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 percent 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 50-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.