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What Is Driving America's Financial Woes?
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In The Atlantic’s May issue, Neal Gabler explores his own financial troubles for clues as to why so many Americans are struggling to remain financially solvent. We reached out to some of the leading scholars of the American middle class to ask what they make of Gabler’s analysis, and their responses are compiled here. (We also have a popular ongoing series of readers telling their own stories of financial woe.)

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Michael Sherraden, the director of the Center for Social Development at Washington University in St. Louis, read our cover story and imagines what would happen if development accounts—ones that kids could draw on for major milestones—were established at birth and implemented as U.S. policy.

Enough monthly income is important, but owning assets is the key to family stability and development. Yet many Americans struggle to accumulate even modest assets. They live with no buffer against cuts in income and unexpected expenses.

Now imagine this scenario:

When it comes to middle-class financial woes, Mehrsa Baradaran, a law professor and author of How the Other Half Banks, notes the shifts in how lenders and borrowers look at credit:

Marquette [the Supreme Court decision Neal Gabler discusses] marked a pivotal cultural shift. Not only did it render centuries of interest-rate caps practically meaningless, it de-stigmatized the practice of usury.

Usury laws were designed to protect vulnerable borrowers from exploitative lenders trying to profit from their distress. Once the caps were lifted, so was the shame of charging high interest on loans. Today, payday, subprime, and credit card lenders peddle predatory products under the cover of law.

Kristin Seefeldt, an assistant professor of social work at the University of Michigan, expands on our discussion over Neal Gabler’s piece on the shrinking of middle-class wealth:

The financial insecurity experienced by so many Americans is not just rooted in the proliferation of credit cards and other financial products now available but also in the changed nature of the employment contract. Let’s examine Mr. Gabler’s situation.

Earlier in the week Damon Jones responded to our May cover story with a discussion of retirement plans. Today, John Beshears, a professor of behavioral economics at Harvard, adds to that theme with an anecdote about his mother:  

My mom retired as a high-school teacher in the San Francisco public-school system about two years ago. Based on her 34 years of service (many of those years part-time), she now receives a check every month from the teachers’ retirement fund. It’s a modest amount, about half what she used to receive when she was working, but it is very comforting to know that the check will continue to arrive, month after month, for the rest of her life. My mother is lucky to have worked for an employer that provides such a lifetime income guarantee, more formally known as a defined-benefit pension plan (DB plan). Most Americans are not as lucky.

In reaction to Neal Gabler’s cover story, Vicki Bogan, an associate professor at Cornell and the director of the Institute for Behavioral and Household Finance, points to a big problem for American families: financing their daily lives with debt. She goes into great detail:

The Great Recession had an enormous impact on U.S. household finances. The financial crisis caused large drops in income [see the figure above] and substantial erosion of household wealth due to the larges simultaneous declines in the values of housing and equities. However, the financial insecurity epidemic that is becoming increasingly highlighted in the media is a problem that has been brewing for decades.

While there are multiple factors that contributed to the widespread problem, one of the biggest issues is the too frequent household behavior of financing day-to-day and other consumption with debt. For two decades prior to the Great Recession, U.S. households were steadily amassing significant amounts of debt. Around 1986, households started accumulating debt and eroding their liquid asset holdings. By 2007, households were increasing debt at a rate equivalent to 6 percent of aggregate consumption every year.

This detrimental trend continues and contributes to the tenuous financial position of households.

The debate around our cover story and middle-class money continues. Damon Jones, a professor the at University of Chicago Harris School of Public Policy, adds that saving for retirement is a different process than in generations past:

One of the most important financial decisions we face is saving for retirement. Over the last three decades, there has been a massive shift in how private-sector workers save for the future. Today, more workers than ever before are relying on retirement plans that depend on their personal investment choices and stock-market performance, as opposed to plans that have a guaranteed pay out built in.

Mary Pattillo, a professor of sociology and African American studies at Northwestern, points to the decline in public-sector jobs and unions to help explain the financial distress Gabler chronicles:

“An injury to one is an injury to all.”  We have traveled so far away from that classic labor-movement slogan that the widespread inability to cover a $400 unexpected expense is suffered in silence and shame. Gabler narrates the story of stagnant wages and insecure employment but fails to name two important and related contributing factors to these realities: the assaults on public-sector employment and declines in unionization rates.

Paige Marta Skiba, a law professor at Vanderbilt Law School, responds to our May cover story on shrinking middle-class wealth:

The problem is not just high interest credit cards. In the last two decades, Americans have experienced a meteoric rise of alternative financial services like payday loans, installment loans and auto-title loans. As an economist, I’d like to think this increase in choice of credit products is a good thing, especially for your typical borrower—a middle-class worker without savings or many traditional options for borrowing after a few credit hiccups.

But because we forget to pay on time, we procrastinate and we fail to predict the predictable shocks to our budget, more credit options can mean more trouble.

Dedrick Asante-Muhammad, the director of the Racial Wealth Divide Project at the Corporation for Enterprise Development (CFED), read our May cover story and submits that the inaccessibility of financial prosperity may only come as a shock to white Americans:

The secret is out: The American Dream of a secure “middle-class lifestyle” with a clear path to better future economic prospects is a too distant reality for most Americans. For white, middle-class households, this is a shock; financial security was considered their right.

In The Atlantic’s May issue, Neal Gabler explores his own financial troubles for clues as to why so many Americans are struggling to remain financially solvent.

When Rachel Schneider, the senior vice president at the Center for Financial Services Innovation, read the cover story, she thought that one piece of the story was missing: volatility. She explains:

Neal Gabler’s beautiful and brave exploration of his financial life captures many of the reasons that millions of Americans live precarious financial lives: stagnating wages, the rising costs of a middle class life, and an overreliance on debt to fund the gap. But, there is another, more hidden cause of financial insecurity: volatility. In the U.S. Financial Diaries project, Jonathan Morduch and I found that, on average, households in our sample experienced more than 5 months a year in which their income was 25 percent more or 25 percent less than the average. The same was true for spending.

We reached out to some of the leading scholars of the American middle class to ask what they make of Neal Gabler’s analysis in our new cover story on financial insecurity. Our first contributor is Edward Wolff, an NYU professor of economics, who points to wage stagnation as the central factor:

The ultimate culprit is wage stagnation, occurring now for over 40 years (average real wages peaked in 1973). This translates into income stagnation. For a while (until about 1990 or so) families compensated for stagnant wages by the increased participation of wives in the labor force. Once this opportunity was exhausted real incomes also stagnated. Indeed, according to Census data, median family income in 2013 was less than it was in 1997.