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Are We Spending Beyond Our Means?
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10714 |
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Section : |
CURRENT ISSUES
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1 / 1986 |
1,138 Words |
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Richard W. Rahn
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Private and public debt in the United States adds up to a staggering four trillion dollars. From this one could easily get the impression that our society has a propensity to spend far beyond its means. Like a group of "drunken sailors" we simply lack the discipline to control our spending habits.
A closer look at the statistics reveals that the situation is not nearly as bad as it may appear. While our public spending habits most definitely require discipline, our consumer or private spending habits are essentially sound.
The total debt of United States households has increased at a rapid pace during the current upturn. With household debt now exceeding two trillion dollars, the increase has rekindled concerns that households have become financially overextended.
However, the data shows that the ratios of household liabilities to total assets and to total financial assets have remained fairly stable, implying that the net worth of households has risen. Further, the increase in household borrowing in the last two years has not been accompanied by a significant increase in illiquidity.
Except for the growth recovery period between the 1980 and 1982 recessions, growth in consumer debt has accelerated at the start of each business expansion and slowed around the start of each recession. Household borrowing for houses and consumer durables therefore, is likely to rise during economic expansions when employment and income prospects are bright and fall during recessions.
Although the ratio of consumer debt to income continues to scale new highs, it exaggerates the burden of debt on American households for two main reasons.
One is the rising convenience of credit cards which inflates debt levels because the outstanding balance is included as debt even though it may be paid in full every month.
Another factor which tends to place an upward bias on this ratio is the increase in the average maturity of consumer loans. Assuming that households consider monthly payments relative to income as the critical factor in determining how much they will borrow, longer maturities encourage higher levels of debt since they result in lower monthly payments.
Finally, demographic trends also come into play. The life-cycle theory of consumer behavior tells us that younger households tend to borrow heavily to purchase homes and other consumer durables. As the proportion of the population in the 25 to 44-age bracket rose to 30 percent in 1984 from 24 percent in 1970, so did household indebtedness.
In view of these factors, the increase in consumer debt is due largely to the typical rise in the demand for mortgage and consumer credit that comes during a business cycle expansion and the greater availability of such credit that has accompanied financial deregulation.
Moreover, other indicators of consumer spending, such as increased employment and consumer confidence, continue to point in a positive direction. Total employment, as measured by the household
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