On Borrowed Time

     A Brief Background

    Throughout this past decade, headlines like “Consumers Stay Strong,” and “Consumers Come To The Rescue” were common in news articles describing better than expected economic growth.¹  These headlines were borne of the fact that about 70% of our economic output (GDP) has consisted of consumer spending for most of the decade. 
    This spending occurred despite the weakening of consumers’ true purchasing power.  Although the period between (roughly) 2002 and mid 2007 was indeed a period of economic expansion, job growth was amongst the weakest ever measured during periods of expansion.  Also, the median income in the U.S. actually dropped over this period.  (Keep in mind that these things occurred before the crash.)  Yet consumer spending pushed the expansion onward.  This paradox was possible because consumer spending was increasingly fueled by borrowed money.  Consumer debt was used as income replacement, and this trend only accelerated with time.  The actual “bubble” in the economy was a consumer credit bubble.  This credit bubble preceded and enabled the housing bubble that has grabbed so much attention.    
    Consumer purchasing power had steadily weakened over several decades as a result of the dominant economic philosophies of “small government,” self regulation, and “free trade” first promulgated by the Reagan administration, and that have since been built upon by both Republican and Democratic administrations and congresses.  These policies funneled the benefits of economic growth to an ever-shrinking number of people at the very top of the income scale.  The poor got poorer and grew in number, and the middle made no gains and shrank in number.
    An economy that is so heavily reliant on consumer spending is by definition a “trickle up” economy, not “trickle down.”  The weakening of consumer buying power was a predictable and measurable result of “supply side”economic thinking.  But the frenetic expansion of consumer credit that began in the mid 1990s allowed spending to continue to drive GDP growth.  Large-scale deficit spending by households wasn’t seen as a symptom of underlying economic weakness.  It was seen as an example of free market “innovation” and a confirmation of the merits of deregulation.
    There are very few examples of the consequences of recent economic thought as illustrative as the present day consumer debt situation.  The story of today’s consumer debt system involves things that tend to make Americans angry, things like  loss of personal privacy, lack of choice, bought-and-paid-for politicians, and rules of the road that benefit corporate interests at the expense of individual interests.   It involves huge sums of money being transferred from  middle and lower income groups to the corporate and investor classes.  It’s also a story of the manufacture and emergence of a surprisingly accepted, though very strange morality in which the average American is obligated to act in Wall Street’s best interest at the expense of his own.  Businesses don’t serve customers, customers serve businesses.
    Our economy has become so reliant on debt and debt-fueled spending that economic recovery is said to depend in large part on the restoration of lending.  In fact, getting the loans flowing again was supposed to be the very impetus for TARP, and for getting “Helicopter Ben” Bernanke to rain money on Wall Street.  The fact that lending hasn’t ramped up is often cited as a reason for our ongoing economic malaise.  It seems that the consensus is that the best way to rescue an economy that is being battered by dud loans is to write more loans.
    This consensus couldn’t be more wrong.  The credit system and our credit culture are two of our biggest impediments to a strong recovery.  They are not the key to prosperity.
    It’s not just the outstanding balances or monthly payments that are problems.   It’s not just that our nations’ courts, deluged by creditor lawsuits, are being used as subsidiaries for the debt collection industry².  The larger problem is cultural.  The act of borrowing money is no longer just one of many economic choices available to an individual.  Borrowing money is now a virtual requirement in today’s society.  Until this reality is changed, the cycle of debt and the flood of funds from bottom to top will continue. And the economy will remain a shell of what it could be.