The Myth That Consumers are Drowning in Debt

In my last blog, I showed that average credit card debt was much less than the ballyhooed number of $9,300 per household. Many researchers (Elizabeth Warren, Economic Policy Institute, and Center for American Progress to name a few) cite the growth of debt in relation to disposable income -- rising from 74 percent of income in 1979 to 132 percent in 2005 -- as proof that consumer debt has reached unsustainable levels.

While it this sounds like a scary number, there are three reasons why it is not.

First, when comparing debt to incomes, averages are used. Since wealth and debt are very unequally distributed, the differences between average and median are very large in this area. Of those with debt in 2004, the average level was $103,000 while the median was half that level at $55,000. But 24 percent of households had no debt of any kind in 2004. When this group is included, the average debt of all households was $79,000 and the median was $22,000.

That's right, according to the best data source that we have on wealth and debt (the Survey of Consumer Finances), the median level of debt including mortgages of all households was just $22,000. This means that the ratio of median debt to median income was about 50% and not the 130 percent cited.

Second, virtually the entire rise in indebtedness was due to mortgage debt (which rose from 46 to 96 percent of the income in the gross figures). This is particularly true in the last 15 years when mortgage debt rose faster than overall debt. Mortgage debt is not considered as frightening as other forms of debt because it is backed with asset, and the alternative to not having a mortgage is paying rent.

Third, debt should really be compared with assets and not income. The accompanying figure tracks the evolution of median debt, net worth, and total assets from 1989 through 2004. Even though debt at the median grew by 150 percent, median net worth (assets minus debts) was 35 percent higher because asset values grew by a greater amount.

Are there some people who have been crushed by their debt? Sure. But the key question is how many. In the past 15 years, "financial innovations" have made high-cost credit more available to high-risk borrowers. This guarantees that a larger number of people will have to declare bankruptcies. But the broader measures of debt problems -- payments out of income, share of households with debt payments over 40 percent of income, and share of households with at least one payment over 60 days late -- are only up one to three percentage points since 1989.

The 2004 wealth survey also found that 11 percent of fifty year-olds had ever declared for bankruptcy protection n their lifetime. So, it would appear that, like many other issues, the drowning in debt story reflects the conditions of the bottom 20 percent of the population and not the population as a whole.

Comments

[UtahLiberal435]

Another much ignored parameter is age, and the decades during which a person's career took place. The current 'Korean War era' American retirees lived during the most prosperous decades that any organism has ever seen on this planet (and perhaps ever will).

Not only did they enjoy low cost of living, rapidly increasing technology, a reasonable world population level, a relatively clean environment, and a secure job market, they also had generous social security and retirement benefits thanks to Roosevelt's New Deal.

Ironically, many of these same people are now 'rock-ribbed' conservatives who deride social programs and somehow think they would have made it in a predatory capitalist sink-or-swim environment. They think they pulled themselves up by their bootstraps, made it through sheer hard work. You hear it all the time. Many now have little or no debt, and huge retirement/investment income accounts (at least until all the medical bills hit 'em).

Many 'affluent' younger people nowdays are, in fact, subsidized by their rich parents (cars, house payments, college tuition, vacations, loan co-signing). Hence their outward prosperity is often an illusion, and the only retirement security (much less job security) they might have comes from a potential inheritance that may or may not be destroyed by age-related medical bills.

I suspect that many aging economists are not immune from this KW delusion mechanism. After all, economics is not a true science, it's more like a bunch of simplistic, hodgepodge philosophies.

[mrcontinental]

We now see that not only does the top 1% of the nation control 70.6% of all of the private wealth in the nation, but it also inures 24.8% of all of the individual income in the nation and that, indeed, the total income of the bottom 50% of the economic strata of the nation has fallen to 12.% of the nation"s total annual income.

A recent Zogby Poll pointed out tangentially that the only reason why the bottom 50% of the economic population still constitutes 25% of the consumption, despite the fact they receive only 12.8% of the national income, is one of the miracles of Bushonomics " i.e., continuous expansion and negative debt-financed consumption, that is, the ability to continuously borrow more money through a Fed-inspired, cheap and easy money policy, and through expansion in financial products that have, as we"ve seen under Bushonomics II.

This has allowed citizens to borrow all of the equity and then some from their homes, for instance, which they have been allowed to use as checkbooks or ATMs. Indeed, the bottom 50% of the population has done this.

By 2006, for instance, 14% of all consumption that was being generated from the bottom 50% of the economic class of the nation was coming from citizens using their homes like checkbooks

How can this strength be maintained under a regime where real wages " i.e., wages net of inflation " have actually fallen?

Nevertheless we see in the consumer credit statistics an average increase of $10 billion a month. And this has happened every single month under this regime.

No, and it"s not fudging the numbers. The regime through Fed manipulation has been successful in keeping interest rates extremely low, unnaturally low versus demand for money. This has reduced the cost of carrying debt.


Taken from www.almartinraw.com

[mrcontinental]

Also the regime has adopted a twofold policy towards debt and bankruptcy. It has changed the laws, as we"ve written about in the past, as in 2005, making bankruptcy more difficult, but at the same time it encouraged business and industry to be more flexible in debt extension -- in so-called work-out programs.

Now we see a record percentage of the bottom 50% of the economic population in a work-out deal -- one out of every 6 credit card holders, in fact, is in a payment work-out program. In other words, one out of every 6 credit card holders within the bottom 50% of the economic population has at least one credit card account that they are on a work-out situation with.

[dadw5boys]

THIS IS BULL!
THE TRUE MIDDLE INCOME IS $280,000 +!
So saying the people making less than $10.00 an hour are not over their head in debt that is silly at least.

[pigsatthetrough]

So if I get this straight, as long as we count in the rich and those that don't owe any money within that circle, hardly anyone is drowning. Something like those who have paid off their mortagages and living the life of luxury while swimming in their glorious pools don't need lifejackets, but the others should know better. Following right alon, of course the 21 percent who don't need help, why they must be suporting the consumer economy, while the others drowning must be bringing it down. Now I should run right next store to the home with the foreclosure sign and let them know all is well.

[rebus40]

It always tickles me how apologist, explainers, and republicans always use percentages instead of hard numbers. The author seems to be ignoring that in an economic pyramid, the BASE has the much greater population. So while she makes much of the fact that SHE is talking about the BOTTOM 20% (quintile), what is the population of that quintile? The top 2% is only (what?) 300,000 people? ....the bottom is how many millions?

[kasa5400]

Bottom 20% in income is 22,840,000 households.

The top 1 1/2% ($250,000 and up) is 1,699,000 households.

The top 20% (80th percentile and up) starts at $87,500 in income and has 22,865,000 households. In that group, 48.96% of the fifth quintile (top 20%) households make between $100,000 - 149,999.

Average household has 2.59/2.51 people. Do the math with average size times households.

[Sundialsvc4]

Personally, Stephen, I suspect that consumers are not quite-so-much "drowning in DEBT" as "drowning in FEES." Many of which they simply do not deserve to pay.

It used to be that the banking and securities industries were "stuffily conservative." They made their money a very small percentage-point at a time, not by TAKING risks but by AVOIDING them. But somewhere in the 1980's they switched gears: now, money was to be made by taking reckless risks with FDIC-insured money. As the bitter-truth began to "prove otherwise," they started covering-up for reality by increasing fees and penalties. (You can very-plainly read this pattern in the pages of any annual-report of any Federally-insured bank from the past five years or so.)

So what is happening now? The music-box has stopped, and in this game of "musical chairs" a great many bankers are caught short.

They're making-it-up by pretending that your credit-card payment arrived "just one day late." They're processing all of your checks before they process any of your deposits. Fees and penalties, levied $35 or $50 at a time, add up to billions.

But... it's not enough. The music-box has STILL stopped, and "the money simply isn't there."

There is ... hell to pay now.

[kellygrrrl]

"wealth and debt are very unequally distributed"

isn't that part of the problem?

[iheartsmartpeople]

so only people who are beyond the point of help are considered drowning in debt? i think there is too much in between to just put out a blanket statement saying debt is not as big of a problem as it's being made out to be. also, comparing assets on paper with debt levels are unfortunately not really a good measure of how much someone is having difficulty with their debt - cash is all that matters.

[kms34786]

So we should feel good about the 6 million or so people that are absolutely destitute. We don't need further proof of the growing gap between rich and poor, just look around.

I also can't fathom that this piece is supposed to somehow make us feel better.

[kellygrrrl]

sorta' feels like Oprah showing us the $20,000 worth of shoes she received as a Thank You gift