How Thomas Piketty and Elizabeth Warren demolished the conventional wisdom on debt

Those who fall into debt are shamed for spending irresponsibly. But the truth of the matter is much more alarming

Topics: Thomas Piketty, Elizabeth Warren, Capital in the 21st Century, Debt, U.S. Economy, Editor's Picks, Income inequality, , ,

How Thomas Piketty and Elizabeth Warren demolished the conventional wisdom on debtElizabeth Warren, Thomas Piketty (Credit: Reuters/Joshua Roberts/Charles Platiau)

In a 2006 “Saturday Night Live” sketch, Chris Parnell sums up the conventional wisdom about credit card debt:

“Did you know millions of Americans live with debt they can not control? That’s why I’ve developed this unique new program for managing your debt. It’s called, Don’t Buy Stuff You Can’t Afford.”

According to the prevailing story, debt is caused by lavish and irresponsible spending by poor and middle-class families. But like much “conventional wisdom,” an increasing amount of evidence belies this point. In fact, the decline of saving and the rise of debt was an almost inevitable consequence of families trying to scrape by in the face of rising inequality. This is the corollary of French economist Thomas Piketty’s now-famous observation: While capital is increasingly concentrated at the top, it turns out that debt is becoming concentrated at the bottom.

In the same “SNL” bit, Amy Poehler says, “There’s a whole section in here about buying expensive things using money you save.” This supposedly common-sense observation is mirrored elsewhere. The American Institute of CPAs runs an advertising campaign urging people to “Feed the Pig.” One such ad depicts a responsible couple studiously saving for a house, while another eats lobster, receives massages and then complains about “never having enough to put away.” Underlying both the real commercial and the satirical one is the idea that those who aren’t saving could do so, but are instead spending the money. But the evidence for this story is weak.

A more compelling story is that inequality has made it harder for households at the middle and bottom to save.  In fact, the decline in savings has coincide with a rise in income inequality (see chart). There is evidence that these trends are connected.



American households falling in the bottom third of income growth from 1999 to 2007 accounted for a full half of the decline in the overall saving rate over the same period, according to the IMF. Meanwhile, a 2012 Demos study finds that “40 percent of households used credit cards to pay for basic living expenses such as rent or mortgage bills, groceries, utilities, or insurance, in the past year because they did not have enough money in their checking or savings account.” Another 2012 study finds that “regions or periods with higher inequality are characterized not only by a more unequal distribution of saving rates but also by lower saving rates for most of the income distribution.”

One of the myths of the right has been that if the rich have more money, they’ll save and invest more as a result, thereby stimulating the economy. That is, more inequality will lead to more national saving. In fact, the data shows that inequality just concentrates wealth in the hands of the few. It also points to the important possibility that the increase in income inequality is what drove the savings rate down to begin with, by also increasing disparities in wealth.

Wealth serves as a buffer for an income shock, like losing a job or a medical emergency; it also constitutes a family’s retirement income and the means for funding children’s education. However, the rise in income inequality has been coupled with a rise in wealth inequality, meaning that wealth is increasingly concentrated in the hands of the few. Recently, Emmanuel Saez and Gabriel Zucman have shown the increase of wealth inequality in the United States (source).

This rising wealth inequality means that American households don’t have anything to fall back on in the case of a bout of unemployment or a health crisis. (One study finds that 62 percent of bankruptcies are medical-related.)

In a recent study, Amy Traub, a senior policy analyst at Demos, sought to test whether those with credit card debt were the profligates portrayed by popular culture. She used a national survey of 1,997 households to create two groups indistinguishable in terms of income, race, age, marital status and rate of homeownership. The only difference? One group had credit card debt, the other group didn’t. Traub finds that the households without debt had more assets, and fell back on them when dealing with unexpected expenses. She finds “little evidence” that “households with credit card debt are less responsible in their spending habits than households that do not have accumulated debt.” Instead, she finds that unemployment, children, lack of education, lack of health insurance and negative home equity correlate strongly with high levels of debt.

In their famous book on the subject, “The Two-Income Trap,” Elizabeth Warren and Amelia Warren Tyagi argue that slowing income growth, not overspending, is what’s driving families into debt. In an essay on Boston Review they write that,

There is no evidence of any ‘epidemic’ of overspending—certainly nothing that could explain a 255 percent increase in the foreclosure rate, a 430 percent increase in the bankruptcy rolls, and a 570 percent increase in credit-card debt.

The Warrens point to the increasing cost of education and housing. A 2000 study performed in Fresno, California, found that the most important determinant of neighborhood housing prices was school quality. The strongest evidence that the Warrens cite is that between 1984 and 2001 housing prices for those with one or more children increased at three times the rate of those without children. As families have tried to provide for the education for their children, they have increasingly been squeezed by high housing costs.

The final factor driving debt is unscrupulous practices by banking institutions.The CARD Act is saving Americans $12.6 billion a year by cutting back dodgy fees and other shady practices. But payday lenders can still prey on the poor. Traub finds that households with higher levels of credit card debt were more likely to have received financing from payday lenders. We need policies to give poor and middle-class workers more income and wealth. Increasing the minimum wage is a simple start. Incentivizing worker ownership and profit-sharing would also benefit workers. The government could give citizens a small basic income each year and it could also institute a “baby bond” policy, which would foster wealth building. On the other side, it needs to bust up concentrated and idle wealth by taxing it.

As Piketty notes in his interview with Matthew Yglesias, “My point is to increase wealth mobility and to increase access to wealth.” He aims to “reduce taxation of wealth for most people, but to increase it for those who already have a lot of wealth.” By spreading wealth to the middle class and poor, we could decrease the reliance on the “plastic safety net,” and create a strong and sustainable middle class.

Sean McElwee is a writer and researcher of public policy. His writing may be viewed at seanamcelwee.com. Follow him on Twitter at @seanmcelwee.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 7
  • Close
  • Fullscreen
  • Thumbnails
    AP/Jae C. Hong

    Your summer in extreme weather

    California drought

    Since May, California has faced a historic drought, resulting in the loss of 63 trillion gallons of water. 95.4 percent of the state is now experiencing "severe" drought conditions, which is only a marginal improvement from 97.5 percent last week.

    A recent study published in the journal Science found that the Earth has actually risen about 0.16 inches in the past 18 months because of the extreme loss of groundwater. The drought is particularly devastating for California's enormous agriculture industry and will cost the state $2.2 billion this year, cutting over 17,000 jobs in the process.

       

    Meteorologists blame the drought on a large zone (almost 4 miles high and 2,000 miles long) of high pressure in the atmosphere off the West Coast which blocks Pacific winter storms from reaching land. High pressure zones come and go, but this one has been stationary since December 2012.

    Darin Epperly

    Your summer in extreme weather

    Great Plains tornadoes

    From June 16-18 this year, the Midwest was slammed by a series of four tornadoes, all ranking as category EF4--meaning the winds reached up to 200 miles per hour. An unlucky town called Pilger in Nebraska was hit especially hard, suffering through twin tornadoes, an extreme event that may only occur every few decades. The two that swept through the town killed two people, injured 16 and demolished as many as 50 homes.   

    "It was terribly wide," local resident Marianne Pesotta said to CNN affiliate KETV-TV. "I drove east [to escape]. I could see how bad it was. I had to get out of there."   

    But atmospheric scientist Jeff Weber cautions against connecting these events with climate change. "This is not a climate signal," he said in an interview with NBC News. "This is a meteorological signal."

    AP/Detroit News, David Coates

    Your summer in extreme weather

    Michigan flooding

    On Aug. 11, Detroit's wettest day in 89 years -- with rainfall at 4.57 inches -- resulted in the flooding of at least five major freeways, leading to three deaths, more than 1,000 cars being abandoned on the road and thousands of ruined basements. Gov. Rick Snyder declared it a disaster. It took officials two full days to clear the roads. Weeks later, FEMA is finally set to begin assessing damage.   

    Heavy rainfall events are becoming more and more common, and some scientists have attributed the trend to climate change, since the atmosphere can hold more moisture at higher temperatures. Mashable's Andrew Freedman wrote on the increasing incidence of this type of weather: "This means that storms, from localized thunderstorms to massive hurricanes, have more energy to work with, and are able to wring out greater amounts of rain or snow in heavy bursts. In general, more precipitation is now coming in shorter, heavier bursts compared to a few decades ago, and this is putting strain on urban infrastructure such as sewer systems that are unable to handle such sudden influxes of water."

    AP/The Fresno Bee, Eric Paul Zamora

    Your summer in extreme weather

    Yosemite wildfires

    An extreme wildfire burning near Yosemite National Park forced authorities to evacuate 13,000 nearby residents, while the Madera County sheriff declared a local emergency. The summer has been marked by several wildfires due to California's extreme drought, which causes vegetation to become perfect kindling.   

    Surprisingly, however, firefighters have done an admirable job containing the blazes. According to the L.A. Times, firefighters with the state's Department of Forestry and Fire Protection have fought over 4,000 fires so far in 2014 -- an increase of over 500 fires from the same time in 2013.

    Reuters/Eugene Tanner

    Your summer in extreme weather

    Hawaii hurricanes

    Hurricane Iselle was set to be the first hurricane to make landfall in Hawaii in 22 years. It was downgraded to a tropical storm and didn't end up being nearly as disastrous as it could have been, but it still managed to essentially shut down the entire state for a day, as businesses and residents hunkered down in preparation, with many boarding up their windows to guard against strong gusts. The storm resulted in downed trees, 21,000 people out of power and a number of damaged homes.

    Debbie Arita, a local from the Big Island described her experience: "We could hear the wind howling through the doors. The light poles in the parking lot were bobbing up and down with all the wind and rain."

    Reuters/NASA

    Your summer in extreme weather

    Florida red tide

    A major red tide bloom can reach more than 100 miles along the coast and around 30 miles offshore. Although you can't really see it in the above photo, the effects are devastating for wildlife. This summer, Florida was hit by an enormous, lingering red tide, also known as a harmful algae bloom (HAB), which occurs when algae grow out of control. HABs are toxic to fish, crabs, octopuses and other sea creatures, and this one resulted in the death of thousands of fish. When the HAB gets close enough to shore, it can also have an effect on air quality, making it harder for people to breathe.   

    The HAB is currently closest to land near Pinellas County in the Gulf of Mexico, where it is 5-10 miles offshore.

  • Recent Slide Shows

Comments

Loading Comments...