Five Thirty-Eight has a nice post on the increase in debt per household and it’s effect on the economy. The data is interesting to me in part because it corrects my perceptions about credit card debt. The image below is from Nate Silver’s post.
I thought it might be useful to post a Wikipedia graphs on the change in real median household income as a comparison to the change in debt.
If I read this properly, median household income went up about $5,000 from 1989 to 2005. The 5oth percentile went from a $40,000 in income per year in 1990 to somewhere under 50,000 in 2003. Whereas debt per family doubled in the same time period. Only the top 5% of earners income rose close to per dollar to the increase in average debt.
My understanding of what this means is that the root cause of this crisis is simply that people were given and took, more debt for themselves than they could manage. Whose to blame? I think the answer might possibly be pretty close to everyone. Financial institutions for bad lending practices, the government for poor oversight, both institutional sets for not generating more real income growth and family’s and businesses for taking on excessive debt they could not manage.
How do we restructure the average family’s debt/income ratio? Well, one way is for the state to assume some of this debt either from the consumer side or the lending side, and thus lessen the load on individuals. The government then shoulders the debt burden until in the long run, economic growth both pays down the debt and raises family incomes, thus improving the debt to income ratio of both the state and the average family.
I’m not an economist by trade, but I think this is the general outline of the situation we are looking at. If it is not, I am certainly amenable to having a better understanding.
March 27, 2009 at 7:46 am |
Blame may not fall so squarely on the shoulders of ‘everyone’ as you suggest. The availability of easy credit drives up prices, requiring more debt to maintain the same lifestyle. This is certainly true in the mortgage market, where it required a much larger mortgage to buy the same amount of house in 2005 than in 1995. Why not follow the same logic for consumer goods?
Of course, there’s no reason to believe that a consumer debt jubilee wouldn’t just drive prices higher. If my student loans were suddenly forgiven, I’d buy a house sooner, and at a higher price, than I can currently afford. Perhaps that’s a good thing, but the moral hazard also applies: will Americans be more likely to take on unsustainable debt in the future if they’re prior debts are repaid at low cost to themselves?
But, yeah: I want a house. Forgive my (and especially my wife’s) debt please.
March 27, 2009 at 7:47 am |
ack! they’re = their