The Debt Explosion

In the new world of unregulated lending, families are barraged with advertisements and offers for a new product: all the debt they could ever want, and more. Now, in a single year, more than five billion pre-approved credit card offers -- totaling over $350,000 of credit per family -- pour into mailboxes all across America. Magazine ads, telephone calls during dinner, and flyers at the bottom of grocery store bags barrage families with even more offers of credit, while roving bands of credit card marketers haunt college campuses and shopping malls. Credit card debt has increased accordingly: from less than $10 billion in 1968 (inflation adjusted) to more than $600 billion in 2000, an increase of more than 6,000 percent. It would seem that once Americans got a first bite of the debt apple, they just couldn't get enough.
But what are families spending all that money on? Did they blow it on "vacations and luxury items," as one columnist claimed? This explanation might gratify the self-righteous bill-payers, but it doesn't square with the facts. Undoubtedly, all that easy credit dangling under everyone's noses enticed a few more Americans into buying things they could have lived without. As we showed in chapter 2, today's families are spending more on some goods, such as computers, home electronics, and pet food, than they did a generation ago. But they are spending less on food, clothing, appliances, home furnishings, and tobacco -- a lot less. There is no evidence of an increase in impulse buying or luxury acquisitions over the past thirty years -- certainly nothing that could account for a 6,000 percent increase in credit card debt. Moreover, the expenditures that have shown the biggest increases -- e.g., housing, health insurance, college tuition, preschool-are the purchases least likely to appear on a credit card bill.

If families aren't buying more goods, then what are they using all that debt for? They get into debt trying to buy their way out of the Two-Income Trap. The bidding war has inflated the cost of middle-class life to the point that once they have paid the mortgage and other fixed expenses, families have little discretionary income left -- and even less margin for error. What to do when something goes wrong, as it increasingly does? Since the two-income family does not have a stay-at-home mom to call on to help make ends meet when emergency strikes, the family turns to debt to make it through to the next payday.

No advertisements trumpet, "When your husband leaves you, there's MasterCard." Nor do we hear: "American Express: Don't lose your job without it." But those slogans would be closer to the truth about how credit is used today. When corporate layoffs loom, workers apply for as many credit cards as possible to see them through until they can find a new job. When health insurance lapses, the family hands a MasterCard to the doctor and prays for the best. And when Dad walks out, that "E-Z check" stuffed in with the latest credit card bill looks like just the thing to tide Mom over until the child support checks arrive. Later, when the credit card payments become unmanageable, the family takes on a second mortgage to consolidate all that debt. No one would suspect it from looking at the ads, but for every family taking out a second mortgage to pay for a vacation, there are sixty-one more families taking on a second mortgage so they can pay down their credit card bills and medical debts.

The bankruptcy court offers a peek at those in the most trouble with debt. The Myth of the Immoral Debtor would have us believe that these families consumed their way into bankruptcy, running up their credit cards to cover their "reckless spending." They are at least half right; families in bankruptcy are choking on credit card debt. Ninety-one percent of the families in bankruptcy were carrying balances on their cards by the time they filed. A third of homeowners were carrying second or even third mortgages or had refinanced their mortgages to get some cash. The amount of debt was truly staggering. Nearly one-third of bankruptcy filers -- more than 400,000 families -- owed an entire year's salary on their credit cards, a hole that was virtually impossible to dig a generation ago.

But the critics are off the mark on one point -- the role played by over-consumption or its ubiquitous cousin, "trouble managing money." By 2001, those two reasons combined to account for less than 6 percent of families in bankruptcy. What about the rest? The overwhelming majority of bankrupt families faced far more serious problems. As we showed in chapter 4, nearly 90 percent had been felled by a job loss, a medical problem, or a family breakup, or by some combination of all three.
Potential Supreme Court nominee Judge Edith Jones asserts that "overspending and an unwillingness to live within one's means 'causes' debt." She is probably right. These families certainly overspent, accepting medical care they could not afford and making child support payments that left them with too little to pay the rent. They also lived beyond their means, trying to hold on to their houses and cars even after they lost their jobs. But we are forced to wonder, what would Judge Jones suggest those families have done? Not gone to the emergency room when the chest pains started? Moved the kids into a shelter the day their father moved out? Paid MasterCard and Visa, even if it meant not feeding their children? It is doubtlessly satisfying to point the long finger of blame at personal irresponsibility and overspending. But only the willfully ignorant refuse to acknowledge the real reasons behind all that debt.