Consumer debt in America is at chart-busting levels. In some cases we are even surpassing the debt statistics from the 2008 recession. And yet economic indicators say this is a healthy economy with a 10-year growth record and full employment. So how did this happen?
One simple answer is things cost more. And the things that cost the most are necessities: housing, healthcare, education. As the same time that these costs have been skyrocketing public support has been waning.
According to the Centers for Medicare and Medicaid Services, U.S. healthcare costs were at $3.5 trillion in 2017. That amounts to an annual health care cost of $10,739 per person. In 1960 it was $146 per person. Is it any wonder that 1 million or so Americans experience medical bankruptcy every year? What is surprising is that of this total, more than 70% have insurance. But as healthcare costs have skyrocketed the private insurance companies that most Americans depend on for coverage have been increasing co-pays, raising deductibles and shrinking coverage.
The biggest segment of consumer debt is student loans. That has been fueled by the fact that college tuition has increased more than 200% over the past 30 years. And at the same time public support for higher education has been declining. The Center on Budget and Policy Priorities estimates that state support for higher education is down some $9 billion over the last ten years.
Some observers have pointed to behavioral issues to explain why so many Americans are willing to take on so much debt. Many derive their sense of self worth from their possessions. Take a look at a TV ad for Cadillac or Lincoln. The marketing of luxury products clearly fuels conspicuous consumption, consumption that the consumer may only be able to keep pace with by going further and further into debt.
And then there is the behavior of the lenders. It is generally acknowledged that the 2008 recession was the result of wide-scale mortgage lending by banks to buyers who did not have to ability to repay those loans. Subprime lending left the buyer in debt while the bank either made money from the high interest loan or the foreclosed property. While mortgages are no longer as easy to come by for the non-qualified applicant, there is no shortage of other loans made without reasonable assurance of the consumer’s ability to repay. One of the more grievous examples are payday loans, loans made in advance of a paycheck. Most of these loans become churn loans, meaning you end up borrowing to pay back the previous loan. The average annual percentage interest rate for a payday loan is 400%.
There have also been court rulings and legislation that have paved the way for banks, credit card companies, retailers and other lenders to engage more borrowers at higher interest rates while at the same time offering the consumers fewer protections.
In 1978 there was a Supreme Court case, Marquette National Bank of MInneapolis vs. First of Omaha Service Corp., that is widely cited as a boon to credit card issuers, and a boom in credit card debt. In that case the court ruled that national chartered banks issuing credit cards were subject to the regulation of the state in which they were based, but if they issued cards to individuals who lived in other states, they were not subject to the regulations of the cardholder’s state. This sent credit card issuers in search of the states with the loosest regulation so they could charge the highest interest rates. Many of the states, competing to attract the banks to headquarter in their state, did so by loosening regulations. For credit card holders, this means higher interest rates and fewer protections.
In 2005, Congress passed legislation that would further fuel credit card debt. The Bankruptcy Abuse Prevention and Consumer Protection Act, did anything but protect consumers. Instead it made it more difficult for debtors to file for bankruptcy. Thus many who found themselves with insurmountable debt, unable to get relief from bankruptcy laws, instead maxed out their credit cards. This legislation was heavily promoted by the banking and credit card company lobbyists.
So what happens to the levels of consumer debt at a time when the current administration has promised deregulation. All signs point to a government that wants to help lenders ride the gravy train with little empathy for the borrowers who suffer the consequences. I look at some examples in my next post.