Shame on you, you profligate consumer

I was driving in the car the other day, listening to the latest This American Life show on the financial crisis. If you caught the show, you may remember this scene near the end of the first segment: Alex Bloomberg is talking with an economist who shows him a graph of household debt. The graph shows (we are told) a massive increase in household debt over the last couple of decades. The lesson of this? Well, as our economist friend put it: "the problem is us...we've been living very high on the hog."

So, shame on you, American consumer for getting us into this mess by putting your lavish spending habits on your Amex. When will you learn?

This constant rhetoric about our hyper-consumer culture seems to miss the fact that maybe, just maybe, the reason people are going into so much debt has little to do with our spending habits, our insatiable thirst for gizmos, or our keeping up with the Joneses, but has more to do with the fact that so many people get paid so poorly at their jobs, that they are dependent on credit to maintain any kind of standard of living.

The graph, below, charts real (adjusted for inflation) weekly wages in the United States against the outstanding balance on all the consumer credit owed in the country*. Now, we do see that sharp acceleration in consumer credit, but notice what else we see--a significant drop in real earnings for the last thirty or so years.


So it's not just that people are extending beyond their means, it's that they've seen their means shrink substantially. We have now had a fully generation of workers who, on average, are getting less income out of their jobs than their parents did. So whose fault is this really? Over the last thirty years the country has done everything it can to try to pay people less--freeze the minimum wage, crack down on organized labor, push people into the labor force by removing social welfare benefits--and now we are shocked when we find out that you can't have declining wages and lots of spending without a mountain of debt.

Blame aside, this has created a real dilemma as we think about how to get out of this mess. On the one hand we are told to do our patriotic duty and spend, but on the other hand we are admonished for our debt-driven spending habits.

The solution? Pay people decently and they can spend the money they earn instead of running up a credit card bill.

*The data come from the Federal Reserve Flow of Funds data (for consumer debt) and the Bureau of Labor Statistics (for real wages).