Thursday, March 10, 2005

Welcome To The New Economy

Over at Crooked Timber, John Quiggin attempted to put the bankruptcy bill in the context of the rising economic instability for American households, and the shifting of economic risks from government and business to individual workers. (The link is to an outstanding LA Times series; some of the best reporting I've seen all year.)

Predictably, the comments at Crooked Timber devolved into a shallow and anecdote-laden debate about whether people in economic distress are shiftless layabouts who make poor economic choices, or hapless victims of unforeseeable catastrophe. I got frustrated fast, because I think that John's point about instability is too important to skim over. Fortunately, I remembered that I have my own blog... neglected as it is.

Here's the key summary from the LA Times series:
In the early 1970s, the inflation-adjusted incomes of most families in the middle of the economic spectrum bobbed up and down no more than about $6,500 a year, according to statistics generated by the Los Angeles Times in cooperation with researchers at several major universities. These days, those fluctuations have nearly doubled to as much as $13,500, the newspaper's analysis shows. [...]

To help cope, many Americans have borrowed. Arguably, borrowing has become for this generation what unemployment compensation, the GI Bill and government-guaranteed mortgages were for a previous one — a way to tide over one's family during bad times and reach for a better life.

The traditional measure of household debt — calculated as a percentage of a family's after-tax income — has climbed from 62% a quarter century ago to almost 120%, according to Federal Reserve statistics. Much of that increase is from the rush of mortgage lending during the last decade. But non-mortgage debt, including credit cards and auto loans, also has risen, from 15% to almost 24% of after-tax income.

Economists and policymakers have generally applauded the growth of borrowing as a boon to the economy and a blessing for average Americans. They have portrayed the extension of credit to families further and further down the income scale as part of a sweeping democratization of finance.
Enough has been said elsewhere about the "democratization of finance," which apparently means "extending loans at usorious rates to people who won't be able to pay them back." (For example, Slacktivist's fine moral indignation can be seen here and here.) The real insanity is the idea that credit cards are my generation's unemployment compensation, GI bill, and health insurance. No wonder we're going bankrupt at unprecedented rates. As funny as we're supposed to find the phrase "I'm from the government, and I'm here to help" (and as someone who provides free government-funded health care to indigent people with HIV, I've never found it all that funny), it is far, far more ludicrous to paint MBNA America as a helping hand in times of crisis. When you're in any kind of an extended economic crisis, credit cards rarely do anything but make matters worse. My generation's unemployment compensation and GI Bill, sure - if those things actually mired you deeper in uncertainty and debt.

Americans are constantly being lectured in the press for our financial imprudence. We buy things we can't afford, we don't have enough savings to tide us over through rough times, we haven't gotten on board with the President's ownership society. But the level of income instability described in the LA Times series is not something that can be countered by simple habits of thrift.

Take "emergency savings," for example. Every basic financial advice article ever written includes the advice that people should have three months' worth of living expenses stored up in savings, in case of catastrophe. Great advice. But with the average length of a period of unemployment now 20 weeks, that prudent three-month cushion isn't going to take you very far. That's what unemployment insurance was supposed to be for - but it's been pared down from 15 months of guaranteed benefits in the mid-70s to six months today.

Conservatives love to sneer at the big TVs and minivans owned by the average debt-holding middle-class American. "If they didn't buy all those fancy things," the condescending argument goes, "they wouldn't find themselves on the verge of bankruptcy." (Then follows a long and dreary story about how the conservative's mother walked home with all their groceries because the family only had one car, and how they listened to a crummy portable radio, and they never felt deprived because they made their own fun.) But look back up at that $13,500 fluctuation in annual income. If you earned $13,500 more last year than you will this year, is the big TV you bought back then really a sign of financial improvidence? is it unreasonable to sign a car note when you're making $60,000 a year, on the off chance that you might lose your job and be out of work for six months and eventually be unable to make the payments?

We here at Respectful of Otters can relate to these questions on a deeply personal level. My household once made the mistake of assuming, based on our quaint 1990s expectations of the economic world, that an intelligent and personable individual with good work habits would be able to find a job in a major city. On the basis of that assumption, we signed a lease for an apartment which, when a job failed to materialize, we couldn't afford. Was it ridiculous for us to be paying $950 in rent with a combined annual income of somewhere around $24,000? Yes. Was it ridiculous of us to assume, when we signed the lease, that two working adults would be able to pull in more than $24,000? I don't think so. We had not adjusted our expectations to the bold new rules of the new economy, the "ownership society" in which it was our responsibility to plan ahead for such common eventualities as a year of un- and underemployment. But even if we had adjusted our expectations, it's hard to imagine what we could've done to cushion ourselves against such a severe economic shock.

What did we do instead? We borrowed money from our parents, and we maxed out my credit card. (That's my generation's version of unemployment compensation, after all.) Eventually, we fell behind in our bill payments. At that point we were flooded by new credit card offers, far more than ever before or since, all of them bearing stratospheric interest rates and enormous penalties for late payments. Five or six offers a day. We were terrible credit risks at that point, and the credit card companies were falling all over themselves to sign us up for more debt.

But they would've been shocked, shocked if we'd defaulted on our loans. We would've been one more example of why Congress needed to protect them from the economic risks of their poor decision-making. And no one would've made speeches to them about their need to take "ownership" of anything... but our assets.

Welcome to the new economy.