Acton Institute Powerblog

Middle-class America’s debt problem

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In recent months, the question of America’s ballooning public debt has started receiving more attention. Far less interest, by contrast, has been given to the growing amount of private debt.

A recent Wall Street Journal article, however, highlighted a growing phenomenon that, I think, merits more attention. This concerns the use of debt by middle-class American families to maintain their lifestyle. Whether it is medical care, housing, or college education for their children, middle-class Americans are increasingly using debt to cover the gap between growing costs and stagnant incomes—a gap that has been growing in virtually every sector of the consumer economy.

While mortgage debt declined after the 2008 financial crisis (but is now increasing again), the low-interest rates which have been the norm since the associated recession have increased access to credit in areas across the economy. Personal debt in America is now over $4 trillion. This is the highest level ever, even adjusted for inflation. The authors of the article go on to point out that

In one sense, the growing consumer debt is a vote of confidence in the future. People borrowing money today expect to have the income tomorrow to pay it back. Consumer debt tends to rise when borrowers feel secure in their jobs.

But the debt pile is also an accumulated ledger of economic risk. It should be manageable so long as unemployment remains low. If job losses begin to rise, it would become unsustainable for some share of borrowers, raising chances of an increase in missed payments and lenders writing off unpaid balances.

If access to credit is diminished because interest-rates go up at some point, or if unemployment begins to rise, middle-class America will start to find itself short on options. And if there is one thing we know about middle-class people in most societies, it is that many of them will go a long way to avoid losing their status.

While there’s no immediate cause for alarm, we should pay attention to this growing level of personal indebtedness in the United States and its relationship to the associated gap between incomes and costs. Over the long-term, the political and economic implications are not to be taken lightly.

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Samuel Gregg is director of research at the Acton Institute. He has written and spoken extensively on questions of political economy, economic history, ethics in finance, and natural law theory. He has an MA in political philosophy from the University of Melbourne, and a Doctor of Philosophy degree in moral philosophy and political economy from the University of Oxford.

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