Zywicki on Debt
By David Henderson
The headlines are alarming. The New York Times panicked that Americans are “Running in Debt” and just a few years later warned that Americans were “Borrowing Trouble.” Business Week asked, “Is the Country Swamped with Debt?” and U.S. News and World Report worried that “Never Have So Many Owed So Much.” Harper’s even expressed fear that “Debt Threatens Democracy.”
A labor leader bemoaned the improvidence of America’s consumers: “Has not the middle class its poverty? Very few among them are saving money. Many of them are in debt; and all they can earn for years, is, in many cases, mortgaged to pay such debt.”
An academic report concluded that consumers’ promiscuous borrowing has “‘lured thousands to ruin’ encouraging people to buy what they could not pay for and making debt ‘the curse of countless families.'” And not merely the poor and improvident were lured into ruin, but upstanding middle-class families as well, as they engaged in a heated rivalry of conspicuous consumption with their neighbors.
An indictment of our times? Not exactly. The first headline from The New York Times, as well as the labor leader’s concerns, were both from 1873, and the latter Times headline from 1877. The academic report appeared in 1899 and criticized the availability of installment credit, or the practice of buying consumer goods “on time.” Thorstein Veblen voiced his concerns about “conspicuous consumption” and Americans’ willingness to go into hock to fund it in 1899. The Business Week and U.S. News and World Report headlines ran in 1959. And Harper’s fretted that “Debt Threatens Democracy” in 1940.
This is from Todd Zywicki, “America’s Debt Paranoia,” The Freeman, September 23, 2009. The whole article is excellent. Somehow I missed it at the time.
If you ask economists to explain this state of affairs, they are likely to finger credit-card debt as a main culprit. Long before the Great Recession, many say, Americans got themselves into credit trouble. According to an analysis of Federal Reserve and TransUnion data by the personal-finance site ValuePenguin, credit-card debt stood at about $5,700 per household in 2015. Of course, this figure factors in all the households with a balance of zero. About 38 percent of households carried some debt, according to the analysis, and among those, the average was more than $15,000. In recent years, while the number of people holding credit-card debt has been decreasing, the average debt for those households carrying a balance has been on the rise.
Part of the reason credit began to surge in the ’80s and ’90s is that it was available in a way it had never been available to previous generations. William R. Emmons, an assistant vice president and economist for the Federal Reserve Bank of St. Louis, traces the surge to a 1978 Supreme Court decision, Marquette National Bank of Minneapolis v. First of Omaha Service Corp. The Court ruled that state usury laws, which put limits on credit-card interest, did not apply to nationally chartered banks doing business in those states. That effectively let big national banks issue credit cards everywhere at whatever interest rates they wanted to charge, and it gave the banks a huge incentive to target vulnerable consumers just the way, Emmons believes, vulnerable homeowners were targeted by subprime-mortgage lenders years later. By the mid-’80s, credit debt in America was already soaring. What followed was the so-called Great Moderation, a generation-long period during which recessions were rare and mild, and the risks of carrying all that debt seemed low.
Todd takes issue with that. It’s true that getting rid of price controls on interest rates (usury laws) made it easier to get into debt. Thank goodness for that court decision. When I was 22 and had just moved from Canada to “the States,” I applied to Visa for a $250-limit credit card, I was turned down. I didn’t know the reason at the time, but now I do: California’s usury ceiling combined with my completely absent credit history. But, as Todd points out, credit cards caused people to alter the form of debt. There was not a huge increase in debt overall. Zywicki writes:
Consumer debt exploded in the 1940s and 1950s during the postwar migration to the suburbs as consumers used credit to buy new cars and to fill their new homes with new furniture and appliances. The ratio of consumer credit to household assets rose from about 1 percent to over 3 percent from 1945 to 1960, where it has hovered ever since.
Russ Roberts interviewed Todd Zywicki about this in 2009 on Econtalk.