The Center for American Progress issued a grim report yesterday showing that household debt grew by a staggering 33% in just three years from 2001 to 2004. In 2001, debt stood at a shocking 78.1% of income. Today those numbers look small. In three years, debt reached a 108.4% of household income.
What’s our exit strategy? When — and how — does the debt get paid down? Think of it this way: If debt is 108.4% of household income, then the average family has spent more than a year’s worth of tomorrow’s earnings. Someday in the future, that average family is supposed to cut spending enough to make up for all the interest payments and principal due on this debt. How will that happen — and what will it mean for the economy?
The CAP report shows that the big debt run up wasn’t a spike in buying Gameboys or $200 sneakers. That’s bad news, because it means cutting back on frivolous spending isn’t going to solve this problem. The problems are more fundamental. Increases in the cost of housing bore down hard on families. McMansions may get all the attention, but the price of a basic 3-bedroom-1-bath where the median family lives also shot have through the roof in hot housing markets. Health insurance, child care and college costs have not been far behind. Once families are committed to big mortgages and they have high balances on their credit cards, interest payments start to take on a life of their own, draining money out of their budgets as relentlessly as utility payments and food. The payments leave them with even less money to cover expenses, and the downhill slide starts to gain momentum. In other words, the debt breeds debt, and the debt itself makes it less likely that a family can pay it off.
Incomes are flat. A fully employed male today earns, in inflation-adjusted dollars, slightly less than he earned in the 1970s. The only growth in household income for the middle class has come from putting mom to work — but that’s already happened and that income has been spent too. So where is the money coming from to pay down the debt?
Economists describe the health of the economy as dependent on consumer spending. But as more dollars are drained away for mortgage payments and interest on credit cards, where is the money to buy tomorrow’s cars and clothing? Household debt won’t be a problem just for the families that are struggling; it will be a problem for every manufacturer and retailer in America.
The fundamentals are off. Income is flat. Costs for housing, health insurance, daycare and college are steadily growing. Families are quickly running out of maneuvering room. And, once again, there is no exit strategy is in sight.
