The folks who write Credit Slips are among those who have long wondered what the “exit strategy” was for an economy that was predictably on a wobbly course, with about 70% of GDP driven by household spending when many of those households were on kind of shaky ground. That’s obviously not a sustainable long term strategy for economic growth when, on one hand, the income side of the ledger for a large share of those households was sputtering or stalling, while demands on the expense side from big ticket, basic items like health care and health care financing, education, and housing were growing. The American household debt burden looks like a more complex problem if you think about the cumulative impact of all of these trends, rather than just thinking “flat screen TV” and stopping there.
In looking at data about these trends, I’ve been struck by the comparisons between the first post-WWII era (roughly the 30-35 years ending in the late 70s – early 80s), and the second one covering the last 30-some years. Since the current crisis seems likely to serve as the end point to the late 20th century economic era, it’s interesting take a Before and After look at the household account trends.
Income growth: Through this last period, the income gains have skewed increasingly not just to the top, but to the very tippy-top. From 1946 – 1976, the average income growth for the “bottom” 90% of households was 92%, compared to 25% for the top 1%. But from 1976 to 2006, the bottom 90% saw only 10% growth, while for the top 1% it was (wait for it --) 239%. (Sources for this and related figures are cited in the appendix to CRL’s comments to the Fed's then-proposed rules defining unfair and deceptive practices for credit cards.) For a really cool visual of this uncool trend, take a look at the graphic in Clive Crook’s 2006 Atlantic article called "The Height of Inequality." And while you’re there, the story’s pretty interesting, too.
Savings: A chart on the "By the Numbers" page on Inequality.org shows that the savings rate roughly doubled from 5% in 1949 to over 11% in 1982. Since 1982, it looks like a downhill ski slope, and the rate was in negative territory by 2006.
Debt: The debt-to-disposable income ratio of American households more than doubled from 60% in 1980 to 133% in 2007. A recent article in the Economist says that household and consumer debt went up from 100% of GDP in 1980 to 173% now.
Sorry I haven't yet collected nice links to specifics on those expense-side demands, except for a recent Washington Post article noting that “college tuition and fees have jumped nearly 440%" since the early 80s, but you get the picture.
Lots of factors went into shaping this picture, not the least of which is just the economic world evolving. But it wasn’t all out of our hands: we made some public policy decisions that helped. (And yes, personal decisions, including collective decisions that made up private sector policy decisions as well. Personal responsibility is appropriate for both home and work.) Now will be a good time to find our way to some better trend lines than these. Yes we can. You betcha. (In the spirit of bi-partisanship.)