Debt Hemorrhage

The Economy

Over at Political Animal, Jacob Hacker is blogging about his new book The Great Risk Shift. In a recent post he answered the question:

Is increased risk just the flipside of the increased returns of our economy? Don’t we have to take risks to achieve rewards, and won’t providing security prevent that?

In other words: Sure, individuals are less secure, but isn’t that because we are doing better as a society? Hacker’s answer was a firm no.” Hacker makes three points:

First, the gains have not been evenly distributed.

Median-income Americans have seen only modest growth in their incomes over the past generation; most of the gains have been at the top. Plus, most of the gains at the middle have been due to the increasing work hours of families (specifically, the increasing work hours of women).

Second, there has been no increase in social mobility, as some people making this argument claim.

And third, he takes on the claim that income inequality isn’t important because inequality of consumption” has not increased.

What should we make of this claim? Well, first, it’s probably wrong. Consumption inequality is less than income inequality, but it seems to have increased just as much. But the broader implication is that we shouldn’t worry about drops in income because people can deal with these drops on their own — hence their consumption is less unequal than their incomes.

But how are people dealing with these drops on their own today? Mostly by going into debt. As I show in my book, median household debt as a share of income for married parents was more than 125 percent of income in 2004. The economist Herb Stein once said, If something can’t go on, it won’t.” And the debt hemorrhage of the American family simply can’t go on.

If the returns of rising risk add up to the ability to borrow more to dig oneself out of short-term holes (thus digging a deeper long-term hole), then I think we can safely say that most Americans would be happy to give up the returns to obtain greater security.

For more information on the debt hemorrhage of the American family, be sure to read Elizabeth Warren’s blog (where Hacker is currently mirroring his Political Animal posts).