The Backdrop for BROKE: Consumer Debt Then and Now

In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle Class,  I present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.

In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?

Since the recession, borrowing has slowed. This seems to have lead some commentators to suggest that consumer debt is back to a "normal" or "safe" level. A piece in the Wall Street Journal suggested that because the debt-service ratio, debt payments as a share of after-tax income, is at its lowest level since 1994, that "the things that worry Wall Street might not be so worrisome for Main Street." The perspective that I offer in Broke is much less cheery. Overall consumer debt only declined about 8% from its peak in 2008, and the newest data suggest that consumer debt has stopped declining (see here for a comprehensive look), and may even be starting to climb. (see here re credit card balances). Consumer debt remains very high by historical standards, meaning that bankruptcy may be ebbing in the very short-term but bankruptcy, and the debt-driven financial distress that it evidences, are certainly are not problems of the past.

You can read the a page proof version of the chapter here at the Stanford University Press website.