The Indebted Hand-to-Mouth
Posted: 4 Dec 2018
Date Written: November 8, 2018
“Indebted hand-to-mouth” households have no net liquid assets (cash, checking, savings accounts etc.) and are indebted in illiquid wealth (negative net value of illiquid wealth defined as a negative net mortgage value that is not offset by positive illiquid assets such as private retirement accounts). I document the share of such households in the United States, their demographic characteristics, their portfolio composition, and the persistence of indebted hand-to-mouth status over their life cycle. In the literature, they assimilate into the poor hand-to-mouth (P-HtM) households that hold neither net liquid nor net illiquid assets. However, I argue that the age profile of indebted poor hand-to-mouth (IP-HtM) households by demographic characteristics demonstrates almost the same pattern as wealthy hand-to-mouth (W-HtM) households that do not hold liquid assets but own sizable amounts of illiquid wealth. Among all HtMs, the IP-HtM group shows the highest marginal propensity to consume out of transitory income changes for different consumption items (durable, nondurable, food, nonfood, social sector, utilities, and health care) in the Panel Study of Income Dynamics (PSID) data. This implies that the stimulatory government’s policies are the most effective for the IP-HtMs. This research can help governments design and execute their fiscal policies targeting the highest stimulatory effect during recessions.
Keywords: Consumption, Hand-to-Mouth, Indebted, Liquidity, Household Portfolio, Income Distribution, Marginal Propensity to Consume
JEL Classification: D12, D31, E21, E62, E70, H31
Suggested Citation: Suggested Citation