Ownership and Debt: Minding the Balance Sheet

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

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

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

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

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

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

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

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

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

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