Tuesday, July 12, 2011

Doing it to debt (20 Oct 2008)

At the Atlantic Monthly (love the new retro nameplate), Virginia Postrel, of The Future and Its Enemies fame, grinds her ideological ax in this essay that argues we should not be worried about levels of consumer debt. The figures cited are often flawed, she suggests, and we are far too pessimistic in thinking that it is possible for Americans to overspend. Such an attitude gets prominent press play out of a desire to "moralize."

Personal debt, for better or worse, has been a moral matter throughout Western civilization (see, for example, Tawney's Religion and the Rise of Capitalism) -- and this seems to be the argument Postrel wants to have, that debt shouldn't be seen as a personal failing, and that debt on a national level has brought unprecedented prosperity, as measured in terms of the consumer goods we get to own and use.
The expansion of consumer credit is one of the great economic achievements of the past century. One institutional and technological innovation after another has made borrowing easier and cheaper for rich and poor alike. With each development have come fears—sometimes fueled by the unforeseen problems that inevitably accompany new practices—that this is the change that surely will lead to disaster. Yet a half century after Black’s warnings, doomsday has not arrived, the “consumer-credit explosion” continues, and most consumers are much better off.
Gripes about personal debt are merely attempts to make us feel guilty for enjoying prosperity ("Still others felt guilty about buying luxuries even when they could afford them" -- horrors!), and they let the scolds and snobs of the world "paternalistically" tell us what we can or can't have on the installment plan. Better access to credit, from Postrel's perspective, means more freedom of choice within the market, which seems to be her definition of freedom itself -- achieving the images of the aspirational lifestyle.

Whatever the merits of that argument -- weighing the benefits of material prosperity against the psychic burden of living in a consumer society; assessing whether vigorously pursuing market freedoms hampers the development and protection of other types of liberty -- Postrel fails to deal with a different kind of problem that consumer credit faces in our current economic climate, one that has nothing to do with an individual's morals but with overborrowing at unsustainable levels. That there is more credit in the economy is a neutral fact, but the rise in defaults is unequivocably bad. And people are starting to default on their credit-card debt. Postrel thinks bankruptcy is no big deal for individuals:"If you default on your Visa bill, nobody comes to repossess your refrigerator or auction off your shoes. The biggest penalty you’ll face is trouble getting future credit." But on a macro level, loan defaults contribute to the chaos we are now experiencing.

Felix Salmon links to two articles that undermine Postrel's case. The first is a post at the Earn What You Spend blog (which has a bias, I'm guessing, against consumer credit), which points out that while credit may be cheaper and more convenient than ever, that has nothing to with whether or not consumers are "overleveraged." Just because we like debt, that doesn't make it good for us, anymore than it makes it automatically bad for us. The post concludes:
There are plenty of valid cases to be made for consumer credit and debt; if Postrel had written about why it makes financial sense to use a mortgage to buy a house, about amortizing costs over long periods of time, that would have been one thing. But to say that all is well in the land of consumer credit, particularly through the use of misleading examples and irrelevant anecdotes, is bit reckless in a time like this. Credit card delinquencies are on the rise. Consumers are overleveraged, and the chickens are coming home to roost.

The problem is not with debt as a concept. It is with overborrowing for one's financial conditions.

The other post Salmon links to is from Henry Blodgett, who lays out the data that indicates a consumer-led recession.
the US consumer is finally broke. For thirty years, we piled on debt and then spent almost every new penny we got. This borrowing spree was made possible by a smorgasbord of no-money-down lending products and ever-appreciating asset prices. Unfortunately, the situation has now changed. The lenders who created those products have now been demolished, and asset prices are falling fast. And this is leaving American consumers with no choice but to cut back.
Consumers need to cut back not because borrowing and buying things is bad or morally wrong, but because they have no more money to borrow -- no one will be willing to lend to them anymore if the prospects of their paying the loans back are bad. And there is no more money to draw out of home equity.

No one doubts that Americans want to spend as much as they can -- they are well primed for that by our cultural norms and our pervasive marketing infrastructure. But we've reached a point where there may be a will, but there's no longer a way. Postrel's essay, it seems, is a plea to maintain the will in the face of changed circumstances, and to preemptively strike at the possibility of consumers adopting priorities other than spending as much as possible.

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