Is consumer debt holding back the economy?
Quite a few economists have argued that high levels of household debt are weighing down the U.S. economy. The reason the recovery has been so torpid, the theory goes, is that households are taking a long time to “deleverage.” Consumers aren’t spending because they’re still cautiously winding down their debts. As a counterpoint to this thesis, however, here’s James Surowiecki with a flurry of stats:
Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 percent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near 10 percent and wages barely rising, that’s to be expected.
More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: In 2010, it accounted for more than 70 percent of GDP, close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five percent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.
Now, granted, consumer spending is still way down from the bubble years. But Surowiecki argues that Occam’s razor suffices here: Americans saw some $8 trillion in housing wealth evaporate after the housing market crashed. Even if consumers had no debt at all, they still have less wealth, and we could expect a drop-off in consumption of about $400 billion to $560 billion compared with 2007. (Here’s an earlier discussion of the “wealth effect” in housing.) And incomes haven’t been rising quickly enough to offset this loss.
If Surowiecki’s right, then it means policies to ratchet down household debt — like the White House’s plan to help homeowners refinance their mortgages at low rates — may not do all that much to boost consumption. Americans are already spending about as much as they can, even with their current debt loads. Something else needs to help consumers close the gap. “This time around,” Surowiecki argues, “business, export markets, and, especially, the government need to do what consumers can’t.”