A Defense of Thrifty Consumers

Oct 14, 2010Bryce Covert

Spending on credit isn't the only way to get the economy humming. Jobs and a living wage can do the trick.

Yahoo! Finance Economics Editor Daniel Gross had an op-ed in the NYTimes recently proving that while thrift is the new black, consumer use of credit cards is still in vogue. The decline in credit card balances may not be due so much to consumers putting their cards in the shredder, but perhaps to accounting:

CardHub.com, a credit-card industry site, crunched data from rating agencies and the Federal Reserve and found that in the 18-month period from January 2009 through June 2010, American lenders simply wrote off $124.1 billion in credit card balances as uncollectable. That accounts for nearly the entire $134 billion decline in revolving credit balances outstanding in the same period. And in the second quarter of this year, company write-offs were actually nearly $10 billion greater than the amount consumers paid down.

Is it a bad that consumers are still paying with plastic? Gross feels that it's not bad at all. In fact, he says it's the very pick-me-up that this slumbering economy needs: "In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel."

I've heard this argument before in response to my anti-credit card stance -- even though I'm not advocating that we get rid of credit cards, but more that we get rid of any chains that tie consumers to them. Some have protested my position by saying that our economy runs on credit card use. It's an issue worth exploring. Does our economy need credit in order to survive? Are there other ways to get the gears grinding once more? I got a chance to ask Gross these questions directly, and his answer can be summed up pretty easily: he maintains that credit is part of the answer, but it doesn't have to be the whole picture. In fact, increased spending on credit is intertwined with increased jobs and pay.

In the op-ed, Gross points out that "unless you're a multimillionaire, it's difficult to make significant purchases -- college tuition, a Viking stove, a Toyota Prius, computers, jewelry, a house -- out of savings or cash flow from wages." The problem right now is that while sales in everyday purchases like food and clothes are either leveled out or rising, really big buys just aren't moving. The good news, he told me, is that data shows over the past two years consumer spending and personal savings have risen together, while credit card debt has fallen (even if it's due to write-offs). In other words, he said, "people with jobs and income are stashing more cash under the mattress, and they're spending more at stores -- without running up as big tabs on their home equity lines and credit cards." But the big purchases still remain stagnant. Some industries, like car dealerships and home builders, rely on credit -- there are few among us who can plunk down $16,000 in cash for a new Civic. So to pick up demand in these slack areas, consumers will have to get comfortable again buying things with debt.

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But increased credit is not the only way to get back to a humming economic machine. In a short video on the fallacies behind fiscal austerity, Professor Mark Blyth discusses how so much debt -- corporate as well as personal -- got racked up before the financial crisis. He makes a key point for my argument: "The bottom forty percent of US income distribution hasn't had a real wage increase since 1979." It therefore made sense for them to take on debt to pay the bills during the boom. But while banks were leveraging up to take huge bets for themselves, the lower 40% "didn't really benefit from the boom. All they got was debt and the illusion of prosperity." And that continues. As of February, the average credit card debt was still about $3,700 per adult, or $7,400 per household. Meanwhile, 44 percent of American families have experienced a job loss of one or more members, a reduction in hours or a cut in pay. One in five American households is financially insecure. The costs of basic necessities are rising faster than incomes for a majority of consumers.

The solution to this problem isn't simply going back to paying the bills with credit cards. As our blogger Marshall Auerback said to me, "You would rather create an environment where people have good paying jobs where they don't need to rely on credit to sustain their living standards." Businesses need paying customers -- not just the car dealers, but also the grocery stores and the clothing outlets. Paying customers need jobs and decent incomes. Those things are in scarce supply right now. If the US were to actually pursue a policy of full employment and a living wage, the number of eager consumers would automatically rise.

And Gross agrees, pointing out that it's not an either/or problem -- credit is compatible with a strong job market and good wages. In fact, it's all inter-related. When unemployment is down and wages are up, "the capacity to handle, manage and pay down debt grows accordingly," he points out. Which means that credit lenders are more inclined to loan out money to cash flush consumers -- the economic wheels start spinning, in other words. Gross is not optimistic, he says, about our politicians' ability to pull off an increase in jobs and wages, given the decline of the unions' powers, a broken political machine in DC, and the state of globalization and free trade. But in this case of the chicken and the egg, we might want to start with more jobs and better pay before we return to a heavy reliance on credit. I'm up for being an idealist over a pragmatist.

So while we still have to rely on credit for large purchases like cars and washers (here's hoping that we someday find a way to make college tuition affordable), our economy should also be based on workers who have access to jobs and decent wages to pay the bills. And those things are in very short supply right now. Too many people are still living in the shadow of debt. After all, huge debt levels are what Auerback calls "the 21st century equivalent of indentured servitude for the vast majority of Americans." And he's not wrong. Listen to the terror in this woman's voice as her bank literally knocks down her door to foreclose it. Watch this woman inform Bank of America she will no longer pay her credit card bill under their inexplicable raise in rates. Debt leaves many feeling powerless against the banks.

Perhaps we can continue to pay cash instead of credit for our groceries a bit longer. Let's focus on abundant jobs and decent pay. Then we can get back to being good patriots and go shopping for new refrigerators.

Bryce Covert is Assistant Editor at New Deal 2.0.

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