Credit as a Cover for Cutbacks Over the Past Thirty Years

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By Michael Brün
Two facts are important for understanding our current economic situation and how we got here. The first is that the finance industry has grown from comprising less than one tenth of our economy in the 80s to over a sixth of our economy today.  The second is that most debt has not come from extravagant purchases, but from  people doing what they felt they were expected to do; people seeking to conform to our cultural definitions of what an American life looks like.We tend to view borrowing as an individual choice, and therefore, debt is a personal consequence/responsibility. Here we are talking about household debt, not government or business debt.  The overwhelming prevalence of borrowing suggests more complex factors. Why have ordinary people borrowed so much over the past thirty years that many face all kinds of hardships now trying to repay or reduce their debt loads?

Of course the finance industry “pushed” credit in a number of ways. That’s partly due to the entrepreneurial zeal of ambitious financiers, but it was tolerated by a government that wanted to hide from the political consequences of unpopular cutbacks.  You can say people were bamboozled if you want to blame the finance industry; or that people were stupid, overly optimistic, or just too shortsighted in their planning if you want to blame the borrowers. You can also blame poor governement regulation. Yet our current problems are not just about gullible and greedy households, criminal and greedy lenders, and incompetent government.  People and institutions have had “moral” shortcomings for as long—at least—as records exist and yet haven’t always been in this type of trouble.  What is special about now?

Thirty Years of Cutbacks and Cost Increases

One way we can better understand this is through exploring choices in a specific area over the past 30 years, take the education sector.  Costs for tuition, fees, housing, textbooks, etc. have outpaced inflation over this entire period.  At the same time, state grant programs were eliminated and federal programs curtailed.  These cutbacks engendered some resistance from the “usual suspects” in left wing and union movements, but otherwise were apathetically accepted.  Why, for thirty years, would the entire middle class population of students and their parents so willingly and uncomplainingly take on a huge extra burden?

The answer is that the finance industry, with some government support, stepped in to relieve the immediate pain.  The student loan industry grew fantastically during this time.  Because of the availability of student loans, the upfront cost of college remained relatively low. The implications of switching from a system of grants to one of loans were not understood because opportunity for social advancement is supposed to be a right.  Until recently, each generation in the US expected to do as well or better than the previous generation. When a new generation of students were offered loans in place of grants, the majority accepted the change as a healthy sign of shrinking government, spreading of markets, and a spur to economic growth.  That’s what they were told the cuts were all about.  They were also told that taxpayers were no longer interested in spending so much on government programs.  They accepted this too. In fact, many parents rejoiced at the Reagan tax cuts of the 1980s and the Bush tax cuts of 2003.

Most people did not understand that, while they might save a few hundred or even a few thousand dollars from tax cuts, a relatively few wealthy people saved tens and hundreds of thousands of dollars; in some cases even millions.  The result was less revenue for government programs. This meant that most non-wealthy people ended up paying much more in extra costs than they saved from lower taxes.  However, it was not spun this way. Most thought they were investing in their future in a modernized economy, and that they would easily be able to pay off the debt via better jobs and higher paychecks.  Why complain about inequality if everyone is going to be better off in the future? The real cost difference was felt only years later, after graduation, when the time came to pay back loans with interest.

Good Calculations Made With Bad Assumptions

So it is that many people ended up in debt, not because they were particularly shortsighted or greedy or foolish, but because they made their calculations based on two false assumptions: that they could expect to make as much or more than their parents had, and that the financing changes would help them along rather than cause their ruin.  They trusted the shrinking government and the growing market.  In short, they put their faith in capitalism.

Today, the up and coming generation does not expect to do as well as previous generations. The old assumptions have been rejected, but a new set of assumptions have yet to emerge, and that is actually problematic.  Assumptions can get us in trouble, but try to make a long range plan based only on what you know for sure–it won’t work.  New assumptions will help reshape our society, for good or ill. What will they be?

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