How I wish I’d written Allison Schrager’s new BusinessWeek post on trends in U.S. consumer debt! This economist performs the invaluable service of reminding us that all forms of borrowing decidedly are not created equal, especially when it comes to judging the state of Americans’ household finances and whether it really is improving.
The conventional wisdom has concluded that, by most standard measures – like absolute levels of debt, debt as a share of incomes, and delinquencies on mortgages and other kinds of loans – U.S. consumers on average are financially healthier than they’ve been in many years. But Schrager shows that the mix of U.S. household borrowing is strongly suggesting the opposite.
As she points out, since the recession broke out, and especially since the housing bust reached historic proportions, Americans have been borrowing less to finance purchases that arguably could increase their long-term wealth and financial health, and borrowing more to finance purchases with no conceivable investment value whatever.
Think of it this way, Schrager writes: Although Americans clearly got wildly overoptimistic about mortgages, buying a home has been a good investment throughout most of American history and even today (depending on the actual transaction) at worst could well hold a family’s housing costs stable for decades. In many ways, Americans still seem to be overestimating the economic value of a college education, but most research indicates that, all else equal, college graduates still out-earn their non-graduate peers.
But mortgage debt is coming down steadily, and student loan growth – though enormous – has been pretty constant year on year. These developments have helped slow down the growth of overall consumer credit. But overall borrowing has begun increasing again and today stands at a new all-time high. What gives?
Schrager’s article shows that the increase has been fueled mainly by a resurgence of credit card debt and auto loans. Many of these purchases may be necessary for day-to-day living, she acknowledges. But from a financial standpoint, she notes, such spending goes to assets that can only fall in value.
Continued gushing by the business media and even many economists about how plucky American consumers remain reveals that, even having suffered an historic financial crisis, the nation as a whole still hasn’t learned that all forms of growth aren’t necessarily good. Schrager’s post shows that crucial lessons about consumer de-leveraging are being ignored as well.