Another day older

by Russ Roberts on May 12, 2006

in Standard of Living

A new study from the Center for American Progress purports to show that Americans are deeper in debt than ever before because income isn’t keeping up with expenses. I suppose this is probably true, but the implication is that the expense side is somehow exogenous–important stuff like houses and college tuition is getting expensive and incomes aren’t keeping up with costs.

As this CBS Marketwatch story says, quoting the author of the study:

"The middle-class squeeze [is driven by] stagnant income growth in the
face of very sharp price increases for big-ticket items such as homes
and education," said Christian Weller, author of the report and a
senior economist with the Center for American Progress.

I’m quoted in the article trying to make the case that people always want more than they can afford and that increased debt from increases home ownership isn’t a sign of economic crisis but a sign of economic health. You can’t just pick some expenses that are rising and use those to explain a rise in indebtedness.

The story also quotes Elizabeth Warren of Harvard who didn’t read the Sowell scarcity post:

Still, "there are forces bearing down on
middle-class families that require them to make choices that many of us
would find unacceptable, and we need to have some vision of that when
we make public policy choices," she said, noting that some people
decide to not purchase health insurance because they can’t afford it.

"What it took to survive in the middle class in the 1970s is simply not adequate today."

No, it isn’t. And what it took to survive in the middle class in 1870s isn’t adequate today, either. It’s not because the American economy is punishing the middle class. The reason is that we’re much richer. Our expectations of what is middle class has changed. If we would be content to live the life of a middle class person in 1870 we’d have no debt and could give an enormous amount to charity. But human beings don’t seem to behave that way. As they get richer, they want to consumer more. (And they give more to charity, too, at least more than they did when they were poorer.)

So why are Americans going deeper into debt? Todd Zywicki shows that debt has actually grown very little. What has changed is the composition of debt which allows scare-mongers to cherry-pick the kinds that have increased while ignoring the kinds that have decreased.  Bankruptcies are up, Zywicki shows, not because of increased indebtedness but because of reductions in the cost of declaring bankruptcy.

As for the general problem of debt, it is always wise to remember Mr. Micawber’s advice to young David Copperfield:

"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought six, result misery."


Add a Comment    Share Share    Print    Email

Previous post:

Next post: