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That ‘$400 Emergency Expense’ Myth Remerges

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Here’s a letter to WTOP Radio in Washington, DC:

Sir or Madam:

This morning your news anchor interviewed financial reporter Paul Brandus who said that even prior to the COVID-19 crisis most Americans didn’t have enough personal wealth to pay a mere $400 in emergency expenses. As the source of this ominous news Mr. Brandus cited a survey done last year by the Federal Reserve.

But the survey that Mr. Brandus cited does not reveal that most Americans have inadequate personal wealth, or even inadequate cash on hand, to pay such an expense. It reveals, in fact, quite the opposite.

When that survey first appeared, economist Alan Reynolds, looking closely at the survey question [2] that asked about how Americans would meet a $400 emergency expense, pointed out that “[t]he question was about how people would choose to pay a $400 ‘emergency expense’ – not whether or not they could pay it out of savings (or checking) if they wanted to…. It turns out that 86% would pay cash or charge it and then pay off the bill at the next statement (many consumers autopay credit card bills from checking accounts).”

Like many Americans, I myself have more than enough cash on hand to pay a $400 emergency expense, but I, too, would nevertheless pay this expense with a credit card and then pay off the card in full at the end of the month. Paying in this way is a source of an interest-free loan for up to 31 days and, in many cases, also of rewards points. That most Americans choose to pay in this way, in short, is not evidence that prior to COVID-19 most Americans were, to use Mr. Brandus’s term, “living paycheck to paycheck.

It’s disappointing that a financial reporter continues to spread a fallacy that will only further muddy the waters for us Americans as we seek to keep to a minimum the economic damage now being inflicted upon us.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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