Good afternoon and welcome to the first session of the Federal Reserve System’s 2022 Community Development Research Seminar Series. I’m Maria Thompson, outreach manager of the Small Business Credit Survey at the Federal Reserve Bank of Cleveland. We are excited to be joined virtually by leaders from across the country to explore ways in which we can achieve an equitable and inclusive wealth recovery from the COVID-19 pandemic. While you will hear from leading experts in a variety of disciplines over the course of today’s program, I must provide you with some that you will only hear from me, a disclaimer that the views expressed during this event are those of the speakers and are intended only for informational purposes. They do not necessarily represent the views of the Federal Reserve Banks of Boston, St. Louis, or the Federal Reserve System.
With that out of the way, let’s jump into today’s program. Last year, we launched the series as a forum for exploring the intersection of research, policy, and practice in the community development field. The series sought to expand access to high-quality research that informs stakeholders who are working to support low or moderate income communities and communities of color. In 2021, the events explored how the community development field, including financial, government, philanthropic, and nonprofit sectors could collectively advance policies and actions that support an inclusive and equitable recovery from the pandemic.
The three 2021 seminars examined how to improve labor force attachment and financial security among low income and marginalized workers, empower women’s economic participation, and increase the housing security of vulnerable renters through rental assistance. All three seminars from our 2021 series are available to watch on demand at fedcommunities.org.
While people have begun to return to work and we have entered a new normal, much work still remains to address the economic and health inequities faced by lower income people and people of color that were exposed by the pandemic and have existed for decades. Therefore, this year’s series will again feature three webinars that will continue to address the same theme as last year toward in inclusive recovery.
Today’s seminar presented by the Federal Reserve Banks of Boston and St. Louis will discuss the wealth trends since the pandemic and how evidence based responses within households and the broader community can promote wealth equity and inclusive wealth recovery. The first panel will provide a framing of the issue, including how different household assets and liabilities have been effected. And the second panel will explore ideas of how to move beyond a simple recovery mindset and focus on collectively getting families to a more stable and resilient wealth position moving forward. During today’s events, we are eager to hear from you. Please submit your questions through the event using the Q&A feature with your video player. Additionally, we invite you to join us on Twitter to continue today’s conversation by using the hashtag #TowardInclusiveRecovery.
It is now my honor to introduce Jim Bullard, president and CEO of the Federal Reserve Bank of St. Louis to provide introductory remarks. President Bullard, the floor is yours.
Good afternoon, everyone, and thank you, and thank you for joining us today. My name is Jim Bullard and I am the president and CEO of the Federal Reserve Bank of St. Louis. It’s my pleasure and honor to welcome you today to our research seminar on an inclusive wealth recovery. We are most pleased to partner with our excellent colleagues at the Boston Fed and the board of governors in bringing you today’s seminar, the first of three in the 2022 series.
I regret not being with you in real time for today’s seminar, but I am eager to hear what was learned and how the St. Louis Fed can continue and deepen its commitment to economic equity. When we say a wealth recovery, we mean how can households recover the savings and assets they may have lost during the pandemic and how can they pay down the debts they may have accumulated? While what a family earns is, of course, critical, without some wealth, they lack economic resilience, as well as the ability to make investments in their future.
Yet today’s seminar isn’t just about an inclusive wealth recovery, it’s also about wealth equity. That is, our goals shouldn’t simply be to restore the large and enduring wealth gaps that existed prior to the pandemic, but to narrow those gaps by reducing barriers and adding more incentives for disadvantaged groups to build wealth. To illustrate, the St. Louis Fed’s most recent data show that, on average, white families owned over $1 million more in wealth than Black and Hispanic families, a gap that’s grown since the onset of the pandemic. And it’s not just narrowing gaps that matter, but also raising the level of wealth among, especially, women, less educated, younger, and nonwhite Americans. For instance, Fed data show that the median Black family owns about $23,000 in wealth compared to the median white wealth of $184,000.
I ask all of you to imagine what you could do with $184,000 in wealth compared to $23,000. What it means for your economic resilience, ability to buy a home, start a business, send your kids to college without debt, to prepare for a secure retirement, or to pass on some wealth to the next generation. Remember, wealth begets wealth. The challenge is to have some in the first place, a real challenge given that the bottom half of the population owns just 1% of the nation’s wealth, down from 3% a generation ago. Clearly, we’re far from reaching gender, educational, racial, and generational economic equity, but it’s imperative that we try. Doing so will reap benefits not just for our families but for the broader economy, as well.
We have a fabulous lineup today. Our first panel will establish a fact base of wealth trends since the onset of the pandemic, while the second will focus on evidence based solutions. We’ll close out today with remarks from my St. Louis Fed colleague, Bill Rodgers, who heads up our Institute for Economic Equity and the Boston Fed’s Prabal Chakrabarti, CAO and executive vice president. We’re also eager to engage all of you in today’s discussion. Thanks again for joining us.
Thank you, President Bullard. I would now like to turn the program over to Sara Chaganti, deputy director of research for the regional and community outreach team, Federal Reserve Bank of Boston. Sara will provide additional framing remarks and introduce our first panel. Sara?
Hello. I’m Sara Chaganti, deputy director of our community development research team here at the Boston Fed. Along with my colleagues at the St. Louis Fed and the Board of Governors, I’m so glad you could join us today. More than two years into the pandemic, we’re still learning about its effects on family finances, both in the short and long term. We’re here today to talk about wealth.
Why are we focusing on wealth? Because before the pandemic, we knew that among the many aspects of family economic inequality, disparities in wealth, in particular, racial/ethnic wealth disparities were some of the most persistent and enduring. And this trend has enormous consequences for families. As President Bullard mentioned, wealth is a critical part of any family’s package of financial resources. It can serve as a buffer to fall back on if income is interrupted or if an unexpected expense arises, like a brief reduction in work hours or a flat tire, or if the cost of a family’s basic needs suddenly increases, as some families are facing right now with high gas and food prices. Wealth can also be used to make investments in the future, to make a down payment on a house, to start a business, pay for college, or have something to pass on to the next generation.
We also know that those wealth disparities are a product of systemic barriers to financial inclusion. Research from within and beyond the Fed has shown the long-term effects of redlining, work discrimination, payday lending, and other policies and practices that excluded some from opportunities to build wealth and paved the way for others. Redlining, for example, excluded many families, particularly Black families, from home ownership in certain neighborhoods, neighborhoods in which ongoing investments led to quickly appreciating home values. That increased value meant that those families could pass wealth on to the next generation, starting them off with an advantage. At the same time, discrimination in lending directed nonwhite borrowers toward predatory lending products so that they ended up paying more for the same products as their white counterparts.
We’ve heard a lot about achieving an equitable recovery. As President Bullard said, by this meaning, a recovery that takes us to a new normal. The legacy of those systemic barriers means that, for many families, a share of their family wealth is acquired through no effort of their own. They received it as a gift or inherited it. And often, they can invest that gift into an appreciable asset, like a home, turning it into more wealth. Meanwhile, families that don’t have this capital to start off with can’t even get in the game. Today, we’re going to talk about a new normal in which every family has an equal opportunity to be financially secure and to make investments for the future.
And as President Bullard said, realizing this vision requires that we be intentional. We’ll discuss solutions that can break down those systemic barriers that have kept some families out of the game and other solutions that find new ways around the barriers, inviting all families onto a playing field that is finally level. I’m now going to turn the stage over to Ana Hernández Kent to kick off the first panel.
Ana Hernández Kent
Thank you, Sara, and thank you to the Federal Reserve Banks of St. Louis and Boston, as well as the Federal Reserve Board of Governors, for putting together such an important event. My name is Ana Hernández Kent and I’m a senior researcher at the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. I’m joined today by Fiona Greig, managing director and co-president of the JP Morgan Chase Institute, Joelle Scally, senior data strategist and researcher at the Center for Microeconomic Data at the Federal Reserve Bank of New York, and Sean An, assistant vice president of the Federal Reserve Bank of Philadelphia. And for the next 40 minutes, this panel of experts will discuss how wealth, both on the asset side as well as the liabilities or debt side, have evolved over the pandemic and the ensuing recovery.
So in my own research that I’ve done in large part with colleague Lowell Ricketts, there are significant and enduring wealth gaps, as we’ve heard both from President Bullard and our colleague, Sara, across various different demographic groups. So if we look at the racial wealth gap, for example, we saw some figures from President Bullard. What that translates into in terms of dollars and cents is the typical Black family, in 2019, so prior to the pandemic, had about 12 cents for every dollar held by the typical white family. For the Hispanic Latino to white ratio, that’s about 21 cents per dollar. And actually, 2019 was the end of a record long economic expansion pulling in families that maybe are on the sidelines, typically. And indeed, Black and Latino wealth actually grew by quite a bit in percentage terms between 2016 and 2019 over a fairly short period, but these very large gaps remain.
And if we look at other demographics, like education, which some people think is a silver bullet to the racial wealth gap, we find in our research and that of others that that’s actually not the case. Those gaps remain, and in some cases, depending on how you measure it, are even larger. So for example, the typical Black and Hispanic four-year college graduate family has less wealth, actually, at the median than the typical white family with only a high school degree. And you can overlay other demographics.
If you look at the gender wealth gap or the motherhood wealth penalty, for example, we know COVID has been talked about a lot as the she session, and I’ve argued that it really was more than that, a mom session effecting women, mothers, particularly. And there’s a large wealth gap there, as well. So single women who are mothers, they have about $7,000 in wealth, versus single women without kids have about $65,000. So there’s a big gap there. And then if you overlay race on top of that, there’s even wider gaps. So single white moms have about 11 times more wealth than single Black and Latina mothers. And so these gaps matter because they were present prior to the pandemic. A lot of the issues that we’re talking about today were present prior to the pandemic and were exacerbated by it.
So I’ll turn it over to my colleague, Fiona, but I’m excited to talk more about what the state has been since the pandemic and what we can do to ensure more equitable recovery. Fiona, take it away.
Thanks, Ana. It’s always so great to start with that baseline. At the JP Morgan Chase Institute, one of the things that we started monitoring during the pandemic was simply cash balances. Why? Because so much was changing during the pandemic in terms of our income. There were dramatic job losses, disproportionately felt by low income workers. There were also huge spending changes, initially, huge spending cuts, when we were all locked in our homes, and then actually spending increases, especially in certain areas, like goods. And so cash balances, checking account balances, is sort of where all of these income and spending fluctuations wash out, right? And so one of the things that was really evident from just tracking a pulse on families through their checking account balances was actually just how progressive a lot of the COVID relief was, right? There were the three rounds of stimulus. There was unemployment insurance, which was expanded not just in terms of duration and eligibility, but of course those supplements, also.
All of those supports, including the debt forbearance, which of course also affects people’s cash balances in so far as they have fewer debt payments to make, potentially, disproportionately put liquidity or cash in the accounts of low income families compared to high income families. So we saw larger proportional increases in cash balances with each wave of stimulus. And even as of the end of March 2022, so now three months ago, actually liquid balances were still elevated to the tune of 70% of low income families, more like 50% or so for higher income families. And by low income families, I’m really talking about families earning take-home income of roughly $26,000 or less.
Now, is this a lot of cash? No. Those low income families, even as of the end of March 2022, had roughly $1,500 in their accounts, right? $1,500 is not month to month worth of cash buffer to sustain a family, but it may give families a feeling that they have more breathing room than they had prior to COVID. It’s also not a lot of cash in light of the inflation pressures that we know are disproportionately bearing down on low income families who spend a larger share of their budget on these commodities like fuel, grocery, etc. that have seen the larger price increases.
So that’s kind of one picture from the cash balances. And one thing that was fueling that was obviously these fiscal supports, but also just what you mentioned, Ana, was the momentum, the income growth that we experienced at the tail end of the expansion right before COVID was actually disproportionately benefiting low income families. It was disproportionately benefiting Black families. And those COVID relief policies actually accelerated that income growth more so for low income families than for high income families, and disproportionately for Black families.
So I think a big question on my mind is how much longer is this going to last, right? It feels like with those inflation pressures, we’re not seeing more COVID relief, obviously, how much longer are people going to have more of this cash buffer? I don’t know.
But there are two groups that I wanted to comment on. One is a group you mentioned, Ana, which are single parents. I think they are particularly vulnerable. We saw them spend down their boosted tax balances, especially after the second round of stimulus, much more quickly. They had completely depleted the additional boost they got. And so single parents is one group that it raises my attention. Another group is actually the CPC recipient family. Right? They received a bunch of additional support in the back half of 2021 with those advance CTC payments, and what we’re observing as of the end of March is their balances have actually depleted more so than everybody else, relative to baseline, or depleted more quickly, if you will. They are not yet back down to baseline. But that could be due to two things, right? It could be that they had become accustomed to those CTC payments, and perhaps their spending has increased. But one other dynamic that happened in the spring of 2022 is obviously tax season. And cash balances are always at their high water mark around the tax refund season in the spring. In 2022-
Ana Hernández Kent
That’s a really great point, and I actually want to get Joelle in here, too, because I think you have some research that talks about non-mortgage types of debt and how people maybe are dealing with some of these pressures that we’re facing more so today.
Yeah, sure, and thanks again for that insight into your data. I know you guys have such amazing data that gives insight onto the income side of the balance sheet. I’ll talk a little bit more about the debt side of the balance sheet, so what people owe. Most of my analysis that we do at the New York Fed is based on our consumer credit panel, which is based on consumer credit reports from Equifax. And so when we talk about non-housing debts, the pandemic has been an interesting stretch. Of course, it affected everyone very profoundly. But the impacts were not really evenly spread. And among those lower income borrowers, particularly people who work in service industries who did experience gaps in income and employment, as Fiona described, there were these incredible policy supports that really reduced the disruptions in consumption and in debt repayment for those experiencing these gaps in income and employment.
At the same time, many white collar workers and higher income households didn’t experience the gaps in employment and income, may have seen some stimulus cash payments, but for these workers, the limited spending opportunities that the pandemic imposed, particularly in the beginning, gave them the opportunity to save quite a bit, and even to reallocate their consumption dollars, and increase their borrowing for different types of things.
Now, almost universally, there were these monumental shifts in how people spent their money and their time in the last two and a half years, and the household balance sheets, particularly the debts, really do reflect this. So we see this sharp reduction in credit card balances in the early part of the pandemic, and these were really across the board. We see them for the high income borrowers, we see them for the low income borrowers, and we see them across the credit score spectrum, as well. This happened in 2022, too, and it just really completely disrupted the typical patterns that we saw of credit card borrowing. At this point, of course, in 2020 Q2 consumption opportunities were extremely limited. There was no travel, no restaurants. And with the stimulus checks coming in, many did reduce their spending and paid down their balances during this time. We also have evidence from our survey of consumer expectations that does show that individuals, households, were using these stimulus checks to repay their debts.
Now, at this point, either as income, as Fiona noted, that incomes have been going up again, credit card balances have begun increasing again, or at least they’ve resumed a pattern that looks a little bit more normal compared to what we saw historically. But they still are considerably below 2019 Q4 levels. So this debt burden is much lower than it had been pre-pandemic, and this is really for all groups, all by credit score and income.
Now, auto loans did take a brief pause in 2020 Q2, so when I think about non-housing debts on credit reports, it’s going to be credit cards, auto loans, and student loans, among some other types of stuff. Now, dealerships were closed in 2020 Q2, or many were. It was kind of difficult to buy a car. But demand did come back and originations have been at historically super high levels through most of the past two years. And they have been growing really for all credit score groups. I mean, we had drawn some attention to a boom in subprime borrowing say between 2015 and 2019, but we’re seeing really rapid growth in auto loan originations in the last two years, after a small dip in the second quarter of 2020. Now, particularly with car prices spiking due to supply chain pressures, these increased prices are also showing up in how much people are borrowing.
Ana Hernández Kent
Yeah, that’s really interesting. And Sean, you are an expert in housing. Are you seeing that also reflected in what’s been a really hot housing market recently?
Xudong (Sean) An
Yeah, definitely. Definitely. Thanks for having me. Well, to continue on the debt side, let me first give everyone two numbers. 10 million mortgage borrowers showed some signs of financial distress during the pandemic. Close to nine million of them received some debt relief through mortgage coverance. We’ll need to talk a little bit about mortgage forbearance. But overall big numbers, right, in terms of people affected by COVID and people who received help.
Related to today’s panel, I think there are two big picture questions. Which group or groups of people were hit harder, economically, by the pandemic? That’s the first one. And then what are some effective measures to help the disadvantaged groups to recover? Well, thanks to the great data we have at the Fed, specifically in radar within the Fed, my colleagues and I were able to study these questions.
Well, first, to the question of uneven impact of the pandemic, we find minority and lower income borrowers were more likely to experience payment difficulties on their mortgages. I guess that’s not a surprise. But what’s surprising is that we found COVID forbearance actually helped mitigate some of their uneven impact. Among those who had payment difficulties, minority, and lower income borrowers, who were able to use forbearance more to preserve home ownership, and to preserve the opportunity to accumulate wealth over time. So that offset some of the bigger adverse impact COVID had on those groups of households. So I call it a heavy surprise. Today when we look back, we can see the scale and velocity of the mortgage forbearance program were critical to help avoid another mortgage market crisis. But on top of that, it had some positive distributional effect as we found.
So from that perspective, I would say government interventions during the pandemic have played an important role in facilitating a more equitable recovery. Another example I want to give is eviction moratoria, I actually wrote a paper on it, which is now published at American Economical Review papers and proceedings. We found eviction moratorium not only helped renters remain sheltered, but also helped reduce people’s mental distress, especially for African Americans. So back to my early point, I think some of the policy interventions during the pandemic were helpful for us to achieve a more equitable recovery. I know we’re going to continue to discuss whether there’s more we can do to achieve that goal of equitable recovery, but for now back to you, Ana.
Ana Hernández Kent
Yeah. Thank you, Sean. So all three of you, and I guess I’m going to do it now, we all talked about the sort of unprecedented government aid that was given and really how that helped especially vulnerable families, whether they be black, Hispanic, low income, women, mothers, less educated folks help them out. And so I’m just going to give some high level statistics of wealth overall, and then I’d love to hear your thoughts as well about was it enough, could more be done. And especially now that we’re reaching a point where many of these aids, things like the student loan moratorium, renter help, mortgage help, et cetera, they either are, or will soon come to an end. What’s going to be the effect. So I just want to give some high level. If we look at the income bands, if we look at five income Quintiles, those who were at the lowest, their wealth actually didn’t need to recover so much on average.
So if we look at their wealth from the fourth quarter of 2019, right before the pandemic, and look at them through the first quarter of 2021, their wealth actually stayed really, really stable. And I think that was in large part due to what I just said, that the unprecedented government aid. On the other hand, those at the top two income Quintiles, on average, their wealth did dip about 6% that first quarter in 2020, and then there was rapid growth. So the stock market rebounded quite quickly, housing has done quite well. For the top income group, a lot of their wealth is held in stocks or equities. And so the disproportionate amount of wealth that they hold in it has really just elevated their wealth overall. So just to give you some idea, from the most recent data that we have from the distributional financial accounts from the first quarter of this year, the bottom income group, their wealth on average grew about 22%, which translates to about $30,000 on average increase from 2019.
The top, on the other hand, their wealth grew about 26% from the same time period, but that translates to about three quarters of a million dollars. So wealth inequality has increased. And my colleague Ray Boshara and I have a paper with the state of economic equity talking about this wealth inequality and what can be done. So again, for the bottom, it seems like that government aid was really critical in making sure that their balances didn’t drop, but there’s only so much the government can do when it’s going up against something like the stock market or housing. Which these higher income groups hold much larger share of those assets. So I’m curious, Fiona, Joelle, Xudong, what you’re seeing too, and what concerns you maybe about these government aid coming to an end? Anyone who wants to go. I know we all have-
I’ll jump in just on actually the student loan forbearance. Because that’s the one that’s still outstanding. It’s set to expire on August 31st. And we’ve done a lot of work on this front trying to understand well, who is most burdened in terms of student loan debt and who holds the biggest balances. And it’s this tale of two sides of the distribution. It’s high income families who have the most balances, but low income families who experience the highest debt burdens. And so, as we think about that student loan forbearance getting turned off, that’s going to be a bigger jolt proportionally for low income families, black families in particular. And because we actually see that black families tend to have higher balances than white families. And I think wrapped up in there that moment, the August 31st is a big policy choice looming over the white house if you will, as to whether they should push it off or create some kind of reset moment with cancellation or other payment reforms in the income driven repayment programs.
But certainly that’s been an incredibly important form, or even I’ll say one more thing just about the plumbing of policy. Some policies, we put it out there and then people have to work and apply and make themselves eligible. Student loan debt forbearance was administrative in nature. Everybody was opted in. And so in aggregate, the impacts were much bigger than mortgage forbearance where only 9% opted in. And then even then a lot of them, even if they opted in, they continued to make their payments, according to our data.
Ana Hernández Kent
That’s such a critical point. And I appreciate you bringing that up about implementation. Joelle, I know that you have… Have you seen drawing down a student loan, were people paying that off? Did it vary by different demographic groups or income groups? What have you been seeing in the data?
Yeah, so this is something that we’ve written about as well. And I think the administrative nature of this forbearance effectively put 38 million borrowers just immediately into non repayment. And that even included people who were in auto payment on their debt, it turned off their auto payments. So if people wanted to actively make payments, they actually had to switch it back on. And this is, again, as Fiona noted the balances for black borrowers or in our case, we don’t observe race directly but people that live in majority black areas tend to be higher. Their debt service payments are a larger share of their income. So how this happens as this forbearance ends on August 31st really will depend on how it’s administratively handled in the administration. And so we worry, the administrative burden of rolling into an income driven repayment plan has really something that has not been weathered well by lower income groups.
We’ve historically seen higher enrollments in income driven repayment programs and higher delinquency in lower income groups, or maybe they’re not quite managing their cash flow as well. And maybe it’s just too much of a headache. So if the Department of Ed can manage that transition well, I think we might not see an increase in delinquency, but I think it’s very likely that given what we’ve already seen with the FFEL borrowers who have transitioned out of forbearance already, we’ve already seen an increase in their delinquency rate. So we suspect the same thing will be happening and it’ll probably disproportionately affect lower income borrowers.
Xudong (Sean) An
And let me just add a few words to this. So first of all, I think you’ve got a great observation that government income support was critical, especially for the lowest income bucket. Now, from a mortgage in housing perspective, like I just mentioned mortgage forbearance provided great debt relief, but that’s a temporary relief. So it has been very successful, but we’re not done yet. So when people get out of forbearance, to your point, a lot of the policies, they expired, or are expiring. I think there is still more to do. So in that regard, for example, in terms of mortgages, when someone gets out of forbearance, if the person is still not back fully to his pre-pandemic income or job status, then it’s likely that the person would need a loan modification. So we are looking very closely at different loan modification programs. And we think there are definitely more to be done, especially in the FHA loan space. We know minority and lower income people are overrepresented in the FHA space. So there’s definitely more to be done.
Ana Hernández Kent
Yeah. And Sean, I wondered if you could talk a little bit more about what the effect of that rental help, mortgage help, has been. In your eyes, did that help with a more equitable recovery? Or, you’ve said it yourself, it’s it was temporary. So now that these kinds of things have gone away, what is happening now? We know, especially that rents are up, house prices especially for entry level houses, that’s increased exponentially too. So what are you seeing, are there any trends that you’re concerned about?
Xudong (Sean) An
Yeah. Well, first of all, like I just mentioned, some people still need loan modifications. Especially lowering income and minority borrowers. In that regard, let me just mention two specific things. One is that last year we looked at the FHA loan modification program. What we found is that the FHA program then was actually not flexible enough. For example, it didn’t have the 40 year term extension option. We did some calculations and showed that with a 40 year term extension option we could actually help a lot more FHA borrowers benefiting disproportionately lower income and minority borrowers. So while fortunately FHA came out this year, in April, announced that they would have this 40 year extension option. So that’s a great development. However, recently with rising rates, the newest problem is that, again, the FHA program is not flexible enough in terms of resetting rates. So in that regard, we’re trying to say we need to be more flexible in terms of the FHA modification, because rising rate is biting everybody, especially the lower income and minority borrowers.
Ana Hernández Kent
Yeah. And we’re kind of all floating around the topic of inflation. Obviously car prices have gone up. Housing prices have gone up. Even if you’re not making a big purchase, you feel that when you go to the gas station, over $5 on average now. So I was wondering Fiona or Joelle, either of you could take this, we’re seeing kind of conflicting pressures. There’s also been a pretty strong labor market and upward pressure on wages and other flexibility that businesses and companies are offering to their employees. So how are you seeing this play out in the data, maybe Fiona with the savings data or Joelle, what you’re seeing with debts? Are people… How are they handling these pressures and how are they paying for the increase in prices?
Well, I’ll be interested to hear from Joelle too. Our data, we’re still sort of a work in progress in terms of trying to suss this out because it’s actually quite hard to distinguish between price and quantity changes and people spending. But certainly I am worried that this is a force that will have potentially more impact on lower income families who do spend a larger share of their budget on fuel, groceries, that sort of thing.
I can say from our side, I mean, we’re struggling with the same price quantity issue and how people might modify their baskets in the credit card balance data that we see. And we also have some really interesting data on credit card transactions. But again, we don’t know if someone’s clocking out at $20 at the pump and walking away with four gallons now instead of eight.
What we do see on the debt side is pretty interesting though. Car prices have been really one of the biggest drivers behind increasing inflation, and particularly with used car prices. So this has been really surprising on our data for people who are originating new loans, they are originating them at much higher amounts. So the average loan amount is well over $20,000 now. And it’s gone up pretty substantially from about $15,000, five years ago. So this really substantial and rapid increase in auto loan balances is something surprising. It’s something like $2,000 just in the last year and we’re seeing it even amongst subprime borrowers. So this increase is, people are borrowing, they’re being forced to borrow more to pay for it. And right now the repayment rates look okay on them. But we do worry that particularly for the subprime borrowers, they may struggle with them. And we are starting to see some increases in those delinquency rates for the sub primes who may have bought a car that might be underwater if car prices are lost.
Ana Hernández Kent
All right, so we see both the assets maybe increasing on average again, but also the debts and what people are taking out more, which as both of you said is disproportionately impacting those at the bottom. So I want to also just talk about, if you were to put your finger on it and say, okay, to target a more equitable recovery, should we focus in more on the asset side of things or the debt side of things? And I suspect it’s going to be a both and answer, but I wanted to put that up and see what you all thought as well.
Xudong (Sean) An
Well, I can probably start first. So I think it depends on where we are in the business cycle. I think in a crisis, I personally think the top priority is based on the debt side. Making sure people can continue making payments, can retain their homes, and retain their home ownership. So that’s the crisis period. Now in terms of getting to the recovery period or an expansion period, I think it’s important for us to get everyone the chance to buy assets and get the chance to accumulate wealth over time. However, I have to put a caveat over there, which I always say, getting for example, home ownership, is not for everybody. It may not be for you at the current moment. So overall getting home ownership is good, especially from a savings perspective. It will help you discipline your savings, force you to accumulate equity in your house. So from that perspective is good. However, if someone gets into home ownership that’s not really affordable to the person, then that could end up biting the person later on. That’s something we learned from the great financial crisis.
Maybe one thing I’ll add to Xudong’s points is a lot of this depends on sort of the price at which that asset is purchased. And so one of the challenges, and sort of thinking about this in the context of business cycles. And so if it’s the case that black families or black workers are the first out and the last in when a recession hits and they see the most income growth at the last few breadths of an expansion period they’re likely, or potentially more likely to be purchasing a home precisely when home prices are also elevated. Or purchasing financial assets when stock prices are elevated. And so we’re starting to think quite deeply about how are the changes in income translating into asset purchases and at different price points for different groups.
So when we think about relief on the one hand, yeah, I think it makes sense to target the debt side, but it’s also important to think about who holds that debt. And what kind of debt are we targeting? So I think targeting student loan debt, for example, made a ton of sense. Because it’s disproportionately burdening low income families. Whereas housing debt may be disproportionately burdening high income families. But in the meantime, channeling supports through assets and giving people liquidity, I think is an incredibly important way to reduce the welfare loss that’s associated with job loss. Boost the consumption at a time when demand might have been depressed and mitigate the deeper impacts of a recession.
Ana Hernández Kent
Right. It’s also so hard to build wealth when you don’t have wealth to begin with. So, Joelle, you were talking about the $5,000 increase from 15 to $20,000 for used cars, I believe you were saying. And so, yeah, that’s all well and good, but if you’re the typical black family and you have $23,000 in wealth overall that’s going to make it much more difficult to acquire that kind of asset than if you’re the typical white family with $184,000. So, yeah. Joelle, do you have anything about the business cycles that you’ve been seeing in your data?
What I think what we’re starting to see now is, as interest rates are going up, we’re just really seeing some housing affordability is really something that is going to be challenging. Particularly these house prices have gone up so dramatically in the last two years. And with mortgage rates going up, this just means that the payment to afford a house is also going up, which I think is really going to limit entry into home ownership for a lot of households, particularly if people have been sitting on some savings and hoping to invest, but the actual debt service payment on buying something is really going to increase. So we saw mortgage originations go down a little bit in our data, and the first quarter is the most recent that we have. But I think the upside of it right now is that on the student loan side, people are still getting some respite. And hopefully, what we are seeing is some borrowers are still continuing to repay and will hopefully improve their balance sheets during this pause. So there’s some positives on the debt side, for sure.
Ana Hernández Kent
Yeah, definitely. And I know we are wrapping up on time. We have about six minutes left good to go here. So in terms of, we’ve been talking about the business cycle, I also wanted to just leave some time open for everyone to have closing remarks and just talk about something that’s been forefront of my mind, which is that in a lot of these cases, we’re talking about student loan debt.
In the beginning I talked about mothers and when you talk about mothers, you have to talk about childcare. One of the positives that I’ve seen coming out of the pandemic has been how a lot of these issues have been elevated. Both in terms of policy makers talking about it, but the general public talking about it as well. And I think it’s important to continue a lot of this momentum and just the realization that this did help. The unprecedented government support did help a lot of families who otherwise may have been underwater. So I wanted to leave maybe a minute or so for each of us to have closing remarks on this and just anything that you are going to be focusing on the next couple of months as well. Maybe, Sean, we can start with you.
Xudong (Sean) An
Sure. First of all, and I think you made the exact same observation I had. Which is, the pandemic period policy interventions were overall very successful addressing the issues we have. But like I mentioned earlier, there’s more to do. So for example, we are closely monitoring the loan modifications. Also we are closely monitoring the housing market, the conditions, situations, like you mentioned. So right now a lot of minority lower income borrowers are priced out of the market. So house price is at sky high. With rising interest rate, affordability is getting even worse. Now, in that regard, also getting back to your question about what should we help people do. Should we help them manage their debt? Should we help them purchase homes, purchase financial assets? So in that regard, I would say, in terms of buying homes, we need to do more in terms of educating people, what’s the downside, what’s the good side of it.
And at this point, personally, I would say to lower income minority people, you need to think about whether this is the right time for you to really try to get into the market. So I would even say, wait a little bit, because month end, I’m monitoring closely is investor purchase in the housing market. Right now, a lot of homes have been purchased and owned by investors. For example, in the metropolitan area, Atlanta and Charlotte, last year, over 25% of homes were bought by investors. So that’s double or even triple of what we see in a normal year. What that tells me is that right now there’s a investment frenzy. And think about in the near future, if house price appreciation slows down, some of the investors, they may get out of the market and that will put a lot of pressure on house price. So personally, I think there will be a price correction.
Ana Hernández Kent
So, it’s a bit of a wait and see game too. Yeah. Thank you. Joelle?
Yeah, I think I’ll echo everything that you both have said, I think the policy supports in this case have been immensely successful. And particularly in contrast to what we saw during the last recession where, sort a wave of sub delinquencies rolled over to the rest of the financial system. The fact that we mobilized so quickly and put these supports in place have really kept things pretty smooth for most and left delinquency rates at really a historic low, which is really remarkable for a recession. So things that we’ll be looking at going forward are how auto delinquencies look as car prices have been high. And then we’re also continuing to look at how the student loan repayment pause is going to look when things end.
Ana Hernández Kent
Thank you. Yeah. Same here. Fiona? Close us out.
Yeah, very briefly. I just want to underscore something Ana, that you said, which is that unemployment insurance support, it was hugely effective in terms of boosting consumption and demand. But actually it did not have a huge impact on work disincentive and labor force supply. And the reason I think that is is something you mentioned, which is, you know, even in 2021, childcare services were still 80% of what they normally are, right? And so access to childcare volatility, and whether my child can even attend daycare and things like that, really that along with the public health concerns, et cetera all contributed to the worker, perhaps being reticent to go back to work. And it turns out it wasn’t the UI supports that were really holding back the worker, and we didn’t see a huge return to work when those UI supports were pulled back. So all to say I think they were very effective and contrary to the bad reputation that they sometimes had in terms of contributing to the shortages in our labor markets, the evidence doesn’t bear that out.
Ana Hernández Kent
Yeah. I so appreciate you ending on that point, Fiona, because it’s important to recognize that this was very positive and also didn’t have those negative effects that people oftentimes critique it with. So thank you all for such wonderful, insightful comments. At this point, I’d like to turn it over to my colleague Ray Boshara to lead panel two on evidence-based responses to what we’ve been discussing. Ray, the floor is yours.
Thank you, Ana. And let me also add my gratitude to our great partners at the Boston Fed and the board of governors for organizing today’s events. And thank you also, Ana, for a great set up and a fabulous panel. Superb work there. My name is Ray Boshara, senior advisor at the Institute for Economic Equity here at the St. Louis Fed. At this point, I’d love to welcome my panelists to the stage, and I’m super pleased to be moderating this panel focused on solutions for achieving an inclusive and equitable wealth recovery. So, I’m very eager to hear from our truly excellent panelists, so let me briefly introduce them.
Gen Melford is director of insights and evidence at the Aspen Institute’s Financial Security Program. And before joining Aspen, Gen was at the CFPB, the Consumer Financial Protection Bureau, where she pioneered their highly influential financial well-being index. Lisa Servon is the Kevin and Erica Penn Presidential Professor at the University of Pennsylvania. Lisa is also a long time colleague who published the critical and insightful book, The Unbanking of America, which we here in St. Louis were pleased to feature at an event a few years ago. Jenny Schuetz is a senior fellow at Brookings Metro and a former Fed colleague of mine, where she served as an economist at the Board of Governors. Her most recent book, published earlier this year, is called Fixer-Upper. It’s an outstanding book on housing policy, which I’m sure she’s going to reference today. And Janet Boguslaw is a senior scientist at the Heller School at Brandeis University. She’s also a long-time colleague and one of the field’s true pioneers on employee or shared ownership strategies. Janet also contributed an essay to the Future of Wealth book that I had the good fortune of publishing last year with the Aspen Institute. So each of them will speak for about three minutes, then I’ll kick off the Q&A and eagerly pull in our audience after that. Gen, this stage is all yours.
Great. Well, thank you. Thanks so much. I really appreciate the introduction and I really appreciate the setup, the really kind of important setup and context for thinking about solutions that all the previous speakers have provided. So at the Aspen Institute Financial Security Program, we are deeply focused on exactly these issues, so both how to change the trajectory of household wealth in America. So, this was referenced by a lot of our opening speakers. We’re not just talking about recovery from the last several years. The trajectory that we were on, both in terms of the wealth of the typical household, and also in terms of wealth equity, was really going in the wrong direction prior to the pandemic. So that’s kind of changing that trajectory is what we’re focused on as well as the systems and investments that we could put in place to 10X the wealth of the bottom half of the wealth distribution of households in the bottom half of the wealth distribution in the US and in households of color.
So, we recently released a report and you can find the link to that report on the session page for this event. It’s called 101 Solutions for Inclusive Wealth Building. And in that report, we diagnosed the roots of today’s household wealth landscape, which we really see as the result of decades of trends in various areas, and in terms of racial wealth and equality, centuries. And we also provide a wide variety of solutions targeted at different barriers to and opportunities for inclusive wealth building, which I will mostly not cover in my opening marks now, because there’s 101 one of them, but I do invite the audience to kind of skim through that report at your leisure to see solutions seem most relevant for your particular sphere of work and influence. And of course, I’m happy to talk more about those specific solutions during the Q&A but what I want to frame now kind of at the upfront of this panel discussion is that in this report, we really ground our analysis of wealth problems and solutions in a new framework that we developed that describes the conditions that any household needs to have in place to be able to build and sustain wealth.
So if we think about making wealth building opportunity in America truly inclusive, we have to be asking, are these conditions in place for everyone? If not, what can we do systemically about that? And if you want to follow along with that first, as I describe it, there’s a one page graphic of it available on the session page as well. Stability is a necessary precondition for even getting on the wealth building ladder. And financial stability, I mean that a household typically has more income than they have to spend on basic needs and debt payments, that they’re able to build and replenish liquid savings, and that they have no or low harmful debt. And that’s really a precondition. And that once that precondition is met, people are then ready to start climbing the wealth ladder.
And then they need five more conditions, right? They need to be able to amass an investible sum of money that they can use to make investments and asset purchases. And then when they’re ready to make an asset purchase or an investment, there’s three more conditions that have to be met. They need access to affordable assets to purchase wealth building assets. And lots of people do not actually have access to those things, right? In many markets, there simply are not affordable or kind of starter homes to purchase. Over 50 million Americans don’t have access to retirement investing tools through work. So, we cannot assume by any means that people have access to affordable assets to purchase, even if they do have financial stability and investible sums of money. They might need consumer friendly financing to purchase assets that are too expensive to be purchased outright. They need the information and confidence to navigate wealth building decisions. And finally, after they purchase and build up wealth creating assets, the fifth condition is that people need the ability to maintain and protect their wealth from loss, and that’s not a given either.
So we apply, and this will be my final kind of 30 seconds here. When we apply this framework to the facts that we see on the ground today resulting from these decades and centuries of trends, we see two areas where systemic solutions are particularly needed to set America on that inclusive wealth building trajectory. First, nearly half of all US households do not have the precondition of financial stability because they don’t have income that is typically exceeds their cost of living. Which isn’t to say that for half of households, that expenses exceed income. For some, it does. For some, they match, but nearly half don’t have more income than their basic expenses and so they’re not able to save a mass investible sums and get on that wealth ladder. And that’s largely driven by the decades long and growing mismatch between wages, which have largely stayed flat for the majority of workers, and cost of living, particularly housing, healthcare, family care and education, which have skyrocketed.
So in terms of solutions, we see boosting wages, implementing some form of guaranteed income. For example, the temporarily expanded child tax credit, which Fiona spoke about seeing the impact of, and a variety strategies to bring down the cost of core household expenses and debt payments. All of those are key evidence based investments in an inclusive wealth recovery. And the other major area, which I will not speak about because our other panelists will is really about boosting lower wealth households, ownership of key assets, including homes, retirement investments, and other less common, but promising forms of shared ownership of businesses and other assets, which our other speakers will talk more about. So with that, I will turn it over to Lisa to hear more about the role of financial systems in household wealth.
Thank you, Gen. And apologies that my camera wouldn’t turn on to everybody, and thank you Gen for the fabulous framework. Very compelling. Lisa, stage is all yours.
Thanks, Ray. And thanks so much for the invitation. It’s been great to just listen in on the first panel and now be part of this one. Genevieve really teed me up well, I think, to talk about this issue. My work has focused mostly on the role of financial institutions and how they interact with financial consumers of all kinds, and particularly looking at why people often choose to use alternative financial institutions like check cashers and payday lenders instead of or in addition to what we call mainstream financial institutions, which we think of as banks and credit unions. And I bet everybody who’s watching already knows this, but about 28% of Americans are in these categories of neither having a bank account or credit union account, or using a bank account in addition to other things.
And I think before I started doing my research, there was kind of a received wisdom that if people were not using banks exclusively or credit unions exclusively, that they probably needed some financial literacy that they didn’t know enough, they were making ill-informed choices. And what I found out by working as a teller at a check cashing store and a payday lending store and then interviewing a lot of people was that they were actually in most cases making very informed choices. And so, you know, before I get to why they were doing that, I just want to follow what Genevieve said and to say that before we can really think about wealth, people need to be financially stable. And some research that the Financial Health Network did a few years ago showed that many more people were concerned with financial stability than they were about increasing their wealth. And that just shows that they were so living paycheck to paycheck, not having enough money to cover their expenses, that they had to be focused on this short term goal and it was very hard to think about the long term.
I really liked the Financial Health Network’s definition of financial health, which is similar to what Genevieve laid out; this ability to spend, save, borrow, and plan, and to do that with financial services that are both safe and affordable. So when we think about the role that different kinds of financial services have to play here, banks and credit unions on the one hand and non-traditional lenders like payday lenders on the other, I do think that banks … and I single them out apart from credit unions here, particularly the four largest banks that hold nearly half of all of American’s deposits, should be doing more like offering very low cost accounts with no overdraft fees and no minimum balance. And they’re unlikely to do that unless government forces them to do that. I took a look yesterday at the New York City Department of Consumer Affairs website. They have something called a Smart Start account, and none of the bank partners that they partner with to provide those accounts is one of these big four ones. They’re all smaller, more local banks. And I think a lot of folks don’t recognize the difference between the big four and other smaller banks or credit unions.
Of course, alternative lenders do need to be regulated, but when I asked people, my check casher and payday lending customers and the folks that I interviewed why they chose to use those businesses instead of banks, one of the reasons they cited was cost. The structure of banks did not really match the way that their money flowed in and out. They were constantly being tripped up by overdraft fees. A few of those a month would way outweigh the cost of cashing a check at a check cashing store. And also, the other two things that they talked about in addition to cost were transparency and service. They felt like banks were tricking them and they felt that the service that they got at these other businesses was better. So, I am not an apologist or a cheerleader for alternative financial services, but I think the point here is that we have to understand, kind of go to the source and find out where people, consumers are living, where their struggles are, and really think about the issues that they’re facing on the ground as we think about the strategies to help move them out.
Underneath everything we’re talking about, though, is that people don’t have enough money. And I think Gen referred to this as well. We can regulate the hell out of every financial institution, and people still need jobs that pay a living wage and come with benefits. I’ll just offer up one thing I think would be a good thing to look at, which is to look at alternative credit scoring, because for so many people, it’s a gateway to being able to borrow affordably and make investments in their future, whether that’s student lending, a home loan, something like that. So, I will end there and look forward to the rest of the conversation.
Thank you, Lisa. Definitely hearing a common theme here between Gen and Lisa about the importance of stability as a precondition for building wealth, and I love the recommendation of the alternative credit scoring. Okay. We will now turn it over to Jenny.
Excellent. And that’s a perfect setup to talking about home ownership, for whom home ownership is a reasonable wealth building strategy and under what kinds of circumstances or assumptions. And it is again, important to remember that saving money for a down payment, saving money for any sort of asset purchase assumes that you are able to cover your monthly expenses already and put some money aside. And if we look at the poorest 20% of households all over America are spending more than half of their income every month on housing costs, which means that they essentially are not covering their monthly expenses and can’t start setting aside money for savings. So when we talk about who could become a homeowner and potentially build wealth, we are not talking about the poorest Americans. We’re talking about probably lower middle income families who are currently renters, but potentially could transition to home ownership assuming that they can afford to buy their way in, which is getting harder and harder every day.
So, I want to think about sort of why home ownership can be a good tool for wealth building and all of the sort of hidden assumptions built into that that we need to make sure that we’re checking. So actually, one of the most important ways that home ownership helps families achieve financial stability and residential stability is that it provides predictable monthly housing expenses over a long period of time, right? So, most renters have a one year lease. And at the end of the year, the landlord can raise the rent or potentially not renew it. Homeowners are essentially buying themselves 30 years of relatively constant payment over times, completely aside from whether or not the house increases in value over time. Right? And so one thing to think about is can we provide renters with more long-term stability and predictability of their housing payments outside of home ownership, just to give them that predictability?
The second way that home ownership helps people build wealth is that it’s a forced savings mechanism. You take out a 30 year loan. Every month, you pay the bank. Part of that goes to interest, part of that goes to principle, and the amount of principle increases over time. So you don’t have to think about setting aside money from your paycheck every month. It just automatically does this. And again, it’s worth thinking about, are there ways that we could recreate this for renters so that you pay your rent every month, and some of that goes to pay off your rent to the landlord, and some of it automatically goes and sits in a savings account without you having to think about it so that money can accumulate for renters. Right? So picking out kind of the pieces of home ownership that we like and seeing if they were necessarily tied to home ownership.
And then sort of the last way in which home ownership can build wealth is if you buy a piece of property that appreciates over time, the value of the property goes up. Then you build wealth and can potentially tap into that, sell it, borrow against it. But again, not all places in the US have seen housing prices go up over time or go up faster than inflation, or go up at all periods of time. And certainly everybody who remembers what happened to housing prices during the Great Recession, if you bought a house in Las Vegas in 2004, you made some money off it. If you bought it at the end of 2006, you lost a lot of money. And it was a very long time before that came back to where it was, right? So I think policymakers have tended to say buy a home and you will build wealth, and this is a surefire way to build up some equity, and that’s not always true and we should be straightforward with people about it.
You know, so assuming that those conditions are met, this can be a very useful tool, but we also want to think about sort of some of the downsides nationally of relying on home ownership as the primary wealth strategy, and the main one is it is the reason we have an enormous racial wealth gap. Black households in particular, Latino households to a lesser extent, were legally blocked from home ownership until very recently in our country’s history, which means that families did not build up wealth, that they could pass along to their kids and grandkids. White first-time home buyers are likely to get a gift from their parents or grandparents to make a down payment. Black and Latino households are less likely to get that because their parents and grandparents didn’t own homes and couldn’t help them out. Right? So we have roughly a 30 percentage point gap in home ownership rates between Black and Latino households and non-Hispanic white households, right? That’s enormous.
And Black households and Latino households who do own their home have roughly half as much home equity as white homeowners do. They’re likely to buy later in the housing cycle. As Sean mentioned earlier, they are less likely to get the upside of the appreciation before the cycle turns, and they’re more likely to buy in neighborhoods that have lower rates of housing price appreciation, right? So I think the sort of takeaway is home ownership can be a great wealth building strategy. It isn’t always, and we want to think about ways to make wealth building possible for people who don’t become homeowners or become homeowners later in their life that they’re not waiting that long to get into it.
Great. Thank you. Thank you, Jenny. Very important point. And thanks for bringing in the historical and intergenerational dimensions of wealth building. Great. Okay, and also now we’ll turn to Janet who also a has a fascinating idea to expand wealth ownership that goes beyond home ownership. Janet?
Good afternoon, everybody, and I’m really happy to be here and such an interesting set of comments today. So, I’m going to talk to you about employee ownership, and a lot of you don’t know about employee ownership. In the material section, there’s a little PDF that you can reference later to look at some of the data that I’m going to be going over really quickly here. So, I want to make a case for the untapped potential of employee ownership for fostering not only an inclusive wealth recovery, but a recovery that gives people stability down the line. Employee ownership firms have been proven not only to build wealth of their employees, but also they weather the economic crisis, and really importantly is that we don’t know what’s coming down the pike.
So, I’m going to start with a little background for those of you who don’t know much about employee ownership and may be afraid of it. So, don’t be afraid. Employee ownership simply means that employees gain some financial capital in addition to their income. And in most cases, they don’t incur any out of pocket expenses to get that benefit. So think about at the higher income levels, people get bonuses, they get profit sharing. They get shares of companies stock. All we’re saying is that those kinds of strategies that already exist can be available throughout an entire firm, and they are, and it’s already very widespread. 47% of private sector employees, over 59 million people, have some form of ownership right now, whether it’s shares or profit sharing, and 20% of low income people in the nation have some form of ownership shares. So it’s not a pie in the sky idea. It’s actually something that we need to understand and elevate. So, it takes a lot of different forms and you can see some of those forms on the sheet.
But I want to make a few key points. Employee ownership builds wealth. A national study of millennials show that median household net worth is 79% higher for employee owners of color and 17% higher for low income owners. And a study I worked on through Rutgers University found that women and people of color at employee stock ownership plans built wealth at much higher rates than their national counterparts. So, this is a strategy that can work. Really importantly, some of the data that’s coming out now about what happened during COVID. ESOP firms outperformed other firms in their sectors. They secured employees’ jobs. They maintained work hours, salary, workplace health and safety. Cooperatives found ways to keep people attached to their firms. And prior research shows that during the last two recessions, employee-owned firms had lower rates of unemployment. So, just to give you a background why this is such a powerful concept and opportunity. So, what do we need? We need a systemic approach to make it happen and to elevate it. So I’m going to just run through some really fast policy ideas, okay?
Just to give you a sense of hoe the system could work. Because there’s a lot of expertise out there to make this happen. So, in cities like New York and Boston, the cities have started and opened their own offices of employee ownership to expand in this work. State legislatures have and can continue to allocate resources to open up statewide offices of employee ownership, to provide guidance to business owners and employees about these different ownership models. There’s at the federal level, the Main Street Employee Ownership Act 2018 directs the small business administration to support employee ownership with a focus on underserved businesses and employees. It’s not funded. If we could get it funded, it would enable broad awareness about ownership opportunities. The Department of commerce could pass things like an employee loan equity act that would-
… feature loan guarantees for employees and how private capital step up to work on this.
And finally, the goals for workforce development both for unemployed and incumbent workers might be achieved by investing in workers not only as employees, but also as owners. The existing workforce training infrastructure operating out of DUL conclude proactive training for ownership so people are prepared to take it on. There’s so many ways that we can work to elevate this kind of strategy and I know we’ll get into the conversation so I’m going to just stop there and turn it back to Ray.
Thank you, Janet. Fascinating. It’s great to have this be a part of the discussion. For too long they’ve been separate discussions, and if you didn’t throw out those numbers, I was going to throw them out. Remarkable differences, 79 and 17% differences between those who have them and those who don’t. So I’m most fascinated, I think, with this intersection of the short and the long-term. Gen made a great case about the preconditions of wealth and Lisa reinforced that. You got to have cash flow. Jenny made that point. Interestingly, Janet’s strategy doesn’t necessarily depend on having the extra income through what’s provided at work. But to me, I think one of the most interesting developments in the field is this intersection of the short-term and the long-term. The field started off with only long-term strategies then kind of shifted to very short-term strategies and now we’re looking at how those things can work together in an integrated way.
You’re seeing this most often in emergency savings buckets and retirement savings. That’s happening with college accounts, it could happen in home ownership. So I’d love to hear any reflections folks have, panelists have, about how we can make the short-term and the long-term work together better in a unified way. Anybody would like to start with that? Perhaps Gen?
Well, first of all, I’ll say that your first example is certainly the first one that I would go to. So that most literal approach about the opportunity for bundling savings products by pairing emergency savings with retirement savings and then automating that via the workplace. And there’s a tremendous amount of energy and some really good evidence around that. So certainly I’m in support of that.
Another way I think about this isn’t necessarily about bundling and I think some of our other panelists have other good ideas about other places to do bundling so let me quick so that they can explain some of those, but is when I think about inclusive wealth solutions, I think about ones that would boost household balance sheets immediately, like with the stroke of a pen. For example, student loan cancellation. That would immediately take a significant number of households from negative to positive net worth, for example.
So there’s the short-term stroke of the pen balance sheet solutions and then there are also, and I think we need to do both/ and, are generational investments like baby bonds, or other kinds of solutions that start smaller now with seed funding and harness the power of capital markets to build wealth over time with compound interest or intergenerationally. So another way to think about short and long-term is the things that immediately change household balance sheets. Or for example, bring in employees into share ownership. I would imagine, Janet, changes their net worth position immediately and then, but we have to also have these longer term kind of investments that are either over a lifetime or intergenerational that really allow everybody to take advantage of capital markets, compound interest that so many people have already benefited from.
Yeah. And there’s a very clear parallel in housing because we encourage people to save money for a down payment, which is a one-time lump sum to get into home ownership. We have not been as good as encouraging people to set aside money to pay for maintenance and for insurance. Anybody who’s bought, especially an older house, which is where a lot of the entry level homes are, know that you don’t just buy it and you’re done, you get in and then stuff breaks and you have to fix it. And actually a lot of low income homers find their stability threatened if they don’t have liquid savings to take care of maintenance, or if they get an unexpectedly large property tax bill, you need to have cash available to do that.
It makes me wonder if we should escrow emergency savings and build it into the mortgage product or something like that. Okay, great. I’d love to keep going on this question, but another question, Anna made a really important point about how the pandemic actually exacerbated wealth inequality, despite the gains on the low end. Part of the reason the top two quintiles grew their wealth was because they had exposure to the stock market. So we’ve talked about home ownership, we’ve talked about employee ownership. Do you see a role for getting more low wealth families exposed to the stock market as a wealth generating strategy? Historically, as you may know, the returns on the market have been about twice as of home ownership, yet we don’t have very many low income, low wealth Americans in the stock market. What might be a responsible way to do that? Anybody like to take that?
Well, I’ll start there. There are employee-owned companies that are publicly traded as well as privately held firms. So when you have employee ownership throughout your organization everybody becomes a shareholder, potentially they could become a shareholder. And coupled with employee ownership, in most cases, not all, is a lot of financial education, a lot of financial literacy so that people understand if they get their profit share, if they get their shares vested, there’s some discussion about what they should do with it. And in the worst-case scenario, they get a quarterly profit statement and there’s usually some mechanisms for them to learn about what that means to them if they get it.
So I would just say that with the employee ownership of all sorts become some forms of literacy where people become more savvy and knowledgeable about what those opportunities are and what it means to them and what it means to the broader economy. So, and again, most people don’t know about their 401Ks and how it’s invested and what’s happening so in most employee-owned companies, there still are separate 401K plans that people can become more knowledgeable about as well.
That’s great. Many of you know, I’m a big fan of 401Ks and 529s at birth, baby bonds, is a great way to get more Americans involved in that. Lisa, did you want to weigh in, and then we’re going to go to some closing question and final thoughts? Lisa?
Yeah. Just a couple of things about that. I mean, on the topic of bundling or thinking about a couple of different products or ideas going together, I think for a lot of people, the idea of investing in the stock market in a vacuum is scary or doesn’t make a lot of sense. But when you think about 529 plans or IRAs, this notion of investing, people don’t maybe even recognize that they’re investing in the stock market by saving in a 529 plan. And while there is very spotty research on the effectiveness of financial literacy, when it does matter, we see, is when people are making a decision.
So one can imagine, for example, starting a job and getting that information at that moment about where to put your money, how much to save, how to think about it and being able to give people that information that they need. I think also, for a lot of what we’re talking about, part of the reason that there’s no good, there aren’t a lot of good studies that show the effectiveness of financial literacy is that it’s so different from one place to another. And if we were to look at programs that start when children are very young and turn them into a particular kind of financial consumer, that could be effective as well.
Thank you, Lisa. So we’re going to transition into closing reflection. I’ll give you a choice. You can offer whatever thought you’d like, or you can address a question that continues to come up in the chat, which is inflation and how that might affect how we think about solutions. I think what we’ll do is go backwards. So, 30 seconds each starting with Janet.
Great. I guess my closing comments would be that we need everything. We need short-term strategies, we need long-term strategies. We need a comprehensive approach to thinking about wealth inclusivity and stability. And so, a lot of the things that we’ve been hearing about today touch on all those different pieces. I would say that the employee ownership piece can not only put wealth into people’s pockets in the short-term, through profit sharing, but through longer-term investments. So that coupled with financial literacy really I think is a long-term strategy for moving some of these things forward.
Great. Great comment. Thank you, Janet. Jenny?
I’ll tackle the inflation question. So inflation is definitely putting more financial pressure on renter households. Their rents have gone up as the cost of housing goes up in a way that homeowners don’t generally have to face immediately. So you’ve got rising rents, which make it harder for them to save money, rising housing prices, which make it harder to get into home ownership and rising mortgage interest rates, which also make it harder. And I’m going to steal a quote from the Joint Center for Housing’s recent state of the nation’s housing report in April 2021, you needed to earn about $80,000 a year to buy the median priced home in the US. In April 2022, you needed to earn $108,000 to buy the median priced house because housing prices and interest rates are going up. That is a real hurdle for first-time home ownership.
Wow. Okay. Thank you, Jenny. Lisa?
I’ll just start by making one more plea for safe and affordable financial services for everyone. But I think one of the things that kind came out of this conversation for me, that I hadn’t necessarily thought about in this way, is that when we talk about increasing the ability for folks to accumulate assets, there are lots of different tiers of people in that larger group. And one group that I’ve really noticed recently that came up in our conversation are people who have actually made an investment like the homeowner who then can’t afford repairs. I also see this in higher ed. There’s an enormous number of people who go to college and then one small financial glitch pushes them out and they may never come back.
And so, thinking about who could take on the responsibility of providing those emergency funds, whether it’s for home repairs or to pay the rent, get some food while I’m in college so that my investment, that I’ve perhaps been making my whole life, stays on track. And I think there could be some creative answers in terms of government and the private sector for that.
Thank you, Lisa. Gen?
Knowing that we’re at time, let me just say that big picture, that my final comment is that we really need, if we genuinely want to have an inclusive wealth building ecosystem in America, given the facts on the ground now, we’re going to have to simultaneously get people to positive cashflow and also improve the affordability of the assets that would allow them to build wealth so that they can buy them.
Great note to end on. I can’t thank my panel enough here of fabulous remarks and ideas. I encourage you all to look at their materials and to follow up with them. And I’m sorry we couldn’t get to all the questions so let me close off this panel. And I now have the pleasure of introducing our two closing speakers. First is my St. Louis Fed colleague, Bill Rogers, Vice President and Director of our Institute for Economic Equity. And second will be Prabal Chakrabarti, who’s Executive Vice President and Community Affairs Officer at the Federal Reserve bank of Boston. Okay, gentlemen, the stage is all yours. Thank you.
Thank you so much, Ray. I’m going to kick it off and I’m glad to be both in Boston and St. Louis, two wonderful cities, and want to thank the partners for this. I just want to start, Bill and I are going to have a conversation here about what we heard. I want to pick up on three things that I heard from the panel. First, this discussion about groups affected, and in particular, the single parents. What my takeaway from that was is if you can focus on the group or define an intervention that really works for the segment that’s perhaps most struggling, that could be a way and an avenue to then expand and scale up to other groups. So that was my takeaway from that. I really enjoyed Anna and Fiona’s discussion, and data discussion.
Sean talked about how the down cycle this time around was different than the time before than the subprime crisis. I think that’s really important. The great recession, the one of 2008, 2007/2008, was enormous waste wealth loss for black and Hispanic families. Had they been able to hold onto their homes, they would’ve seen that incredible house price appreciation that continued from that bottom of the market to today. But they weren’t. And that’s what’s different about this pandemic, at least with these types of forbearance programs. Again, that’s not a gift. There’s some cost, but they still have to make the mortgage or the hole at the end. I think about car loans. Going ahead, if there’s an issue there, is there a way to keep people out of that down cycle, in terms of insurance and to learn from this positive experience of the pandemic and the policy?
And then the third thing is this space for innovation around the employee stock ownership, around some discussion of child savings accounts, baby bonds. We’re at a time now where the Community Investment Act is being proposed to be reformed for the first time in three decades. This is a place to spur innovation and I think about, are there ways to, whether with CRA or with another set of actors, provide an enhancement, something that mimics an inheritance, but that allows you to start a business, enter a home, or have education? This is where policy can be creative and there may be a role here for CRA. Bill, I’d love to hear some of the things that you took away from today’s session.
William M. Rodgers III
Yeah. Excuse me, Prabal. Thank you. Yeah, I really, really enjoyed both panels. So much rich, rich information and analysis. And the two things that, for me, I see as a takeaway. One is, it’s important that we really, really do our monitoring of the economy right now, and that our community development perch allows us to really talk about the disparate impacts, that allows us to talk about what’s happening, not only amongst the lowest income families, but families, what I’ve come to learn to call ALICE. And these are families who call their asset limited income constrained and they’re employed. It’s a concept that was created by the United Way of Northern New Jersey back in 2009, 2010. And what it’s doing is it’s capturing the families who are above poverty, but below a survival budget in their communities. And so, for example, depending upon your family size and where you live, you may need between $40 and $70,000 a year just to make ends meet.
And so, that means that these are families who have very little amounts of savings, who have very little disposable income, who hence have very little wealth or low levels of wealth. So, it’s something that I think the second panel alluded to and talked about, but I think the first panel, and I’m sure this has been done at work, but I would like to see not only talking about those lowest income families, but these ALICE families, they do make up a larger segment of households. But given the headwinds we’re experiencing from inflation, continued supply chain issues, the war in Ukraine, and also the pulling back of these relief and recovery efforts. So from, in response to the pandemic, the monitoring of these households and their communities, and their communities, is really, really important.
And then a second big takeaway for me is that tremendous amount of evidence, lots of needs from an absolute to a relative standpoint. Prabal you just mentioned some of those again, but we also have tremendous amount of ideas. Ray’s book in consultation, or co-authored with our Aspen Institute friends and colleagues, great many ideas and so maybe one of the next steps for me to takeaway is, and if it’s some of them are already going on, but continue to do some demonstration type projects, maybe in smaller settings and then identifying, using benefit cost analysis, SWOT analyses that allow us to figure out which ones do we want to go to scale. So again, lots of great insights. Those are my two takeaways.
Great, Bill. [cross-talk]
William M. Rodgers III
Prabal, what was something that surprised you or jumped out at you?
One thing that jumps out at me throughout is the number of times some of the speakers mentioned inflation, and you just did as well. And also the importance of wealth as a buffer. It’s interesting, I’m speaking right now from a community college just outside Lawrence, Mass., And I think about the students here and what they’re facing in terms of being able to handle price increases, rent increases, and the role of wealth. Will they be able to continue their education? And no, education, as we learned from the first time, was not the silver bullet, but it’s incredibly important.
And as I think about that, the point that you raised, Bill, about collecting local data. At the Boston Fed, we’re engaged in an effort to gather data on the wealth distribution by race and ethnicity and to be able to say something important about the sources of the wealth gap and the wealth in the wealth distribution, to be able to point to, or model particular solutions and give some guidance to some of these great ideas that are here. And I think my takeaway is, obviously we need scale and we need scope, but we also need to pilot and understand what works.
William M. Rodgers III
Yeah. And I love that you mentioned that you are doing that local level work. We’re actually using you all as a model or a potential framework and hopefully partners, so we want to do similar type of work here in the eighth district. And we think we offer a slightly different picture because of our demographics we have in terms of our racial composition, but also our urban/rural dimensions. And so, we’re going to be reaching out to you all. Anna Kent, who was chair of the first panel, she’s leading that project for us.
I really just, one thing that really surprised me, and it’s something I really want to know more about, and it came up when I was doing my listening tours, or part of my listening tour a couple weeks ago in Memphis, and also in Little Rock Arkansas, and even in these communities in the local levels, we’re seeing, or the people we’re seeing are reporting that the investors were buying up, not the high-end properties, but middle and lower income properties, and as you were saying, and others were saying, that’s what’s jacking up, or it’s been raising the cost of living, and particularly it has, or continues to have, quite a major impact or disproportionate impact for lower and moderate income individuals.
So, that’s something I really want to understand more about. Who are these institutional investors and what’s their short and long run game plan? And then I will also appreciate the comment that was talked about unemployment insurance, that there were other bigger, bigger factors that were impacting why people weren’t coming back to the labor force en masse. And that was also a nice job of connecting the, as I’m a labor economist, but connecting labor and workforce issues to this broader wealth conversation. And that’s what we’re, my last comment here, that’s how we have ourselves structured here at our Institute where we have our wealth researchers, then we have myself and others who are doing labor and workforce issues and then we have our community impact, or community response team that is collecting surveys and analyzing surveys. But I really enjoyed the conversation, look forward to continuing it and following it up on some of these next steps that we’ve talked about. So, thank you very much and I’ll turn it back to Maria.
Thank you, William. I’d also like to thank all of our presenters for sharing their time and expertise with us. And all of you who joined us today for this critical conversation. Following this event we’ll share a link to a post-event survey. We’d appreciate any feedback that you can provide about today’s session, and the survey will only take two minutes. As a reminder, today’s session was the first in the series of seminars focusing on an inclusive recovery. Information and registration for the next two events are featured on fedcommunities.org. We hope that you join us for the next session, which will be on September the 8th and the discussion will be provided by the Federal Reserve Banks of Minneapolis and Philadelphia about how the rules of the labor market matter for workers. With that, thank you again and enjoy the rest of your day.