Mike Konczal gets a lot right in his analysis of why our economy continues to suffer sluggish growth. The expansion of consumer debt has left households over-leveraged, pressured to pay down loans. As he explains, the historic and swift build-up of consumer debt must be understood in the context of financial deregulation and trends in overall household incomes and costs. Considering these two factors helps us identify the policy reforms that might relieve households of debilitating debt and protect them against further indebtedness in the future.
In 2008 and 2012, Demos commissioned national surveys of low- and middle-income households to examine the nature and scope of household indebtedness, with a particular focus on credit card debt. Both surveys reported similar results. About 40 percent of households reported going into credit card debt to pay for basic necessities, defined as housing payments or rent, utilities, insurance, and groceries. Job loss, car repairs, home repairs, and out-of-pocket medical expenses were also among the most commonly cited sources of credit card debt. Forty-seven percent of indebted households cited medical expenses, averaging among them slightly more than $1,600 in credit card debt due to health care costs.
Thus, as Konczal does well to remind us, consumer debt is not simply a matter of personal choice, but rather operates within a system of institutions and rules. For too long income growth has stalled or declined for the majority of Americans, with gains going predominantly to top earners. At the same time, the costs of food, housing, and higher education have risen faster than inflation.
The antiquated, patchwork state of our public safety net—especially unemployment insurance, bankruptcy protections, and public health insurance—ensures that as more Americans fall on hard times, there is less support available to them. Consider our unemployment insurance system, which leaves nearly half of displaced workers ineligible for benefits. Our surveys found that indebted households were much more likely to have experienced a job loss or major illness than households that did not have credit card debt. In other words, some credit card debtors may be spendthrifts, but most are trying to pay for essentials they can’t afford for lack of social insurance against the financial effects of unemployment and ill health.
Bankruptcy reform will only go so far. We need wage growth and a working safety net.
The dramatic increase in the percentage of college students taking out loans and the growing size of their debt are also related to a weakening of public investment. State funding of higher education is down 26 percent since 1990, a major contributor to rising tuition rates, which have more than doubled at state colleges and universities over the same period. Borrowing to pay for college has become the primary way students and families access opportunity—yet another public good that has become privatized and financed through debt.
These trends are important because they show that reforming our bankruptcy system to allow families to recover from burdensome debt will only go so far in providing economic growth and household financial stability. It’s only a matter of time before credit card offers and credit extensions once again become ubiquitous, so strengthening the public safety net and shoring up our investments in state higher education systems will be critical to preventing further debt accumulation among the working and middle classes.
Like a household examining both sides of its ledger—debt and assets—our nation must confront both sides of cash flow: income and outgoing costs. Beyond bankruptcy protections, which will only give relief to those with the heaviest debt loads, we need to focus on increasing disposable household income either through wage growth or by reducing the costs of necessities. Socializing costs through public investment in goods that benefit our society as a whole—childcare and higher education chief among them—and strengthening social insurance are key ways we can shore up households’ cash balances, allowing them to pay down current debt and avoid future indebtedness.