Morduch & Schneider, The Financial Diaries

Traders and investors know how potentially devastating high volatility can be for all but the most nimble. In The Financial Diaries: How American Families Cope in a World of Uncertainty (Princeton University Press, 2017), Jonathan Morduch and Rachel Schneider show how income volatility wreaks havoc with a large number of American families.

A team of ten researchers followed 235 households for 12 months in communities in southwest Ohio and northern Kentucky, the San Jose (California) region, eastern Mississippi, and Queens and Brooklyn (New York City). None of these sites was thriving, “but all had opportunities.” To qualify for the study, a household had to have at least one working member. Otherwise, the participants were diverse. None was among the richest or the poorest in their communities.

The book alternates between family stories and economic analysis. In the cases that are highlighted, workers do not have a steady pay check. Instead, their income fluctuates week to week, month to month. For instance, a mechanic who worked on commission repairing long-haul trucks at a service center on an interstate highway did reasonably well in the winter and summer. More things went wrong with trucks during those seasons. During the spring and fall, however, his pay was about halved.

Most families whose income was volatile were able to smooth the ups and downs of their finances, “but only to a point. Then, illiquidity is felt sharply.” Thirty-one percent of the best-off, middle-class households were, in the course of the study year, threatened with (or actually experienced) eviction, the disconnection of utilities or cable, or repossession of an asset. Nearly half of the households overall had at least one bank overdraft.

Although most studies talk about income inequality, income volatility is perhaps even more important. In a 25-year study, beginning in 1984, “volatility increased for the poorest 10 percent of households, and it fell for the richest 10 percent. … [O]ver the past generation, the gap in income volatility between the poorest and the richest grew by more than 400 percent, reinforcing divides based on income and wealth.”

The people profiled in this book are hard workers who just can’t get ahead. They move in and out of poverty. (Nearly one-third of all Americans experienced poverty for two months or more between 2009 and 2011.) They save for short-term needs, deplete their savings to fulfill these needs, then start saving again. They never get to the point of benefiting from the miracle of compound interest.

The portraits the authors paint are depressing. They go a long way toward explaining why the U.S. is seeing “deaths of despair” and Donald Trump is in the White House. Moreover, with increasing automation and a freelance workforce, the problem is only going to get worse. The authors offer some suggestions for improving the situation, but most of them require government, employers, and financial institutions working together “in new and different ways.” In the present environment, that is unlikely.