How the Hell Do You Get Out of Debt If You're Not a CEO Raking in Millions?
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Americans are doing everything they can to pay down their debts, but with prices rising and wages stagnating, they just can't dig themselves out of the red.
“Since early 2010 we’ve been seeing a consistent focus on cutting debt as part of an overall strategy to improve family finances and embrace frugal living,” said Scott Spiker, CEO of First Command Financial Services, Inc. According to a monthly survey of consumer attitudes conducted by his firm, "Eight out of 10 respondents said that paying down debt is currently their No. 1 priority.”
They're working hard – and sacrificing – to make that happen. According to the survey of 1,000 middle-class households, more than half or respondents say they're cutting back on everyday expenses, four out of 10 say they're “using all of their extra income” to pay down debt and 15 percent are even taking second jobs or working extra shifts to dig themselves out of the hole.
As the shock of the financial crash took hold, these efforts looked like they were paying off. According to Federal Reserve Data, American households lopped 4 percent off of their consumer debts in 2009. They kept it up through the first three quarters of 2010 – paying down consumer debt to the tune of about 3 more percent.
But since then, the pattern has reversed itself – from last fall until today, households are again running up the credit cards, taking out lines of credit and sinking deeper into the red. According to the First Command surveys, while over two-thirds of respondents said they are at least “somewhat aggressively” working to pay down debt, more than four in 10 have taken out at least one loan in the previous 11 months. Almost one in five got a new credit card; 14 percent took out a car loan and 11 percent said they'd grabbed a retailers debit card. According to the researchers, “new debt trend appears to be accelerating, too. During the previous three months, nine percent of survey respondents took on new credit card debt and five percent took out an auto loan.”
What's going on is not difficult to discern. Incomes are flat, and Americans' disposable income has actually declined this year after adjusting for inflation. At the same time, prices have been ticking up, slowly but sure, led by a big run-up in gas prices (which just began retreating somewhat in the past months).
For a while, debt was also falling because the banks were tightening up their lending standards. It appears to be that people are paying off one debt and then just as soon taking on another to make ends meet. Americans are tapped out, and despite their expressed desire to get out of debt, they just can't get off the treadmill.
The backdrop to all of this is the long-term upward redistribution of wealth in this country, with those on top of the pile taking an ever increasing share of the national income and leaving the rest of us to fight over the crumbs. As the Financial Times notes, “Starting in 1975, male US median pay has stagnated in real terms, while gross domestic product continued to rise rapidly.”
Growth in per capita national income must go somewhere. In the US, the money flowed almost exclusively to the very richest. The earnings of US individuals with pre-tax income in the top 1 percent accounted for 8 percent of total in 1974, but rocketed to 18 percent by 2008, according to the world top incomes database, a resource compiled from tax return data. Even larger proportionate rises in the share of income went to the top 1 percent of those with incomes within the 1 top percent.
When that trend started, household debt represented about 45 percent of our economic output. By 2006, it had reached 100 percent. In the mid-1970s, we managed to put away about 10 percent of what we earned for a rainy day; by the time the crash hit in 2008, our savings rate was close to zero – we were spending money even though our incomes weren't rising, and we pulled that feat off by running up piles of debt rather than squirreling away a few acorns for when we might need it.
And it's important to understand that it is this overhang of personal debt, rather than the public debt over which Washington is obsessing, that is really dragging down the economy. It's an economy that's built largely on consumer spending after all, and American consumers don't have any spare cash to spend; real personal consumption was relatively flat at the beginning of the year, but has declined over the past two months.
Although income inequality has been on the rise in many countries in recent years, nowhere has the trend been longer or more severe than in the United States. With middle-class wages continuing to rise, the citizens of many developed countries were able to continue to save money and this left them in far better shape when the crash hit. Consider a few wealthy countries' savings rates alongside our own (courtesy of Seeking Alpha), and note how far behind we were as the 1990s got underway:
All of this tells us that growing inequality isn't just a moral issue or a matter of people being “envious” of the rich, as many within our elites would have you believe, but is a severe drag on economic growth. As economist Jared Bernstein, considering why Sweden has fared better than we have since the crash, put it, “When most of the growth ends up in the top few percentiles of the income or wealth scale, Nordstrom does well at one end of the barbell economy and Walmart prospers at the other end. But there’s a gap in consumption, investment and demand in general in the broad middle. And this dynamic could make it tougher for a recovery to take hold among the broad American middle class.”