What personal financial stress can do for the economy

Financial stress

Natalia Ovcharenko /Pixabay

Financial stress

Natalia Ovcharenko /Pixabay

Americans are pretty stressed. In the American Psychological Association’s 2022 Stress in America Survey, respondents cited violence and crime and the current racial and political climate as significant sources of stress. The biggest stressor of all, however, has been economic: 83% of people said they were stressed about inflation.

Which means we’ll just be more stressed in the coming year. Why? Because we are almost certainly headed for a recession. The Conference Board, a nonprofit business research group, estimates the probability at 99% over the next 12 months. Models from the National Bureau of Economic Research say there’s a 67 percent chance. Bankrate experts say there is a 64% chance. The Wall Street Journal he puts it at 61 percent. Clearly the numbers are everywhere. But however you dissect the data, whether we go in sooner or later, hard or soft, it just looks like we’re going in.

Which means a lot more stress, for a lot more people. And stress is bad news for the economy. More than a quarter of adults told the APA that when they’re stressed they can’t do anything. At all. This type of paralysis, at home, at work and in managing one’s finances, has profound implications for all of us.

Stress and the economy

A new working paper, “The Economics of Financial Stress,” examines what stress can do to a family’s financial situation. Spoiler alert: not good. And it has profound implications for a nation that is likely to become extremely stressed over the next year.

The paper is by economists Dmitriy Sergeyev of Bocconi University in Milan, Italy, and Chen Lian and Yuriy Gorodnichenko of the University of California, Berkeley. They surveyed a group of 10,000 employed early American workers, who are representative of the population in terms of gender, age, region, total household income, and education. They asked them a series of questions about their current financial situation and asked them to speculate on how they would behave if certain financial conditions prevailed in their life. And they found that respondents fell into two rough groups: financial sophisticates, who understand that financial stress can impact future earnings and are therefore more likely to protect themselves by saving; and the naïve financiers, who do not internalize the threat of financial stress and continue to spend and save (if they save) normally.

Most households, the researchers found, are naive about three-quarters of respondents. Given the levels of financial literacy in the US we discussed earlier, this will come as no surprise to readers. And there were a few other findings that might resonate. For example, the idea that the more indebted a family is, the more stressed they will be, and vice versa. Having children in the family and being married are associated with more stress. Also the finding that our stress levels fluctuate with our checking accounts: The share of Americans who feel financially stressed rises steadily throughout the month, as the money available falls, then declines sharply by 53% at the start of the month. next month when the salaries arrive.

Eraser, meet the road

What may surprise many is how the sophisticated and naïve respond to financial stress. Sophisticated first: Having saved a lot of money in the past, in anticipation of some kind of adverse financial event, you might expect these squirrely saver types to hunker down and start throwing their pillow down. Instead, they double down and save even more, “despite the direct negative effect of financial stress on earnings,” the economists write.

Naifs, meanwhile and remember, most Americans “have no reason to save extra,” say the researchers. They have lower net savings than stress-free households, due to the direct negative effect of financial stress on earnings. And even if they understand that “less savings translate into more future financial stress, they fail to understand that financial stress incurs negative economic consequences in the future.” So even with the clouds of financial stress looming on the horizon, they don’t save.

Instead, naifs often go the other way.

“To alleviate financial stress, the household may spend on items they would not purchase if they weren’t financially stressed,” say the researchers, noting that “impulsive spending increases with the qualitative measure of financial stress.”

In other words, the more stressed a family is, the more it tends to spend to induce immediate comfort, rather than saving to ensure a certain level of comfort in the future.

Unless the family is financially sophisticated, then, financial stress can drain its bank accounts, inducing even more stress and sending the family into a downward spiral that can end up in a poverty trap. And it’s not just the family’s bottom line that can be compromised. Financial stress can affect all aspects of a person’s life.

“Financial stress drains valuable time and knowledge from productive work,” the report notes. “Because financial stress affects their performance, a stressed worker may have a lower chance of being promoted to a higher-paying job and a greater chance of being demoted to a lower-paying job. Financial stress can also lead to economic decisions worse”.

Impact on the economy

The knock-on effect and implications for an economy on the brink of recession are clear. Most Americans are already stressed out. The financial shock of a recession will likely put many more people under stress and raise the stress levels of those already suffering. Given that more than a quarter of Americans say they’re so stressed out they can barely function right now, what could that mean for the economy when we’re really under fire?

Sergeyev, Lian and Gorodnichenko say financial stress can mean lower earnings, an impact on labor supply and reduced productivity. They also note that financial stress tends to hit the most vulnerable, including the elderly, women and the least educated, and therefore the most financially insecure.

What can we do about it? ‘Policies such as default choices that encourage saving and promote financial literacy could be powerful antidotes to the negative consequences of financial stress,’ say the researchers. And an examination of the economic cycle is a must. “There may be more room for targeted counter-cyclical policies to ensure that recessions don’t push vulnerable households into poverty traps.”

But that’s for the next cycle, because a recession is coming, and very soon. Inevitably, as during the Covid 19 emergency, all eyes will be on the government. And there will no doubt be a very heated debate about what government should do. Sergeyev, Lian and Gorodnichenko appear to be on the Keynesian side of the fence here: “The positive wealth effect on labor supply for stressed households is a new transmission mechanism for fiscal policy,” they say. “Government debt-financed stimulus checks increase private assets and relieve financial stress. This increases effective labor supply and increases aggregate output.”

Are we talking about helicopter money here? Like the $5 trillion distributed during Covid? This is stress shopping!

#personal #financial #stress #economy
Image Source : www.npr.org

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