Public Comment

Debt or No Debt: That Is the Question!

Harry Brill
Friday April 06, 2018 - 02:50:00 PM

According to the Federal Reserve Bank which recently has officially encouraged banks to raise their interest rates, the economy is thriving. For the rich the economy is certainly doing well. But for the majority of the American public, their economic situation is very precarious. Here is one important, worrisome statistic. The majority of the public -- 56 percent -- have under $1,000 in their savings and checking accounts combined. And 39 percent of the public have no savings at all. That's up from 34 percent in the previous year. Too many households are living from paycheck to paycheck. 

If an adverse event occurs, such as losing a job or acquiring costly medical expenses, the consequences can be serious and even disastrous. Of course, those who can appeal to family members and friends to obtain assistance or are able to borrow from financial institutions to pay their debts may be able to ride it out. However, a growing number of individuals and families are not that fortunate. Their contacts, if they have any, may be unable or unwilling to help. And their line of credit may be inadequate to help sustain their living expenses. 

For a long while debt has been fueling the economy. Consumers have been spending billions of dollars of money that is not theirs, but which are debts that they are required to repay. The most widely used source for borrowing money are credit cards. About 174 million adults possess at least one credit card. Although many households use credit cards only for convenience, millions depend on these cards to pay their bills. The average credit card debt, which has been increasing, is currently over $16,000. The average annual interest rate is just over 16 percent. 

Moreover, the already high interest rate will increase because the Federal Reserve has not only recently raised interest rates. It is also planning on at least two more interest rate hikes this year. And many financial institutions have been willing to make loans but at a higher rate to borrowers with "impaired credit records".  

In the short run, the additional spending financed by loans has been beneficial for both households and the economy. But because of the high interest costs for borrowing, the long term impact for individuals and families have been unfavorable. That is because paying off debt with their low earnings has appreciably reduced their purchasing power. 

Among the visible consequences, major retailers last year closed over 5,000 stores. Small retailers closed about another two thousand stores. The massive closings cannot be explained by the increase in internet based purchases, which is only about 8.3 percent of the total retail market. The problem is the economy. The main headache is that purchasing power has been shrinking. 

Of course, had the income of households increased sufficiently, that is, kept pace with inflation or better, the narrative would be quite different. Instead, the costs that consumers pay for necessities has substantially outpaced the increase in income, which explains mainly why Americans have been borrowing in the first place. Over the past decade, medical costs have increased by 34 percent, food prices has climbed 22 percent, residential electricity prices are up 34 percent. But the income earned by working people has lagged behind. It is not surprising, then, that the number of households that cannot afford to stay above water has been increasing. Borrowing money has become a necessity. 

But because many borrow more than they can afford, hundreds of thousands of debtors each year file for bankruptcies. Although these filings have relieved at least some of their obligations, -- under chapter 7 of the bankruptcy laws credit card debts could be forgiven -- their poor credit rating either makes future borrowing impossible or they are required to pay much higher than average interest rates when borrowing again.  

Since paying off debts subtracts from their ability to spend, the resulting decline in purchasing capacity increases the risk of being evicted and even becoming homeless. Many of those who remain in their apartments become burdened with rising utility bills that they are unable to pay. Although many states have enacted laws that attempt to protect those who are unable to pay their utilities in full, the number of households being disconnected is nevertheless rising. 

In 18 states that have kept track of the number of units that electricity was cut off, close to 3 million households were darkened last year. In just Texas electricity was cut off in more than 900,000 homes last summer. This was triple the number that was cut off 10 years ago. In Ohio, the electricity in 314,000 homes in a recent 12 month period were cut off, which was an 84 percent increase from 10 years ago. In Pennsylvania the state reported 220,000 electricity terminations, which has more than doubled since ten years ago. In California, electricity was cut off in 714,000 households, which is the state's highest on record. The problem is not just that members of the households are unable to watch TV. Cooking is very tricky with a disconnected electric stove! 

Although most households are eventually reconnected, the future for many households looks discouraging. To help low income families pay their utility bills many have been accessing the federal Low-Income Home Energy Assistance Program (LIHEAP), which was enacted in 1981. Last year the program assisted about 6 million households to pay their utility bills. However, President Trump is committed to scuttling the program, claiming it is "no longer necessary" and is subject to fraud. With a declining real income and unable to borrow sufficiently, cutbacks on necessities have been the only option. Low income families have very little leeway to do otherwise. So the poor, and the near poor who we call nowadays the middle class, are in a bind. They are dammed if they borrow and dammed if they don't.  

What can be done? Poverty wages should be completely abolished. The federal minimum poverty wage of $7.25, which has remained the same since July 2009, should exceed $20 an hour currently because of the gains in worker productivity. Instead, the hourly gain in the amount of work that the average worker produces has mainly benefited profits.  

Also, interest rates should be lowered. Financial institutions have been able to make substantial profits by charging relatively low interest rates for mortgages that are amortized for as long as 30 years. Clearly, more progressive lending policies, which can still be profitable, should apply generally to all those who depend on borrowing money. There are other tools as well that are based on egalitarian principles which would alleviate the economic distress of those who suffer financial hardships.  

Is the activist and song writer, Joe Hill right when he commented in one of his classic songs that the chance of improving our lives is only "pie in the sky"? As the lyrics explain, that is only so when we don't do our best while on earth. His advice is certainly worth taking: "Folks of all countries should unite, side by side we for freedom will fight". He also urged that we develop our skills. Indeed, that is immensely important to overcome the immoral and ruthless character of the nation's Robin Hood in reverse practices. 

With regard to taking advantage of the public,Corporate America is especially gifted and well funded. But there is a very serious downside. The business community for the most part is incredibly shortsighted. In the long run, a massive decline in purchasing power will inevitably result in a huge reduction in purchases as well as a much lower rate of profit, if any, of the goods and services that are sold. What then?