According to recent research, the new poor are not actually poor at all. Well, at least not as we know it.

Late last week, influential American think tank The Brookings Institution released a report showing it is not just those from the lower socio-economic strata that live from paycheck-to-paycheck, but many of the middle class as well.

These ‘wealthy hand-to-mouth’ households are identified as those who, despite a high income and despite owning sizeable amounts of assets, hold either very little or no liquid wealth at all. This is because every dollar of their income goes towards fixed expenses such as mortgage payments, car repayments, insurance or retirement plans – assets that, while valuable in the long-term, cannot readily be converted into cash when necessary. 

With little cash to spare towards maintaining a modest cheque account, or contributing to a savings account, these households exist in a precarious balance; no liquid wealth leaves them immensely vulnerable to any external shocks.

This is precisely the painful lesson many households learned the hard way during the global financial crisis, resulting in defaults on mortgages, car repayments and credit card bills due to a lack of cash cushioning.

Wealthy but heavily indebted, cash-poor households have a low average propensity to consume, understandable given the little discretionary income left over from a paycheck. But their marginal propensity to consume is on par with that of low-income households. In other words, they are more likely to spend any extra dollar they earn rather than save it.

This preference to spend eradicates any substantive cash buffer, meaning that any economic shock becomes a major economic shock.

Mitigating the risk these households pose to the greater economy is a core concern of Brookings.

The strong consumption response of ‘wealthy hand-to-mouth’ households in response to transitory income shocks and the macroeconomic implications of this behaviour, is crucial in determining the efficacy of fiscal policy.

One would have thought that the lesson was to have less debt. Not so, according to Brookings. Instead it proposes that targeting expansionary fiscal policy at the ‘wealthy poor’, given their consumption behaviour could be just as effective.

However, justifying a fiscal stimulus on the basis that more public debt usefully helps a middle-class household struggling to pay off a new BMW is a pretty weird suggestion.

The ‘wealthy hand-to-mouth’ lifestyle may not be a new phenomenon, but it is still risky. Failing to borrow prudently can – and does – have severe repercussions and, as Rick Newman points out, ‘that fancy home can suddenly seem more like a noose than a palace’.