Government is calling on the American consumer to pull us through one more time. Congress and the White House want families to spend-spend-spend to restart the American economy and prop up world markets, and they are even offering a few hundred bucks to get started. The government is like a coach who turns to a battered athlete and asks him to play his heart out one more time, but no one asks how much longer he can keep doing this. The American consumer is exhausted. Debt loads now exceed annual income. The proportion of income that goes to interest payments is at record-breaking highs. Twenty-three million families cannot make more than the minimum payments on their credit cards. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders missed at least one payment last year, and an additional 2.1 million families missed one or more mortgage payments. (Data cited here and here.)
The federal government can borrow money to give to families. Frankly, if families are smart, they will use the money to pay off some debt. Even if they make new purchases, what happens the next month and the month after that? The problem is that Americans owe a lot of money. They owe so much money that they can’t pay it off without substantially reducing future spending. And if they reduce future spending, like the slowing athlete, they can’t keep the economy going. Think of it this way: The average American family that carries credit card debt owes about two months’ income on their cards. Wages are essentially flat, and both mom and dad are already in the workforce. That means that some time in the future they can repay this debt only if they spend less than they are spending today — a lot less. What happens when they cut back on spending? There’s another implication to this huge debt load: interest. Interest operates just like a tax — it has to be paid month after month, in good times and in bad. Unlike a tax, however, interest isn’t calculated on something good like income; it is calculated on debt loads. For the average family carrying credit card debt, interest payments alone have become a significant expenditure. In 2006, credit card companies collected about $90 billion from American families in interest, fees, late fees, penalties and the like. That’s $90 billion that didn’t go to buying socks or movie tickets or Big Macs. The American consumer can’t keep it up. Maybe the economic stimulus will work for a while, and maybe it won’t. But I’m sure that a real, long-term solution to the problems facing the American consumer and the economy will take something very different. A good starting point is to take a hard look at creditor practices. Reining in abusive lender practices can help more families get back on their feet financially. It would also save American families billions of dollars — and it wouldn’t cost taxpayers a nickel. I listened to George Bush call on Americans to go shopping after 9/11, and I felt sick. Americans were already deep in debt. But everyone in government pushed in the same direction: The fed helped out with low interest rates, bank regulators turned a blind eye to tricky practices, and Wall Street jumped in with stacks of money in the form of SIVs. The economy kept booming, all on borrowed money. The financial tricks aren’t working any longer in the housing sector, and Bush has gone back to the consumer, urging more shopping. Even if the consumer pulls us out this time, this game can’t go on.