The Good News Is . . . the Bad News

As 2012 drew to a close, Americans were borrowing money at a pace not seen since the financial crisis of 2008. You’re probably thinking: debt = bad. But for the U.S. economy, which is largely fueled by consumer spending, this trend is heralded as good news! It may seem paradoxical, but when consumers spend money—whether out of income they’ve earned or from a loan or credit card—it contributes to economic growth. Truth is, taking on debt, or buying on credit, is a way of life for many Americans, and the health of our economy, for better or worse, has come to depend on it.

There are different kinds of debt, say most economists, and not all debt is bad. For example, most U.S. households can only afford to buy a house by borrowing—that is, taking on a mortgage. If home building depended on people amassing enough savings to buy with cash, very few homes would be built. And increasingly, Americans buy cars on credit (that is, with a car loan), often because of low (even 0%) interest rates. When homes and automobiles are purchased, certain businesses prosper and jobs are created. In addition, middle-class American families tend to rely on at least some level of borrowing to pay for college tuition. Statistics consistently show that attaining a college degree will significantly increase a person’s earning potential. Thus, from this perspective, some level of student loan debt might be considered a sound investment.

One key factor affecting the level of borrowing is “consumer confidence.” This is a measure of consumers’ attitudes, such as their expectations as to whether there will be more or fewer jobs available, or whether incomes are likely to rise or fall. When consumers’ confidence rises, they tend to both spend and borrow more. But of course it works in the pessimistic direction as well: lower confidence shrinks spending and demand. While looser credit and increased borrowing may have short-run benefits, high levels of household debt were a major factor in the severe recession the country has only lately emerged from.

Image credit: © Stuart Miles/Shutterstock

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