"We've Built This Latest Economic Boom On Borrowed Money"

Elizabeth Warren of Harvard Law, our very favorite consumer debt expert, gave an interview to Marketplace this morning in which she talked about the rising cost of so-called “fixed expenses” and their affect on the American consumer.

Harvard Professor Elizabeth Warren has spent a career looking at personal debt. I asked her if consumers can sustain the engine of our economy much longer.

Elizabeth Warren: No, it’s not sustainable. We’ve built this latest economic boom on borrowed money. Consumers, to the extent that they’ve stayed afloat, have managed to stay afloat by using their credit cards and by taking out home-equity lines of credit.

Krizner: And they’ve used that credit for what? For lattes and microwaves and expensive vacations? Have Americans been over-consuming?

Warren: I wish that were the case, but the data say otherwise. Americans are in a lot of debt not because they’re overconsuming, but because of big fixed expenses that they really can’t wiggle out of.

Krizner: When you say “fixed expenses,” what are you talking about?

Warren: Where American families are getting ruined financially is in the areas of mortgages and health insurance. The fact that they’ve got to have two cars, the fact that they’ve got to put their children in child care, their taxes — the things over which they have little or no control.

Krizner: But can that really be the whole story? I mean, in gross numbers, consumption has tripled, apparently, in about 20 years. Surely a good chunk of that is discretionary spending.

Warren: Let’s look at the basics. What families are spending on clothing in the last 30 years, it’s down 33 percent in inflation-adjusted dollars. What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent. It’s not stuff that’s driving families to the poorhouse.


Priced out of the American Dream
[Marketplace]
(Photo:emuphoto)

Comments

Edit Your Comment

  1. Consumer-X says:

    “What families are spending on clothing in the last 30 years, it’s down 33 percent in inflation-adjusted dollars. What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent.”
    Look at these figures. They prove that companies like Walmart have helped the American consumer greatly.

  2. Parting says:

    Does that mean that an average person gets less in net salary (after insurance & taxes)? Inflation wise ?

  3. timmus says:

    The headline sounds like a Jefferson Starship song from 1985!

  4. heintzer says:

    @Consumer-X: I’m not an economist, but wouldn’t it reason that technology advances (both in terms of manufacturing and shipping) and overseas labor have had more of a dramatic impact on those lowered costs than stores like Wal-Mart?

  5. Consumer-X says:

    I read the interview with Elizabeth Warren. She makes a few unsubstantiated, simplistic claims of doom for the economy. As a regular contributer to the Huffington blog one can assume that she is a Left leaning politically motivated author. I wish she had presented even a tiny bit of factual evidence to back up her assertions.

  6. DudeLebowski says:

    And, as we see here, the next housing balloon is ready to launch. Sponsored by RE/Max.

  7. Crazytree says:

    Credit card purchases of Louis Vuitton bags will destroy America.

    And Charter’s insipid and indefensible price increases/gouging will destroy my sanity.

  8. James Sumners says:

    @chouchou: Yes. If your pay doesn’t grow at the same rate, or, preferably, better than the rate of inflation you earn “less” money year after year. That’s how inflation works. The same dollar in your pocket is worth less tomorrow than it is worth today.

    For a quick example, go to [www.inflationdata.com] and input an even number, say $20,000. Then click calculate. If the rate of inflation remains constant, in this case 3.62%, you would have to earn the resulting salary ($20,764) the next year just to break even.

  9. James Sumners says:

    @jsumners: Correction. It’s 3.82% in the example.

  10. humphrmi says:

    @Consumer-X: Yes, those do seem to be rather – um, unsubstantiated claims.

    But still, some of this rings true to me. I know that our family had a really tough time when my wife was working, getting decent day care and not having it cost more than my wife made in salary (I’m the primary breadwinner so her income, which was substantially lower than mine, had to cover daycare.) In the end, we always either afforded what we paid for, or we didn’t buy it. Daycare is an expensive must-have for a two-worker family but we’re lucky enough to be able to get by (albeit with less net income) on my salary alone. I make six figures, and I can’t imagine what families with less income and two working parents must do to pay for daycare.

    That’s just one expense. We’re in good shape on health care because my employer offers excellent insurance options. Not everyone is so lucky. I can see this being a huge drain on some families and people going into debt to maintain it.

  11. Grrrrrrr, now with two buns made of bacon. says:

    @timmus: That’s the first thing that came to my mind too :D

  12. uricmu says:

    I’m no economist, but couldn’t one argue that it is natural for economy is based on borrowed money? Most corporations are funded by bonds and smaller business are funded by loans. They create growth which helps them cover those bonds and generate a surplus. Similarly, government bonds fund some government growth. In a similar manner, consumers loan money but “catch up” with it.

    The problem is not lending, it’s overpricing in certain sectors such as healthcare, for which only government regulation can help.

  13. courtneywoah says:

    America is consuming products at an alarming rate and that must factor into the debt picture somehow. American’s are walking around with an average $12,000 credit card debt buying stuff they just don’t need with interest rates that are just too high to catch up to. Clearly our economy is running on borrowed money (from China) but its ironic that we are buying goods from China with their borrowed money, quite an interesting circle we have going on.

  14. Left leaning politically motivated author. I wish she had presented even a tiny bit of factual evidence to back up her assertions.

    Yes, let’s turn this into political theatre. Because everything is either Bush’s fault or not.

    Please don’t pit us consumers against ourselves by trying to make this into another political catfight.

    The roots of the current crisis lay outside the control or purview of any administration in recent memory. If you’re going to blame anyone, blame the markets and Alan Greenspan, but don’t turn this into a “left-right” argument – especially because politics in this country are mainly about the center and the right – there are no effective left-of-center or leftist politicians in the United States.

  15. CumaeanSibyl says:

    I’m guessing she didn’t provide evidence because she was talking on the radio, and it’s hard to give footnotes on air. Just a thought.

  16. EtherealStrife says:

    With the feds continuously pissing dollars into the economy in a hopeless effort to prop it up, I can’t even come close to the real inflation rate with any kind of low-risk investment. So it’s spend it or lose it. :-

    @CaliforniaCajun: Please don’t pit us consumers against ourselves by trying to make this into another political catfight.
    Sadly that’s exactly what you’re doing by taking his bait.

  17. Saydur says:

    What we need to do is completely deregulate the mortgage and insurance businesses. Remove Medicare and Medicaid entirely, allow for insurance companies to regulate themselves in the free marketplace. Those who offer unfair deals will certainly price themselves out of the market, and if the market prices are inflated all around, people will happily go without until the market corrects itself. Likewise, mortgages should be deregulated, as interest-only mortgages and adjustable rates are easily seen as bad deals for a customer in the long run, and people are intelligent enough to recognize a bad deal on interest when they see one. Payday loan outfits are struggling because of this, since only a handful of the most desperate people who understand that this is a one-time loan make use of such, and fiscal responsibility leads them to avoid usage of these facilities in the future.

  18. jtconnor says:

    “What families are spending on clothing in the last 30 years, it’s down 33 percent in inflation-adjusted dollars. What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent.”

    Any idea where these numbers come from?

  19. weave says:

    She is spot on. Reoccurring monthly expenses kill you. Ten years ago I was horribly in debt. I “bit the bullet” and moved into a ghetto apartment near a bus line that went to my work, got rid of my car, and then worked on paying off my credit cards. I got out of debt, got married, and we moved into a house in a nice established suburban neighborhood that was 25% of what the mortgage company said we could “afford” (and was on a bus line). I continued to not get a car and started piling money into savings. (Granted though, it was over-consumption that got me into that big monthly minimum credit card payment in the first place)

    I went from feeling broke-ass poor to feeling rich on about the same salary. By rich I meant I stopped caring about what little things cost, I took lots of trips and enjoyed life, and always paid as I went, am still not in debt, and just two weeks ago finally got a car again — a Honda Fit for $16k that I paid cash for.

    It’s that monthly hit that is hard to control that will get you every time.

  20. sleze69 says:

    @Saydur: I am trying to look for sarcasm in your response but I can’t detect it. Do you really think that allowing the “invisible hand” of the market will really keep those industries in check? Did it work for the cable television companies? Oh wait, the free market for cable only provides me with one choice in cable TV.

  21. Ben Popken says:

    Every economic boom is built on borrowed money.

  22. NoWin says:

    @Saydur: “Those who offer unfair deals will certainly price themselves out of the market…”

    Oh sure, and when ALL of “those” offer the same unfair deals, you alternative then is…???

    Many may claim the credit-card and mortgage lending industries were/are “un-regulated” to a large degree, and look what happened to us (as consumers in general) via their “self-regulatory” practices….

    Paraphrasing: Welcome to my web, said the spider to the fly.

  23. anonymouscoworker says:

    @chouchou: Does that mean that an average person gets less in net salary (after insurance & taxes)? Inflation wise ?

    The difference in salary from today to 1973 is about 23%. That means that if you held the same job in 1973 as you did today, your past self would make 23% more than you in inflation adjusted dollars. That sucks for us, but it’s good for the capitalist bosses.

  24. humphrmi says:

    @sleze69: Then it’s not a free market.

    But yeah, businesses that rely on or provide TLM are likely going to remain a monopoly and the Milton Freidman philosophy won’t work because the barrier to entry for competitors – building a new delivery infrastructure to your house – is too high, new start-ups can’t afford it.

    Surprisingly though, some companies are making inroads here. In my town, Skokie Illinois, we used to have one cable company. Now we have two. The village encouraged a competitor from a neighboring community to build out their TLM to our community. Now we have Comcast and RCN. It does happen.

  25. kimsama says:

    @weave: Nice story and a good example.

  26. MrEvil says:

    @Saydur: Thanks to the Supreme Court decision Dodge vs Ford Motor Company. The courts have basically been writing carte blanche for companies to do anything to make a profit….including ripping off people. Unfortunately, NOT ripping off customers doesn’t provide as good a return on investment as doing what’s right and treating people fairly.

    Thanks to a flawed Supreme Court Decision we pretty much let corporations do as they please leaving them above the law….so long as that stock price stays up.

    Only in a perfect world can you have an absolutely free market. In fact, as it stands now letting insurance and mortgage companies regulate themselves is like letting the wolf guard the hen-house.

  27. MrEvil says:

    sorry, I meant “Not ripping off people does not provide as good a return on investment as fleecing them for every nickel.”

  28. mac-phisto says:

    she makes some good points – she probably would’ve elaborated had she more time. i’d like to see more people focus on the impact of energy in this debate – i think that’s been a big factor to the equation. deregulation in most states has increase prices across the board, along with the implosion of the nation’s largest energy wholesaler, increased competition in the demand side of the marketplace (china, india, europe), reduced supply caused by various issues.

    & that’s what i think can also save us. businesses & consumers alike are making investments in conservation & seeking alternatives in the marketplace. but you know what’s lacking (aside from alternatives)? extensive government investment. if we can spend close to $1 million on a single tomahawk missile (not to mention a few billion to develop its successor), we can put some grant money on the table for innovation in the energy marketplace. & i’m not talking about shoveling a few billion to exxon-mobil or northeast utilities here. i’m talking small dollar (<$1 million) grants for small enterprise to create & develop alternatives to fuel, fuel systems, transportation, etc., etc. if the big boys like an idea so much, they can buy the company.

    we are a nation of innovators; it’s what we do. let’s spend some money to create change that can boost every segment of our economy, save some money for business & consumers & secure our place as a nation in the future.

    …that’d be my platform if i was running for office.

  29. Consumer-X says:

    @CaliforniaCajun: I appreciate your argument and agree with you that injecting politics into a consumer site is generally uncalled for. The reason I made my comments was because I strongly felt that the original posting was not a fact based article intent on informing or helping consumers. I felt the story was political based upon 1.lack of facts, 2.Interviewee’s liberal political blogging activity on the Huffington Post, 3. Interviewee’s own liberal political blog, 4.Interviewee’s published works, 5.lack of any consumer advice in original posting.
    I would have had the same problem if Ann Coulter had written a fact free puff piece on how great everything is.

  30. llryuujinll says:

    @Saydur: “…if the market prices are inflated all around, people will happily go without until the market corrects itself.” i don’t think everyone can just go without health insurance, considering the ridiculous price of health care. And by your logic, people shouldn’t go the doctors too since they charge too much. this sort of tactic works but it causes a lot of suffering as well. its like a game of chicken, who will blink first.

  31. gregero says:

    From wikipedia:
    “Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. Warren graduated from the University of Houston with a B.S. 1970 and received her J.D from Rutgers University in 1976.”

    I would suspect that Harvard Law professors aren’t in the habit of tossing out info-bits that cannot be backed up by valid research… regardless of their political leanings.

  32. Morgan says:

    @Consumer-X: She didn’t write the piece; she granted an interview. That’s why your “lack of facts” charge is ridiculous; when you’re granting an interview, as opposed to writing a paper, you don’t cite every source you’re basing a conclusion on even if you could off the top of your head.
    I’m having a hard time figuring out how someone essentially saying “Americans have too much credit card debt, but can’t reduce it because they spend too much on fixed reoccuring payments like mortages, health insurance, and taxes” would be politically motivated by liberal tendancies. What political goal do you think she’s trying to achieve, here?

  33. endless says:

    @timmus:

    it sounds even more like a song by Wilhelm Scream

    “we built this city (on debts and booze)”

  34. Techguy1138 says:

    She also posts to [www.creditslips.org] where shoe does have foot notes.

    That site is kept up by several Harvard economists. They have spot on arguments.

  35. julienne says:

    @Consumer-X: Sorry to keep the Elizabeth Warren credential thing going, but she has been highly respected in the legal community regarding financial law and bankruptcy for years.

    Here’s a link to her 157 faculty publications:
    [www.law.harvard.edu]

  36. rhombopteryx says:

    @mac-phisto:

    exactly. Paying more and more for a heating bill or “gasoline to drive to work” are prime examples of costs you can’t just “go without.” This kind of change cant be solved by “just using less,” they’ve got to be solved by “doing different,” which means a little investing into the alternatives. (Although, p.s. the “Vote for mac-phisto” part just lacks a certain ring. Put it on a T-shirt and see if people change their mind.)

  37. Keter says:

    What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent.

    That doesn’t add up. My food budget, particularly recently, has skyrocketed. I spend in a week what was my total food budget for the month only 15 years ago. It’s double what I was spending 7 years ago, and I was buying more expensive foods and including expensive supplements back then. I’ve cut back to very minimal, basic stuff now, so the cost increase is despite cutting back, and am now in the worrisome position of not having much more scaling back I can do on quality or quantity without risking health.

    Appliances cost less? Bullhockey! I had to buy a new refrigerator two years ago when my 25-year old one quit and wasn’t worth repairing. I paid $600 for the old one back when…and the same amount for the new one, which is essentially identical to the old one, just a different color. The difference was that it took me a couple of weeks of shopping to find any full-size refrigerator that looked like it would last more than a couple of years for less than $1000. The market was full of high-end stuff I don’t need and flimsy foreign-made junk. I almost decided to buy a used one, even though that thought really grosses me out…*shudder*

    And the other day I was looking at washing machines…I bought used rental-return six years ago which are still working well, but was thinking about upgrading after I finish remodeling my laundry area…no way that’s going to happen. $1600 for a washer is not merely ridiculous, it is gouging beyond the limit I thought anyone could get away with. Why aren’t consumers just saying ‘no’ to prices like that? Because they can charge it at 0% interest? Without offers like that, how many people still could buy?

    Oh…and insurance. It should be illegal, never mandated. Each person should be individually responsible for their decisions and acts. I would have over $1000 a year back in my wallet if I could dump homeowner’s and auto insurance…I’ve never had a claim and am never likely to. The house is indestructible (literally only glass breakage is a risk), and if someone else hits my car, there’s always small claims court to get my repairs covered…insurance would just total my old car and leave me with nowhere near enough money to buy another of similar quality.

  38. Dashrashi says:

    @Keter: I think she means as a percentage of family income. Could be wrong, though. Also, all of economic theory (that I’ve learned so far) appears to depend on insurance. Making it illegal would have some pretty gnarly effects.

  39. pearlandopal says:

    @Keter: Are you talking about all insurance, or just homeowner’s/auto? Two years ago we were caught without health insurance and my previously perfectly healthy husband developed a seizure disorder. Two days in the hospital later, we now owe nearly $15,000. How exactly is the sudden onset of sickness, carrying with it a crushing load of debt, a “decision or act” for which one should be held responsible? I’m terrified of losing health insurance now – what if something else were to happen?

  40. Consumer-X says:

    @Morgan: True she did not write the article and was “only” interviewed. During the interview she was able to state her claims and conclusions. If she could state her claims and conclusions she could have easily added some supporting facts at the same time. Why did she omit them?
    As for the political goal she is trying to achieve one only has to know that we are coming into the presidential election season. If the people view the economy as great then it gives the Republicans an advantage because they will want to stick with the status quo. If the economy is viewed as a disaster then the voters will demand change and vote for the Democrats.
    Factually the US economy is stronger than at any point in our history: Unemployment is lower than during the Clinton Admin., The stock market is at record levels, our 13 trillion dollar economy is expanding by 3-4%. Compare these facts with Elizabeth Warren’s anecdotes and you will see why she was arguing not with facts but conclusions.

  41. gregero says:

    @Consumer-X:
    Ah so now I see, you are so scared of the upcoming political climate you are inferring a political spin from a source with no explicit political posturing based solely on your impression of a person’s political views and a lack of stated supporting data. Heaven forbid you fact check her before calling her out. Oh, yeah, I forgot, you are also discounting her information, even though she is a recognized expert on the issues at hand.

    PS – a car can be full of gas and traveling faster than it ever has right before it hits a brick wall.

  42. Consumer-X says:

    @gregero: Scared? huh? Greg please refer to my previous posts. Thanks

  43. FLConsumer says:

    I would like to see the numbers that she’s basing her arguements on.

    Weave actually illustrates what’s really happening, although they didn’t mention what is truly happening. And I tip my hat to them for making the difficult decisions needed to get themselves out of debt.

    Quite simply, people are trying to live lifestyles above their means. Do people really need 2 cars in a family? I know of 2 couples who went from 2-car to 1-car families and have decided it’s how they’re going to keep things. Many “essentials” today really aren’t, but we just haven’t realized that yet. Internet? Cell phone? Cable TV? Life goes on without these things. Even at that, do these people really need to be driving around newer cars with higher payments? While not an easy fix, there are many people who are in housing they really can’t afford. Sure, they can pay off the mortgage payment every month, but it doesn’t leave them enough left over for other expenses and those oh-so-coveted luxury status symbo, er, items.

    Suck it up America — you’re not doing as well as you though you were. It sickens me to see people who I can tell can’t afford things buying their kids all sorts of junk & clothing they really can’t afford. Teach them useful life lessons about saving money instead. When they’re adults and understand, they’ll thank you for doing this for them. I’m living proof of it. It DID suck to wear all sorts of generic clothing & shoes while in school, especially those cheap-ass K-Mart “sneakers” that had plastic soles rather than rubber ones, BUT, my parents taught me how to save and invest wisely and profit substantially from it.

  44. gregero says:

    @FLConsumer:

    She’s extremely well published:
    [www.law.harvard.edu]

    You can read her about many of her points in detail for free from that page… CONSUMER-X: I don’t recommend you go to that link, your political spider-sense may go off the charts from what I can only assume you will think of as lefty web design.

  45. Consumer-X says:

    @gregero: Greg, using your logic I will accept her as correct simply because of her Harvard credentials if you accept that George W Bush is correct simply because he has degrees from both Harvard and Yale. Deal?
    Impressive titles do not grant one immunity from having to prove ones case.

  46. gregero says:

    @Consumer-X:
    Surely you understand the difference between being a well published professor at a prestigious school and being a graduate of the same.

    At any rate, I was unaware we were discussing any of GWB’s assertions as being true/false/baseless etc.

    Ultimately my point is she DOES prove her case in her multiple publications, one merely needs to dig into them, a daunting task I grant you. I would even go so far as to guess that if one were to email her, she could send a bibliography of her sources.