Neither a Borrower

Commenting on a David Brooks column that is three days old? Is this a blog or a broadsheet?

Seriously, though, I am badly divided on the worth of the piece. On the one hand, I viscerally agree with it. I myself have a horror of debt. I was raised by a fanatically frugal mother who would brag about a shirt she bought at a flee market for 10 cents that was still wearable 20 years later, and while I am considerably looser about spending than she is I’m still at one end of the spectrum of my peers in terms of overall consumer lifestyle.

On the other hand, though, the column is just bad history. Debt has been an American way of life from the beginning. Alexander Hamilton wrote of the virtues of the national debt, and at the level of the individual consumer Americans have long been innovators in the development of new ways to enjoy now what you will pay for later. An entire political movement – the Populist Party – was founded on a policy platform of debasing the currency to relieve debtor farmers. So while it’s all well and good to look back at the Depression-era babies and sing a few bars of “Those were the days,” if we’re honest with ourselves we have to admit that deferred gratification has never been the American creed (and does nobody recall the decade that preceded the Depression?). We have a tendency to measure our forebears’ frugality against our own spendthrift ways, but globally disposible income, and hence consumption, is much higher than it has ever been historically, and so the real question is whether Americans have historically been comfortable with the idea of buying in installments, etc. And, in fact, we have – we have, historically, viewed debt as a means to social mobility, and a sign of our democratic habits that in America, ordinary people, and not only gentlemen, can ruin themselves with debt.

On yet a third hand, though, there’s no question that America has a problem with indebtedness; the legitimate debate is over how serious it is and how to address it. The right way to answer that debate is to ask questions about the economic causes and consequences, and the right way to talk about changing the situation if it needs changing is to talk not so much in terms of values as in terms of incentives.

In a nutshell, here’s what’s happened over the past 20 years:

The recovery from the last credit crunch (a slump that began with the 1987 stock-market crash, grew much bigger with the S&L crisis, and ended with the Bush Sr.-era recession) ballooned government debt from already high levels, trashed the dollar, and saw individuals and corporations rebuild their balance sheets (i.e., save more and spend less).

From 1994 to the end of the decade, we saw a virtuous cycle take hold, where government indebtedness dropped, asset prices (both real and financial) rose, the currency strengthened, the economy grew, and inflation remained low. We even had record-low unemployment and rising wages at all levels. In this environment, it made sense for both consumers and corporations to reduce savings and borrow more heavily. Corporations in particular went heavily into debt on speculative ventures.

The early 2000s saw the collapse of the internet-fueled stock-market bubble and a corporate credit crunch. In response, the Fed reduced interest rates dramatically, setting off a boom in consumer borrowing against rapidly inflating house prices. As well, changes in taxes and spending opened a new structural government deficit. While corporations spend the 2000s getting their balance sheets in order, consumers and the government spent the 2000s destroying their balance sheets – and borrowing overwhelmingly from abroad (unlike, say, Japan, whose government is technically bankrupt but whose society is a substantial net creditor – the Japanese people save vastly more than the Japanese government can borrow from them). Now the bill is coming due on this indebtedness in the form of the mortgage crisis, the weak dollar, and rising inflation.

All through this period, meanwhile, through periods of wage stagnation and wage increases, rising unemployment and rising employment, economic inequality was growing. That’s a vital point to keep in mind when we think about how to tackle our structural debt problems. First, because it’s very easy to describe consumer indebtedness in particular in moral terms – people should just live within their means! – if you forget that their means is taking them less and less far even as the winners of our economy get further and further ahead. Social equality is a real value in America, and like it or not, a certain consumer lifestyle is a lot of what social equality means in America – and, if we are honest with ourselves, has meant for a long time. The other, more important reason to keep inequality in mind is because the simplest ways to tackle indebtedness will (in the short-term, at least) exacerbate the social consequences of income inequality. Those simple things would include: raise interest rates; toughen bankruptcy laws; allow the anticipated wave of foreclosures to take place without interference; cut government spending, particularly consumption spending like defense and entitlements; and so forth. This is a real “eat your spinach” agenda that would, rightly, be wildly unpopular, as it would increase poverty and restore the national balance sheet on the backs of those who are most vulnerable.

Ah, but how else is the national balance sheet to be restored?

As I said, I think the right place to start is in terms of incentives. This country’s tax and entitlement system disproportionately penalizes earning and rewards consumption, relative to other countries. We have high payroll taxes and high corporate income taxes, and no broad-based consumption tax such as a value-added tax. If I had my druthers, I’d eliminate the payroll tax entirely, slash or eliminate the corporate income tax, slash or eliminate the mortgage interest deduction, and institute a VAT to replace the lost revenue. I’d also think about creating some kind of frankly paternalistic system to give every citizen a greater stake in saving and investing for the future, whether it’s government matching of certain long-term savings accounts or what-have-you, and balance that new social “savings” with reductions in entitlement spending (ideally by raising the retirement age, which needs to happen anyhow).

I do think it would be a good idea to crack down on predatory lending and so forth. But advocates of doing this should recognize that this will not suddenly make lending available at better terms; it will mean less lending to a given class of people. If we’re talking about college students, that’s probably a good thing. If we’re talking about laid-off workers, maybe not. Similarly, I have friends who are involved in establishing nonprofit credit unions to provide small loans to people who can’t get credit at a traditional bank, and shouldn’t have to rely on (legal or illegal) loansharking to get access to capital. These kinds of institutions can also do a lot in terms of financial education. But if you have a system that rewards consumption and penalizes savings, you’re always going to be swimming upstream, and savers are always going to wonder if, in fact, they’re suckers. And if we’re going to focus on building equity, we’re going to have to give up on some other goals that were previously high on our lists but that could only be achieved by encouraging indebtedness (for example, raising homeownership rates among the poor and among racial minorities).