How To Lower That Household Debt?

Financial FAQs

Here is the underlying reason our economy isn’t growing faster, hence creating more jobs. Household debt hasn’t even declined to early 2000 levels, mainly because household incomes haven’t risen above 2000 levels, after inflation is factored in.

Mortgage debt in particular still totals some $8 trillion, for example, whereas it was some $5 trillion in 2003 before housing prices really took off. Then how can households adequately service that debt, and increase their overall spending? They can’t, and so there is very little increase in the demand for goods and services, hence little increase in growth and jobs.

Graph: WSJ Marketwatch/Federal Reserve NY

Household debt is declining, but ever so slowly. In Q2 2013 total household indebtedness fell to $11.15 trillion; 0.7 percent lower than the previous quarter and 12 percent below the peak of $12.68 trillion in Q3 2008, said the New York Federal Reserve in its latest Household Debt and Credit Report.  Mortgages, the largest component of household debt, fell $91 billion from the first quarter.

“Although overall debt declined in the second quarter, households did increase non-housing debt, led by rising auto loan balances,” said Andrew Haughwout, vice president and research economist at the New York Fed.  “Furthermore, households improved their overall delinquency rates for the seventh straight quarter, an encouraging sign going forward.”

This graph from Ezra Klein’s WaPo blog illustrates how much household incomes have fallen, as well. Back in 2007, for instance, median household income was $55,438. That’s declined to $51,404 in February 2013. Those numbers are pretax and adjusted for inflation and seasonal factors. The red line is median household income and blue line the unemployment rate, which is still 7.4 percent.

Graph: Ezra Klein

We can also understand why lowering the budget deficit has been such a problem. It’s not only because government unemployment benefits increase during recessions and their aftermath, but government tax revenues decline precipitously. Even there the effects of reduced household income is obvious. Private sector businesses don’t see increasing demand, so it’s hoarding some $2 trillion plus in cash from record profits, but isn’t hiring many new workers. Meanwhile, banks hold $1 trillion plus in excess reserves, rather than increasing lending.

That leaves only one way to increase household incomes; by borrowing from those excess funds held by the private sector to create more public sector jobs, such as in infrastructure repair, better educational programs, and research and development of new products. The consequent increase in tax revenues then pays down that debt, as it did in the 1950s to 1070s after the record 120 percent World War II federal deficit. So we can see that until more jobs are created, household incomes can’t growth; or households even begin to pay down their debts to pre-recession levels.

Harlan Green © 2013

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