August 4, 2011

Continuing Downness on the Economy

Justin Katz

Thinking further about an aspect the topic that I raised this morning — namely, things that prevent Americans from forging their own way in this economy — many additional factors came to mind. A huge one is debt.

On my short lunch break, I don't have time to go in search of the link, but I read recently that personal debt in the United States greatly exceeds government debt, which is a compounded problem beyond forcing future generations broadly to finance today's public spending. Even within a couple of generations, the typical family would have needed much less money just to survive because it would have lived within its means on an annual basis.

My in-laws bought their modest cape in Portsmouth for $15,000. For the sake of ease, assume the interest payments amount to a doubling of the ultimate cost of the house; that means they would havce wound up paying roughly $1,000 per year over the life of a thirty-year mortgage. A similar house now would cost somewhere around three-quarters-of-a-million dollars, with the same interest assumption, or $25,000 per year. Somebody who decided to go out on his or her own to start a business could live on just about that amount of money while ramping up, and somebody with a mortgage of that size will surely be significantly more reluctant to take on greater debt in order to invest in a business venture.

I'm simplifying, of course. Wages have inflated, as well, and the price of real estate has something to do with demand, and so on. But part of the reason that the market has borne a 2,000% increase in the price of a house is that our toleration for debt has grown immensely. It's not just mortgages, either. Consider college debt (which has arguably only inflated the amount of education that one needs for the same exact sort of work). Cars. Equity loans. Credit cards.

Speaking from personal experience, that all means that I would be insane to commit to business loans for, say, Anchor Rising. Given all of my existing debt, I need to make so much money just to pay each month's bills that I'd quickly eat up my investment in personal salary. And if the full-time writing activity didn't result in an adequate revenue stream, I'd wind up needing to earn even more money per month to pay off the loan.

Of course, Americans used to have more room in their personal finances for a host of other reasons. When the marketplace was calibrated to the idea of one-income households, a spouse was spare capacity. Whether the working man's wife found part-time work outside the home, helped her husband with business paperwork, or worked as a partner in a storefront, that was all extra income tacked onto basic priorities.

As with regulations, both the tolerance of debt and shifts in the culture have had justifications, but it may be that they've finally all added up to a society that so differs from its prime that decline is inevitable.

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Imagine the discretionary income that would be available to two income families if they got rid of the smart phones, cable and internet bills, second cars, motorcycles, jet skis, vacations and take-out bills. I am flabbergasted when I see my own kids charging trips via their ipads or whatever, thinking nothing of eating out three and four times a week, watch premium cable movies on their charged sixty inch plasma screens and drink Grey Goose in their dry cleaned pajamas while wondering why they have no money, but chuckle at the old man's '92 toyota.

I'm no cheapskate, and my parents would roll in their graves if they saw how I, never mind my kids, waste money. I've often thought of my grandparents when I read things comparing today's economy to the Great Depression. If the stories I heard from them are true, we need to smarten up, because we are in no way shape or form ready for a real depression.

Posted by: michael at August 4, 2011 2:49 PM

Often, my wife who wants to be able to stay home with our daughter, will wonder aloud why her mother could stay home with three kids while we can't afford for her to stay home. The number one reason I came up with is home prices. When my father bought his house, there was a 1:1 relationship between home prices and his salary. He was just an average working stiff. I think he was making about $14,000 a year and bought the house for $16,000. Today, the average home price to average salary is closer to 3:1. So even if you add a working spouse at an average salary, now you're up to 3:2, still coming up short. Add on to that all the gadgets of our society, and you can see where we run into so much debt.

Michael, you're right about how much discretionary income you have when you cut all that stuff out. My wife did just start her own home business about a year ago, and we did cut out all of that stuff. We cut our phone, cable, eating out and even birthday gifts for each other. It's amazing how much "crap" we had in our spending. We've been forced to cut our spending by about 50%. Some months it's tough to meet the number perfectly, but it's also pretty interesting to see that you can live without things just fine.

Posted by: Patrick at August 4, 2011 3:41 PM

Is it me, or is Justin advocating Sharia law?

Interestingly the fringe-right was defending 3,000% interest loans the other day on RIF...

Posted by: Russ at August 4, 2011 4:00 PM

I think you actually live better without all the "stuff." Good luck with the business, if it is something that would benefit from advertising, nothing wrong with dropping a name on a blog now and then.

Posted by: michael at August 4, 2011 4:36 PM

Thanks to Congress distorting the higher education market through Federal Stanford Loans and Perkins grants, the cost of tuition has tripled over the last two decades. I graduated school with $80k in student loan debt, which got me off light according to similarly situated individuals my age. Nice way to start off your career, isn't it?

Posted by: Dan at August 4, 2011 4:57 PM

You cant forget the impact of healthcare. In the golden days you might pay your doctor on a payment plan but by and large you didng have the healthcare premiums which eat up so much of you salary each week. Add in the medications for a few kids with allergies and maybe one with asthma, to say nothing of mom and dads medications and even with a good plan, you are still paying atleast 100 a month on top of the 30-40 a week.

Posted by: Rich at August 4, 2011 5:11 PM

"Thanks to Congress ... the cost of tuition has tripled over the last two decades."

It's not going to be long until there are Congressional hearings with college presidents coming in and explaining why tuition is so high and endowments are in the billions. Why they're being so greedy and earning more than half a million dollars a year in salary and running these billion dollar campaigns, yet little Johnny is $100k in debt with a degree in American Literature that he can't do anything with. Wait til the media starts printing endowment totals and college president salaries on the front pages of newspapers. Congress will make the presidents out to be the bad guy yet, like the housing bubble, they are the ones to blame.

Posted by: Patrick at August 4, 2011 10:11 PM

Russ said:
"Interestingly the fringe-right was defending 3,000% interest loans the other day on RIF..."

Interestingly, the Democrats sneakily slipped the reform bill into the dead file. Nice attempt to obfuscate your incompetent GA's lecherous relationship with the payday loan industry.

Posted by: Max Diesel at August 5, 2011 7:37 AM
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