The American Consumer - Rising Debt, Decreasing Savings, And Stagnating Incomes

One consequence of increased spending in the late twentieth and early twenty-first centuries was rapidly increasing consumer debt, which reached an all-time high of approximately $9 trillion (including mortgages on homes and other debts; excluding mortgages but including credit card and car loan debt, the figure was $2 trillion) in 2003. In January 2004 credit card debt alone totaled $735 billion, with outstanding balances averaging $12,000 per household. Figuring in car loan debt, the balance per household was $18,700 (Joanne Laurier, "U.S. Consumer Debt Reaches Record Levels," World Socialist Web Site, January 15, 2004, http://www.wsws.org/articles/2004/jan2004/debtj15.html).

FIGURE 7.1

(See Figure 7.1, which shows amounts of consumer debt from 1992 to 2001, minus mortgage debt).

Bankruptcy

As a result of this increasing debt, U.S. bankruptcies reached record highs in the early 2000s. Filing for bankruptcy means that a person or business has more debt than they can reasonably hope to repay, so they enter a legal agreement with their debtors and a federal bankruptcy court to "pay" as much as they can with whatever assets they have, and after a predetermined amount of time—usually a number of years—begin again with new credit. Depending on state law, certain belongings may be kept through the bankruptcy. Personal bankruptcy is a non-business filing of bankruptcy by an individual or family. There are two main chapters of personal bankruptcy under which individuals may file: chapter seven is a total liquidation of assets (meaning most of one's belongings must be sold and the money used to pay debtors), while chapter thirteen is a guided reorganization of one's budget with a plan to pay off debts in a certain amount of time. According to the American Bankruptcy Institute (www.abiworld.org), about 70% of those who file for bankruptcy use chapter seven, which completely erases debt. Of people who file for chapter thirteen bankruptcy, only about 35% actually pay off their debts.

According to the Administrative Office of the U.S. Courts, the total number of bankruptcies filed between September 2003 and September 2004 was 1,618,987; 34,817 were business filings and 1,584,170 were personal filings. Most (1,133,622) were chapter seven filings, and 449,613 were under chapter thirteen (the rest were under chapter eleven, which is rarely used in cases of personal bankruptcy). In researching their book The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (New York: Basic Books, 2003), Elizabeth Warren and Amelia Warren Tyagi found that women and families with children at home were two of the fastest-growing groups filing for personal bankruptcy. Between 1981 and 1999, for example, the number of women who filed for bankruptcy went from about 69,000 to about 500,000—a 662% increase. Warren discussed the phenomenon of bankruptcy among middle-class American families in her article "Financial Collapse and Class Status: Who Goes Bankrupt?" (Osgoode Hall Law Journal, vol. 41, no. 1, 2003), writing of the importance of such studies: "Knowing who files for bankruptcy can signal information about successes and failures throughout the population, informing research, for example, on the economic progress of different social and racial sub-groups, the heightened vulnerability of the elderly, or the economic risks facing divorced women or mothers of small children." In her study Warren found that an overwhelming majority of the people she interviewed who had filed for bankruptcy had at least some college education, worked in occupations that are typically rated high in status surveys, and were home owners—the three factors that Warren used to identify

FIGURE 7.2

membership in the American middle class. This finding contradicts the idea that people who declare bankruptcy tend to be poorly educated and economically disadvantaged from the outset. Additionally, the most common reasons people give for declaring bankruptcy are sudden financial setbacks, such as job loss, illness or injury, medical debt, or divorce, rather than long-term problems involving chronic overspending (although those cases do exist).

BANKRUPTCY REFORM. Nonetheless, in March 2005 the U.S. Senate passed a bill that would tighten bankruptcy standards. The new law called for those earning more than their state's median income who can afford to repay at least $6,000 over a five-year period would no longer qualify for a chapter seven filing but would instead have to file under chapter thirteen. Citing abuses of the system, members of Congress and the George W. Bush administration stated that the existing law was too lenient on "gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires" ("Senate Passes Tougher Bankruptcy Bill," http://www.cnn.com/2005/ALLPOLITICS/03/09/bankruptcy.ap/, March 11, 2005). Because of different state laws regulating which assets and belongings a person can keep after a chapter seven filing, there were unquestionably people, including celebrities, who used chapter seven bankruptcy as a way to keep possessions without having to pay for them. Opponents of the new bill argued that it was actually designed to make more money for credit card companies and lenders, and that it would keep ordinary people who had chosen bankruptcy as a last resort permanently in debt.

Issues behind Increasing Debt

There are several reasons for the dramatic rise in debt and bankruptcy. The most obvious is that spending has outpaced wage increases. According to Louis Uchitelle ("Why Americans Must Keep Spending," New York Times, December 1, 2003), government data for 2003 reported that, while personal consumption expenditures rose at an annual rate of 3.2% since 1973, median household income increased by only 0.5%. Additionally, spending outpaced disposable income, or post-tax money available after fixed expenses are paid. Between October 2003 and October 2004, spending increased 4.1%, while disposable income rose 2.7%. (See Figure 7.2 and Figure 7.3.)

FIGURE 7.3

In The Overspent American: Why We Want What We Don't Need (New York: Basic Books, 1998), Juliet B. Schor offers a more complex explanation of increasing consumer debt. Noting that "competitive acquisition" has been a hallmark of American life since the beginning, Schor writes that people used to compare themselves and their belongings with those who lived near them in circumstances similar to their own. More recently, however, as exposure to different economic classes has become commonplace, especially via television, movies, magazines, and the Internet, but also with coworkers and acquaintances, Americans began to compare themselves with people outside of their own economic group—usually looking to the upper classes for direction on what and how much to buy. This seemingly unrealistic comparison eventually became the norm, causing average Americans to expect their material status to equal that of those outside of what Schor calls their "reference groups"—the group of people each of us chooses to identify with most closely. The material possessions of one's reference group quickly come to be considered necessities rather than indulgences; Schor writes of the trend of overspending to keep up with others:

Oddly, it doesn't seem as if we're spending wastefully, or even lavishly. Rather, many of us feel we're just making it, barely able to stay even. But what's remarkable is that this feeling is not restricted to families of limited income. It's a generalized feeling, one that exists at all levels. Twenty-seven percent of all households making more than $100,000 a year say they cannot afford to buy everything they really need. Nearly twenty percent say they "spend nearly all their income on the basic necessities of life." In the $50,000–100,000 range, 39 percent and one-third feel this way, respectively. Overall, half the population in the richest country in the world say they cannot afford everything they really need. And it's not just the poorest half.

Elizabeth Warren and Amelia Warren Tyagi find in The Two-Income Trap that many Americans overspend for practical reasons, citing education as an example. While public schools were once considered more or less reliably similar in different communities, the perception in the 1990s and 2000s has been that families who plan to send their children to public schools must buy houses in more affluent neighborhoods whether or not they can afford them because those areas have better school districts. Many parents consider this to be a fair trade-off, but it often strains a family's finances. Additionally, Warren and Tyagi note that, unlike earlier generations that typically had one parent working full time and the other at home and available to take on a job to supplement the family's income if necessary, families in the late twentieth and early twenty-first centuries already tended to have both parents working full-time and putting about 75% of their pay toward household essentials.