September 24, 2010

How Is Debt Going Away?

Justin Katz

Most of us have taken it to be one of the few salutary effects of this recession that Americans' debt habits appear to have shifted somewhat. Blogger Les Jones suggests that we've overestimated that result:

It turns out that the belt-tightening interpretation may not have been true in the least. If the data below is correct 99% of the reduction in consumer debt was due not to repayment of loans, but to non-repayment. The debts didn’t go away because they were paid off. They went away because they were written off as hopeless.

I'm not inclined to disagree with Jones that "there's too much debt that will never be repaid" — although, in the name of exactitude, I'd note that the Wall Street Journal's numbers to which he's reacting actually suggest that 96% of the reduction was due to default. However, this evidence alone doesn't prove that habits haven't changed. After all, it's much more difficult to pay down debt than to default and takes a longer time to show results.

If I pay every dollar that I can toward debt reduction, my total goes down a couple of hundred dollars per month. If my creditors were to write off my debt in total, well, it would plummet quite a bit more than that. Indeed, in the balance between the two ways of reducing debt, there would have to be a large number of folks like me to offset even one defaulter.