U.S. Consumer Debt at Record Levels

In around the last decade in the U.S., there has been a particular theft of wages into a conversion of corporate profits. From about 1977 to 2007, the main story of income inequality there was upwards redistribution (theft) of income directly to higher-income professions. (See chapter 2 of the book Rigged for further data.) If wages hadn’t been largely stagnant over the last four decades (among other policy failures) for many workers, there wouldn’t be consumer debt of this magnitude. This is because stagnant wages and rising costs (such as U.S. university) force many to borrow more than they’d otherwise have to with higher incomes.

Also, $193 billion is a lot of money, and the reporting would be better if it and other figures were expressed in terms that most people could understand more easily. An increase of household debt by $193 billion is an increase of about $1529 per U.S. household.

Total household debt rose by $193 billion to an all-time high of $13.15 trillion at year-end 2017 from the previous quarter, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data report released Tuesday.

Mortgage debt balances rose the most in the December quarter rising by $139 billion to $8.88 trillion from the previous quarter. Credit card debt had the second largest increase of $26 billion to a total of $834 billion.

The report said it was fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories.

Report Finds Significant Benefits to Canceling All Student Loan Debt

Canceling student debt is a proposal worth supporting, and it isn’t even radical when it’s considered that the student debt shouldn’t have been allowed to accrue anywhere near the depraved level of $1.4 trillion. It’s also not radical when it’s considered that there is enormous U.S. welfare granted to the rich and to major corporations, much more welfare than the amount that goes to poor and middle-income people.

report from a group of economists at the Levy Economics Institute of Bard College finds that there would be huge benefits if the federal government were to forgive all existing student debt. This would ripple out from young people struggling to pay off massive college loans to the economy as a whole, according to the report.

“The idea of canceling student debt is not just some crazy idea out of left field, but is actually something that could be done, and done in a way that has a moderately positive economic impact,” Marshall Steinbaum, a fellow and research director at the Roosevelt Institute and a coauthor of the report said in an interview.

“The way this and similar polices are often discussed is in a mode of ‘well can we really afford this?’ and the answer is definitely yes,” he added.

The report finds that canceling all student debt would likely lead to an increase in U.S. GDP between $861 billion and $1,083 billion over the course of 10 years. It would also lead to an increase of 1.18 to 1.55 million additional new jobs over the same period — that’s about 50% to 70% more jobs per year compared to an average of recent years.

This new analysis comes at a time when more than 44 million American have a collective $1.3 trillion in student debt — higher than both auto U.S. debt and credit card debt.

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The report also finds that total loan forgiveness would cost the U.S. government approximately $1.4 trillion over the course of 10 years — a number that is almost exactly the same as what the CBO recently projected the Republican’s new tax bill would cost.

But researchers said that the positive impacts of canceling student debt would likely be more broadly felt than those of the tax bill.

“[The GOP tax bill] is going to add 1.5 trillion to deficits over the next 10 years,” Stephanie Kelton, Stony Brook University professor of public policy and economics, said in an interview. Kelton is one of the authors of the report, and recently worked as the chief economists for the Democratic minority on the Senate budget committee.

“What else could we do? Canceling student loan debt was just about perfect because it comes in at about 1.4 trillion and it’s almost six of one, half a dozen of the other in terms of the price tag,” she said.

Kelton emphasized that U.S. government shouldn’t be thinking of how it can spend money to help Americans as a zero sum game. But at the same time, if lawmakers can spend money to provide massive tax cuts for the wealthy and corporations, it can also afford to spend nearly the same amount to cancel student debt and grow the economy simultaneously.

Government Budget Deficits as Overblown Concerns

Government budget deficits can actually be beneficial if the spending that results in them is in the public interest. This is contrasted with large trade deficits, however, which in wealthy countries have a negative impact on demand in the economy. Both of these truths are important to know for public policy debates.

There are three ways in which deficits or debt can be seen as a problem. First, large deficits can overheat the economy leading to high interest rates or high inflation. Second, a large debt can impose a significant interest burden on the government and implicitly on future taxpayers. The third way is that excessive indebtedness can cause a country to become uncreditworthy, making it difficult or impossible to finance the government. None of these issues plausibly apply to the United States at present.

The first point is the classic story in which large amounts of government borrowing pulls capital away from the private sector. This would be bad news because businesses and state and local governments would have to pay higher interest rates, which would reduce their investment. With less investment, we would see less productivity growth, which would mean that we would be poorer in the future.

There are times when excessive deficits may crowd out investment, but this is clearly not one of them. Interest rates are extraordinarily low. In fact, they are far lower than in the years at the end 1990s when we were running surpluses.

There also is no evidence that excessive spending has led to inflation. The Federal Reserve Board has been struggling for most of the last decade to raise an inflation rate it views as too low.

The second issue is that the debt service — the amount of interest that we pay on the debt each year — will impose a large burden requiring either higher taxes or cuts in other spending or some combination. There also is no basis for this concern at present.

The interest that the government pays on its debt each year comes to around 1.0 percent of GDP, after we subtract the amount that was paid to the Federal Reserve Board and then refunded back to the Treasury. By comparison, the interest burden was more than 3.0 percent of GDP at the start of the 1990s.

It is also worth noting that the much larger interest burden of the 1990s did not prevent us from having a very prosperous decade. In other words, there is a long way to go before we face any serious problem by this measure.

Finally, there is the argument that we could end up in the same situation as Greece was in a few years back, where no one wants to lend money to the U.S. government. There are two major reasons the United States will not end up like Greece.

First, we borrow in our own currency. The U.S. prints dollars; we don’t have to worry about being able to borrow them. By contrast, Greece borrowed in euros, which it did not print.

This brings up the second point; we could print so much money that we face hyperinflation, like Zimbabwe did in the last decade. In principle, that could happen, but the problem in that case would be having a weak economy, not having a large debt. As long as the U.S. economy remains strong and grows at a respectable pace, we will never end up like Zimbabwe.

If we need proof of this fact, we need only look at Japan. The country has a debt that is two-and-a-half times as large as the U.S. debt relative to the size of its economy. Nonetheless, it can borrow long-term at a near zero interest rate. Its inflation rate has also been near zero as the government has been desperately trying to increase inflation for the last two decades.

In short, the country has many real problems. Tens of millions of young people struggle to pay for college. Young parents struggle to pay for quality child care and tens of millions of people have inadequate health care insurance.

These are all issues that deserve our attention. The federal debt is just a huge distraction.

Attorney General Rescinds Guidance Meant on Abolishing Debtors Prisons

Debtors prisons are horrific and should be abolished entirely. That an aspect of the Trump regime is supporting them is a sign of how regressive the current federal government is, and it’s also an unpleasant reminder of how the Justice Department reinstated corrupt police civil asset forfeiture earlier this year.

During the holiday season, many of us think about what we can do to help people struggling with poverty. Attorney General Jeff Sessions, on the other hand, decided just before Christmas to rescind a guidance meant to protect low-income Americans.

The 2016 guidance, issued by former President Obama’s Justice Department, urged state and local courts nationwide to abide by constitutional principles prohibiting the jailing of poor people who cannot afford to pay court fines and fees. Jeff Sessions’ action makes clear that he and his Justice Department are unconcerned by courts trampling on the rights of poor people.

The Obama Justice Department issued the 2016 letter after reports and lawsuits by the ACLU and other groups revealed how modern-day debtors’ prisons function in more than a dozen states, despite the fact that the U.S. two centuries ago formally outlawed jailing people simply because they have unpaid debts.

These efforts revealed that poor people were being locked up in GeorgiaWashingtonMississippi, and elsewhere without court hearings or legal representation when they could not pay fines and fees for traffic tickets or other civil infractions or criminal offenses. These efforts also show that modern-day debtors’ prisons result from state laws allowing or requiring the suspension of driver’s licenses for unpaid court fines or fees without first requiring confirmation that the person could actually pay.

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There is no place in this country for a justice system that lets rich people buy their freedom while poor people are locked up or lose their driver’s licenses because they can’t afford to pay money to courts. The momentum for change will continue even as the current Justice Department declines to lead by encouraging fairness and equal treatment of rich and poor.

U.S. “Retail Apocalypse” Only Beginning and Receives Little Awareness

There isn’t much awareness or planning for what’s being referred to as a retail apocalypse, which could have a considerably negative impact on areas of the U.S. economy. Risky retail debts are set to be due with other potentially destabilizing debt loads in the few years ahead, and local economies look as though they’ll be hurt by the loss of retail jobs and reduced tax bases.

The last time I heard the data, the Federal Reserve said that I think somewhere around 15 percent of at least certain aspects of the means of production (land, factories, equipment) were sitting idle in the U.S. That isn’t because there’s a lack of work that needs to be done. On the contrary, there’s plenty of work that needs to be done — which can be easily seen by merely looking around at crumbling infrastructure of cities — and there are people who would like to do it. The economic system isn’t putting those together, however.

And to me, all those malls sitting idle is ultimately a wonderful example of how inefficient the corporate state capitalist system is. If those malls are no longer functionally productive, they should be used by the communities that have often been hurt in neoliberal globalization. They could use the facilities and land to do productive work themselves, and beyond that, the workers could have actual ownership stakes in the enterprise, so that the typical capitalist top-down structure of employer and employee is altered. I say that because how the economic system functions now isn’t working real well for most people, and introducing actual democratic measures into where people work (and spend much of their time) is a way of changing that for the better.

The so-called retail apocalypse has become so ingrained in the U.S. that it now has the distinction of its own Wikipedia entry.

The industry’s response to that kind of doomsday description has included blaming the media for hyping the troubles of a few well-known chains as proof of a systemic meltdown. There is some truth to that. In the U.S., retailers announced more than 3,000 store openings in the first three quarters of this year.

But chains also said 6,800 would close. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.

Screenshot-2017-11-11 America_s ‘Retail Apocalypse_ Is Really Just Beginning

The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.

The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.

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Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.

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The coming wave of risky retail debt maturities doesn’t take into account that companies currently considered stable by ratings agencies also have loads of borrowings. Just among the eight publicly-traded department stores, there is about $24 billion in debt, and only two of those—Sears Holdings Corp. and Bon-Ton Stores Inc.—are rated distressed by Moody’s.

“A pall has been cast on retail,” said Charlie O’Shea, a retail analyst for Moody’s. “A day of reckoning is coming.”

CFPB Trying to Stop the Debt Trap

This is an example of intervention by government power that’s actually trying to help downtrodden people. The role of consumer debt in society is often to weaken people and make it more difficult for them to fight against the corrupt people at the top with power.

The U.S. should use its post offices to provide basic banking services to communities to diminish the role of horrible payday lenders. The government should also cap consumer interest rates at 15 percent, as credit unions did in the early 1980s. Usury would have a much smaller role in a healthier society.

Today, the Consumer Financial Protection Bureau (CFPB) took the first step toward ending the debt trap by finalizing new consumer protections for shorter-term loans where consumers must repay all or most of the debt at once including payday and auto title loans, and longer-term loans with balloon payments.

The Debt Trap Harms Consumers

Payday loans, which often carry an annual interest rate of over 300%, are unaffordable and ultimately trap consumers in a cycle of debt where consumers roll over loans because they are unable to repay them. Lenders make money even if the loan is never successfully paid back because of high interest rates and fees—the debt trap. Financially vulnerable communities and communities of color are particularly harmed. Almost 70% of borrowers take out a second loan within a month, and one in five borrowers take out 10 loans or more consecutively. These borrowers taking out more than 10 loans a year are stuck in the debt trap and generated 75% of the payday loan fees in the CFPB’s research.

Auto title loans feature many of the same problems as payday loans and the CFPB found that 1 in 5 short term title loans ended up with borrowers losing their vehicle for failure to repay.

The New Rule is a First Step to Addressing the Harms of the Debt Trap

The CFPB’s new rule addresses some of the worst excesses of these loans, in states that allow them, by requiring lenders to establish a borrower’s ability to repay the loan before making the loan.

“The rule is an important first step and will benefit some consumers who need relief the most, but a great deal of work is still needed to ensure that American families are no longer ensnared in the debt trap of high interest, abusive loans,” noted Michael Best, Director of Advocacy Outreach at Consumer Federation of America.

Consumers will be pleased to see the rule as, in a recent poll, 73% of respondents supported requiring lenders to check a borrower’s ability to pay before making a loan.