The Agenda

Mason and Jayadev on the Sources of Increased Household Debt in the U.S.

Josh Mason and Arjun Jayadev have a new working paper on the evolution of U.S. household debt, and Mason has written a blog post summarizing their findings:

It’s a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It’s also well-known that household borrowing has increased sharply over this period. Indeed, for most people — including many economists — these are two ways of saying the same thing. In fact, though, they are quite different claims, and while the first one is certainly true, the second is not.

So what’s going on, exactly? As Mason goes on to explain, it turns out that rising household debt levels flow from the Volcker-era conquest of inflation.

If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation. In other words, there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households rescued their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn’t, or couldn’t, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices.

This complicates some of the familiar narratives surrounding the increase in household debt:

Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking. Given the increased availability of credit and rising inequality, some households may well have chosen to increase spending relative to income, and those lower down the income ladder presumably did rely on borrowing to maintain consumption standards in the face of stagnant wages. But for the household sector in the aggregate, until 2000, there is no increased household borrowing to explain.

During the housing bubble, Mason explains, there was an increase in borrowing, but debt dynamics still accounted for a third of the increased in debt.

Mason and Jayadev conclude that it will be very difficult to alleviate the increase in household debt through belt-tightening:

[G]oing forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. Even the very large surpluses of 2006-2011 would not have brought down leverage at all in the absence of the upsurge in defaults; and in the absence of large federal deficits and an improving trade balance the outcome would have been even worse since reductions in household expenditure would have reduced aggregate income. As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs.

It’s a fascinating argument. The following is drawn from the paper’s conclusion:

While growing out of debt would be ideal, it would require a large increase in net exports, government spending and/or private investment, none of which seems plausible for the US at present.

This serves as a reminder of the importance of “global rebalancing,” an idea that we tend to think of narrowly (e.g., in the context of China’s currency peg) if at all but which strikes me as absolutely central, particularly if you’re inclined to the Michael Pettis view that (a) the role of the U.S. dollar as the world’s primary reserve currency has outlived its usefulness for the U.S. and that (b) the China’s investment-driven growth model is about to sputter under the weight of bad debts. 

I might be more sanguine than Mason and Jayadev about the prospects for a large increase in net exports and private investment. But their argument merits wide attention.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

Most Popular

Media

Jeffrey Toobin and Our Public-Hate Ritual

Oh, Jeffrey Toobin — let him among us with a free hand cast the first stone. Toobin, a writer for The New Yorker and fixture on CNN, was participating in a role-playing exercise on a Zoom call with his magazine colleagues, wargaming election-night scenarios. Toobin was standing in for the courts when he ... Read More
Media

Jeffrey Toobin and Our Public-Hate Ritual

Oh, Jeffrey Toobin — let him among us with a free hand cast the first stone. Toobin, a writer for The New Yorker and fixture on CNN, was participating in a role-playing exercise on a Zoom call with his magazine colleagues, wargaming election-night scenarios. Toobin was standing in for the courts when he ... Read More

Trump: No

Editor’s Note: The following is one of three essays, each from a different perspective, in the latest edition of National Review on the question of whether to vote for President Trump. The views below reflect those of the individual author, not of the NR editorial board as a whole. The other two essays can be ... Read More

Trump: No

Editor’s Note: The following is one of three essays, each from a different perspective, in the latest edition of National Review on the question of whether to vote for President Trump. The views below reflect those of the individual author, not of the NR editorial board as a whole. The other two essays can be ... Read More

Trump: Yes

Editor’s Note: The following is one of three essays, each from a different perspective, in the latest edition of National Review on the question of whether to vote for President Trump. The views below reflect those of the individual author, not of the NR editorial board as a whole. The other two essays can be ... Read More

Trump: Yes

Editor’s Note: The following is one of three essays, each from a different perspective, in the latest edition of National Review on the question of whether to vote for President Trump. The views below reflect those of the individual author, not of the NR editorial board as a whole. The other two essays can be ... Read More
Elections

How Trump Might Be Winning

I’m far too dumb to be able to shed any light on polls, but I do know something about celebrity and I think I can guarantee this: If President Trump wins re-election, Robert Cahaly is going to become very famous very quickly. Who is Robert Cahaly? The chief pollster for the Trafalgar Group, the only major ... Read More
Elections

How Trump Might Be Winning

I’m far too dumb to be able to shed any light on polls, but I do know something about celebrity and I think I can guarantee this: If President Trump wins re-election, Robert Cahaly is going to become very famous very quickly. Who is Robert Cahaly? The chief pollster for the Trafalgar Group, the only major ... Read More
Elections

Biden Is Still Underperforming Hillary

On October 20, 2016: Hillary Clinton was up 6.8 in the RealClearPolitics average in Pennsylvania. Today, Biden is up 3.8. (that race only tightened to 2.1 in the last week of 2016.) Clinton was up twelve points in Michigan on that day. Biden is up 7.5 right now. Clinton was up 6.5 in Wisconsin. Biden is ... Read More
Elections

Biden Is Still Underperforming Hillary

On October 20, 2016: Hillary Clinton was up 6.8 in the RealClearPolitics average in Pennsylvania. Today, Biden is up 3.8. (that race only tightened to 2.1 in the last week of 2016.) Clinton was up twelve points in Michigan on that day. Biden is up 7.5 right now. Clinton was up 6.5 in Wisconsin. Biden is ... Read More
World

Trump and Dictators

Donald Trump’s first presidential trip abroad was to Saudi Arabia. On landing, he said, “We are not here to lecture. We are not here to tell other people how to live, what to do, who to be, or how to worship.” That was undoubtedly music to dictators’ ears. It’s their job, as they see it, to tell ... Read More
World

Trump and Dictators

Donald Trump’s first presidential trip abroad was to Saudi Arabia. On landing, he said, “We are not here to lecture. We are not here to tell other people how to live, what to do, who to be, or how to worship.” That was undoubtedly music to dictators’ ears. It’s their job, as they see it, to tell ... Read More