Center for Household Financial Stability: The First Five Years
This 18-minute podcast was released Aug. 7, 2019.
“The balance sheets of millions of Americans failed because of too much wealth and home ownership financed with too much risky debt,” says Ray Boshara, senior adviser and director of the St. Louis Fed’s Center for Household Financial Stability. He talks with Matuschka Lindo Briggs, senior media relations specialist at the St. Louis Fed. They discuss lessons learned from looking at the recovery following the Great Recession.
Matuschka Briggs: Welcome to the Timely Topics series from the St. Louis Fed. I'm Matuschka Lindo Briggs, your host for this podcast. With me today is Ray Boshara, a senior adviser and the director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. He is also a senior fellow in the financial security program at the Aspen Institute. Ray, thanks for joining us today.
Ray Boshara: Thank you.
Briggs: So can you even believe that the Center has been here at the Bank for five years?
Boshara: I can't believe that, and I can't believe that I've been here five years.
Briggs: Refresh us on the purpose of why the Center was brought to the Bank in the first place.
Boshara: Well, the Center wasn't actually brought to the St. Louis Fed. I was recruited to come to the St. Louis Fed without even a job description. I was given a blank slate and told, "Tell us what we should be thinking about." And so I caucused with Bill Emmons, and together we proposed the idea of the Center. That's how it got started.
Briggs: And what was the purpose of it?
Boshara: Well, at that time, you have to remember, we were just a few years following the Great Recession. And our view was that nobody had really looked at the recession from a balance sheet perspective. It really was a balance sheet recession. The balance sheets of millions of Americans failed because of too much wealth and homeownership financed with too much risky debt.
But nobody was really looking at balance sheets retroactively to see what happened, and especially proactively to see, could we think about balance sheets in the future and make sure that they're strong and healthy both for the good of families and—for the good of the economy?
Briggs: Looking at the balance sheet and all of the goals that you had, what have you learned from the past, and did you meet your expectations?
Boshara: I'd say three key lessons is what we've learned. First is that you really do have to look at the entire balance sheet. You know, for a long time, people were worried about building up savings and assets, building wealth. The field I came from for 20 years, that's all we had been thinking about, but kind of ignoring the debt side of the balance sheet. And we learned, of course, from the Great Recession that you can't really do that. So I think the big lesson was, how you finance an asset is just as important as the asset itself. You have to look at the entire balance sheet and how the different components, you know, interact with one another.
I think the second big lesson was, how uneven and how incomplete the recovery was. So the headlines back in the day was, wow, balance sheets have fully recovered. The economy is way past the Great Recession. Well, in fact, the recovery was really strong for some people, but not for others. And for those for whom it was not strong—younger, less educated, and non-white Americans especially—they had yet to recover their wealth. That lesson was, we're far from having a complete recovery, and it's been very uneven.
And I think the third big lesson was that you really need to take a demographic approach to looking at family wealth. Too often folks had looked at wealth by income, but income predicts wealth, and wealth predicts income. It's hard to know what's what. And so we thought a more stable, a more predictable, a more powerful approach was to look at the demographic drivers of who's building wealth and who's not, and we decided to focus on age, race, and education.
And so the three big lessons were: a whole balance sheet, who's recovered their wealth and who hasn't, and to look at demographics.
Briggs: I appreciate you sharing all of that with us. I want to even actually kind of go back down memory lane, and then look forward. As you talk about the balance sheet and all of the goals that you were trying to meet in the first five years, what was your biggest ah-ha moment?
Boshara: Well, I'd have to go back to one of the things I just shared, just how remarkably incomplete and uneven this recovery was. So the first report that we put out when we launched the Center back in 2013 was called After the Fall. It was about, American family wealth following the Great Recession. And we were the first ones, through the leadership of Bill Emmons, our lead economist, to determine that millions of Americans—actually, more than half of Americans had yet to recover their wealth.
So the headline coming out of the Board of Governors actually was, full recovery looking at family balance sheets, and we said, "No, if you control for population growth and inflation and look at some of these demographic drivers, you had millions of younger, less-educated, and non-white Americans." And that finding was so startling, so surprising, that our Center was the lead story on the PBS NewsHour right after that report was issued.
Briggs: You do a lot of work with the Demographics of Wealth series, various events, and various publications. How do you know you are being heard and making an impact?
Boshara: Well, the phone keeps ringing. People keep asking us to show up, to speak, to write publications, to do media interviews, to advise. As a matter of fact, we're to the point now where we have to turn down some folks because we can't keep up.
Do people care what you have to say? That's what it's all about … and as long as they keep caring, we're going to keep producing.
Briggs: And how has the Center evolved, when you're trying to stay relevant, because it's such important work, why do you think it's important? Why do you think it needs to be out there? And how are you changing things in the Center?
Boshara: We've changed a lot. I think, most importantly, we've hired two full-time staff who reflect the demographics that we study, Lowell Ricketts and Ana Hernández Kent. Through our visiting scholars, we've really diversified our team generationally and racially, as well. And so I think we thought it was important not just to have two guys in their 50s, me and Bill, kind of leading this work. So I think that's been probably the most important thing we've changed over the years is to think a little more carefully and strategically about our team and who they represent, and the insights and skills they bring to the team.
I would also say, kind of, on the substantive side, we're getting very interested in this idea of liquidity, like, the piggy bank, your liquid savings, your rainy day fund. We're finding, and others are finding, that without a cash buffer you really can't have resilience as a family, nor can you have upward economic mobility. It really cuts across the health of balance sheets to have some kind of a buffer. That's becoming a focus for us, as well.
I would just say, again, how all the pieces of the balance sheet fit together. And, very importantly, why it matters for economic growth. We study Main Street, but we need to know how Main Street affects Wall Street and the rest of the economy.
Briggs: What do you think the Center's research has really called attention to?
Boshara: The first is, wealth inequality as distinct from income inequality. We know that wealth inequality not only is greater than income inequality, it's more consequential. When you don't have wealth, you don't have a foundation for risk-taking. You have no resilience. You don't have opportunities to make investments in the future. You have nothing to pass on to your kids. And so I think wealth inequality needs more attention, and I'd like to believe that we've given it more through our focus on wealth.
Secondly, looking at the full balance sheet, with a particular focus on the debt side and why those matter. We did a whole series on debt.
The third thing would be the uneven recovery, that nobody was really paying attention to that until we called that out.
The fourth would be the demographic drivers, which have proven to be very powerful, and a lot of people have taken that up.
And finally, I'd say under what conditions do assets lead to wealth? OK, so you have this asset, education or a home. Does it necessarily lead to wealth? And that's a very different question. And so we're trying to understand the conditions under which an asset does, in fact, lead to wealth.
So those would be the five things, I think, where we've really added something new to the debate.
Briggs: Was your research surprising in what you found?
Boshara: Very much. So I think we were also surprised by the uneven recovery, the extent of it. No question.
Secondly, the disparities by race were really shocking. Certainly, so were the other disparities, but let me just mention one: 2015, we put out a brief showing that whites and Asians with college degrees had almost doubled their wealth in 25 years. But blacks and Hispanics, with college degrees, had lost a substantial amount of wealth over that same period.
So college-educated whites and college-educated blacks had diverging wealth outcomes. We were stunned by this. But we didn't stop there. We structured an entire research symposium around trying to figure out, how could that happen? We're honest researchers here. And we go where the facts take us, and they often surprise us, too.
Briggs: You've mentioned the demographics a couple of times. We also know you have the Demographics of Wealth series. Explain demographics predictors.
Boshara: So I give credit to Bill Emmons for proposing that we think about demographic predictors because they're more stable, powerful. So the three that we really focused on are age or your birth year, second would be your race or ethnicity, and third would be your education.
Younger Americans are not on track to hit the same wealth as their parents or grandparents did at a similar age. For the first time in history, we have a generation not doing as well as previous generations. So younger generations, those under 40, really are struggling. So that's been the first.
Race and ethnicity have been the second. These are very persistent disparities. There was about a 10-to-1 difference between the wealth of whites versus blacks and Hispanics. And these have persisted despite other gains in the economy. So we've looked a lot at those disparities.
And then finally, education, which is where we see the largest disparities, the only people who've built wealth in the last generation have been people with college or graduate degrees. Everyone else has basically flatlined.
So if you look at all these together, you basically see that younger Americans, those under 40, non-white Americans, and less-educated Americans have flat lined. Their wealth is about where it was 30 years ago, adjusted for inflation. So whatever else good might be happening in the economy, whatever gains there might be, it's not translating into more wealth for a lot of families. So that's why we think this demographic approach is very interesting.
Now, I would just add one thing, though. It's not just being white; if you're white without a college degree, what we've called the white working class, you're also really struggling. So it's not just about race. It's about class, too. We did find—Bill and team, that the white working classes had a 13% population decline since 1992, an 18% decline in their income, and a 23% decline in their wealth. So their wallets are shrinking faster than their numbers.
So when we talk about demographic drivers, it's not just race. It's not just age. It's not just education. You know, these things all interact with one another. And you have to look at that, too.
Briggs: I find it very interesting, but I'm going to play devil's advocate as I sit here as an African American, as a Hispanic, listening to all this, and you've been doing great research for five years. I'm sure you're looking at five years ahead. I have to ask, what is your work doing? Are you just going to keep talking about wealth and the balance sheet for five more years? I have a black male son who just graduated from college. But I listen and I watch this research. Are you going to look in the five years and do other research that kind of aids, gives ideas? Maybe there are others out there that can help you with your work.
Boshara: I actually think that ideas have consequences. I think that our work has already had an impact. Not the impact that we would like to have, but we already have. So we've advised a lot of philanthropic organizations, a lot of community organizations, financial institutions about our research and what we're finding. And it's actually changed the way they think about tackling the problem.
After hearing our research, a foundation might put more money towards younger Americans, might do more about student loans than they were doing already, might redouble their efforts on closing the racial wealth gap. So we're convinced that our research and our ideas have already impacted the direction of philanthropy, and some policymakers and some community groups.
Now having said that, I wish it had more impact. I do hope that our work has more policy impact going forward, and we certainly have had many opportunities through the White House, through Congressional testimony, to share our work.
But we're not sure yet that it's changed policy as much as we think the numbers merit. These disparities are very real, very powerful. They're hurting people's lives. They're hurting economic growth. And so we really hope that our work does have more policy impact going forward.
Briggs: I like that you're talking to non-profits and getting other people out there. And those are currently followers of the Center's research, as well as academia, I am sure. But who else would you like to draw in and have recognize what you are doing?
Boshara: I certainly would, of course, like to see more policymakers interested in this work. Even though we don't tell them what to do, we believe that our research has relevance for how public policy could be made. So we would like to have more of those folks paying attention to our work, beyond the folks that have been paying attention already.
I'd like to believe that corporate America, employers, could be a new audience for us. The few times that I've spoken to corporate audiences, they tend to be the most shocked at what they're hearing.
Non-profits, philanthropy, some policymakers, they're kind of aware that wealth inequality is a problem. But employers, I feel like that's a sector where we really could be doing more, and the impact that they have on people's lives through the—you know …
Briggs: It's huge.
Boshara: Yeah, it's huge. And there's, there's an emerging trend towards what's called employee financial wellness. I think our research about who's struggling and what they need could really help these employee financial wellness programs be better.
Briggs: Where would you like to see the Center doing more work or research?
Boshara: I would love to be able to study gender. I think it's also a disparity between men and women that needs to be addressed. But the data don't allow us to do that at the moment. So we are working with the Board of Governors, and the research team there, on coming up with better measures of gender wealth inequality. So I hope that that work continues.
As I mentioned already, I think the liquidity is really critical. We have to prevent more families from spiraling downward, but also give more springboards for those who want to, and are ready, to move forward. So figuring out what that number is is important. And then I think just stepping back a little bit. It's, kind of, what's the future of building wealth? Like if you peek over the horizon.
We're in a moment now, an economy, a world, where it's really hard to generate enough earnings from your work, from your job, to build sufficient savings and wealth and security. And so labor market income has been flat or declining for about 40 years. Technologies have displaced a lot of people, lowered their wages. Globalization, the same thing. The safety net, public safety net, isn't as strong as it used to be. For all these reasons, it's harder for people to work hard and save enough to build wealth for a home, for a college education, for retirement, to pass on something for their kids.
I think what we have to think really hard about is, what could be other sources of earnings and wealth for struggling families? That’s the world that we're in. And I think there's a lot of ideas out there, but we haven't really pulled them all together. I think there's assets out there that haven't been monetized and turned into some kind of a dividend for families and communities. So I think there's a real future in that. I'm very interested in that question, and I'm eager to explore that.
We've laid a really good foundation about educational, racial and generational disparities. We understand that much better.
What does that mean for how we move forward, though, right? So I think part of what we might be doing going forward is moving from, say, just the descriptive to the normative. Under what conditions does college actually lead to wealth? Under what conditions does home ownership actually lead to wealth? Because you have an asset, it doesn't necessarily mean that you're going to build wealth from that asset. That was the old assumption.
Boshara: But as I mentioned earlier, how you finance an asset is just as important as the asset itself. So we have to think really hard about how the assets and the debt side work together, and ultimately, does it lead to more wealth? I think we would like to do more work about, OK, we've studied college, but under what conditions does college make sense from a balance sheet perspective? The same with homeownership. So I can see that being a part of the future of our work, too.
Briggs: Are there any final words to listeners on why the information and research coming out of the Center is so important, or anything else you would like to share?
Boshara: Yeah, just kind of stepping back a little bit, you know, we're in a capitalist society. Nobody wants to change that. But in order to function in that, you need capital. Right? And not enough Americans have enough capital to move their lives forward. That's what inequality is. Too many folks don't have enough of a stake to have security and opportunity.
And having capital isn't just critical for their financial well-being, it's important for our democracy. Capitalism and our democracy have kind of gone hand-in-hand from the very beginning. To participate in democracy, you had to have capital.
Now we did expand ownership a lot throughout our history. It tends to go in waves. We had a lot of expansion in the 20th century, but in the last 40 years especially, we've retreated. So we have a growing economy, but we don't have growing wealth.
So think about this, the bottom 80% of the population, you're talking about 4 out of 5 Americans, they only own 12% of the nation's wealth. And the bottom 40%, 4 out of 10 Americans, owns less than 1[%].
Matuschka, we can do better.
Briggs: Thank you so much, Ray. I appreciate having you here. Thanks for sharing what you've done, the research that you and your team have done. And we truly look forward to what you have ahead for the next five years and plus.
Boshara: Thank you.
Briggs: For more on the Center and Ray Boshara's team, go to stlouisfed.org, then click on Community Development, followed by Center for Household Financial Stability. To listen to more of our podcasts, go to stlouisfed.org/timelytopics.