Recent debates surrounding President Biden’s plan for public spending on infrastructure have refocused attention on public debt, but the sleepy and dangerous debt giant is really private debt.
American households were in debt before the COVID-19 crisis, and now they are inundated with it. Household debt now stands at $ 17.5 trillion, up 320% from 1950 income. The “debt service ratio,” which estimates payments made by consumers on their debt relative to their income, is about 30% higher today than it was then. The 1950s and 1960s, the two most dynamic growth decades of the post-WWII era.
These levels have become so high that they are suffocating many households and stifling economic growth. In my household debt surveys, it was not uncommon to find families with all of the following: mortgage debt equal to or greater than the value of their home; student loans still in arrears for parents who are now afflicted with student loans for their children; and large debts linked to unforeseen health expenses. Highly indebted families are much less able to afford their own children’s college, renovate their homes, buy household appliances, or start new businesses – the very things that power an economy.
The heavy burden of this private sector debt has also been an underlying problem in many of our recent and worst social and economic problems. The boom in household mortgage debt sparked the 2008 global economic crisis. The weak GDP growth that followed was largely due to the residual burden of this crisis debt, and some commentators believe it contributed to stoking the discontent that led to the election of Donald Trump in 2016. As minority communities disproportionately felt the burden of private debt, this also exacerbated racism. injustice.
Rising debt has been a key element in rising inequality, which has sharply worsened in the last decade. Gini coefficient from 0.40 in 1980 to 0.48 in 2019 (on a range of 0 to 1). Middle to low income individuals bore the disproportionate burden of rapidly growing debt, creating a debilitating cycle that increased inequality.
Data from the Federal Reserve’s Survey of Consumer Finances indicates the trends. From 1989 to 2019, the debt of U.S. households with net worth between the 1 percentile and 59.9 percent increased by 92 percent in proportion to their income. In contrast, households in the top 10 percentile saw their debt-to-income increase by only 18 percent.
For those bottom 59.9%, their net financial worth (financial assets minus debt) also declined, from 43% to 24% of their income. For the top 10%, it’s a completely different story – or, more precisely, almost the same story but told backwards. While their debt-to-equity ratio only increased by 18%, their net financial worth increased double from 158% to 335% of their income. The contrast could hardly be more striking.
To reduce inequality, improve the lives of Americans, and energize the economy, we need to reduce the debt burden of households and businesses against their income.
Thinking creatively, we could introduce a program that allows people with student loans to get debt relief in return for volunteer community service. We could introduce regulations to make it easier for banks to provide mortgage relief for loans that are underwater or past due due to the COVID-19 pandemic. We could introduce health care debt relief programs for surprise medical bills or unexpected but critical health care needs. We could streamline household bankruptcy laws.
Debt relief initiatives are not pipe dreams of soft hearts, but a key part of a well-functioning economy.
The good news is that debt relief would bring economic renewal: households would be financially stronger, and governments, businesses and financial institutions would be better off because those households would be stronger.
Since debt relief would bring economic renewal to households, it would benefit us all.
Written by Richard Vague. The opinions expressed in this book are those of the author and do not reflect the official policy or position of the Commonwealth of Pennsylvania.
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