends and family is quite small: 9 percent of households using the liquid savings measure and 5 percent using the broader savings measure.

The difference in Pence's 9%/$3000 findings and the more newsworthy 40%/$400 number comes down to design.  The estimates 2018 Fed report linked at the top are from the Survey of Households and Economics Decisionmaking ("SHED").  SHED asked participants outright "Suppose that you have any emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?"  The SCF asks people more directly about their current assets and liabilities, and then Pence triages the lines which people would be most likely to draw on first.

And I do not like putting these disclaimers since I trust people not to jump to conclusions, but none of this is pointed out to trivialize the disruptive experience that many people would find a $400 emergency to be (even 9 percent is still high!, and taking out credit be it formally or from family is not painless!).  Nor do I want to dismiss the value of surveying sentiment (even when biased towards the pessimistic) versus having a cold look at the data.  However, I do suspect many people overstate the difficulties of meeting a $400 expense, much like people underrepresent their savings or simple surveys tend to overestimate the size of the "middle class."  Therefore I see the 40%/$400 as similar to how I see the Warren et al work on medical bankruptcies:  a useful approach for arriving at a very conservative upper bound for the result in question.