Over The Ears in Debt

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Of more immediate concern to most households is the level of consumer installment and mortgage debt, which has ballooned from $1.2 trillion in 1980 to $2.2 trillion now. In the past three years consumer debt grew some 40%, while personal disposable income climbed only 22%. About 15 million U.S. households now pay more than 50% of their total disposable income to service their debt, according to Greenspan. Such payments, he noted, are not a problem unless income suddenly contracts, as it might when layoffs occur during recession. In such a crisis, stricken families can lose their houses, cars and other vital possessions. Many people are making themselves more vulnerable by taking out large home-equity loans. The popularity of such loans has grown enormously under the new tax-reform law, which is phasing out the deductibility of interest payments on most other kinds of consumer credit.

Some economists have argued that the overall level of consumer debt is not alarming because the value of personal assets, including stocks and houses, has been rising just as rapidly. But Thurow pointed out that the wealth tends to be concentrated. The richest 10% of the population, for example, owns 72% of all stocks. Many of the families deepest in debt do not hold stocks or own homes.

To be sure, American individuals, corporations and Government entities need not get totally out of debt. The question is whether they can keep interest payments within manageable bounds and have enough left over to make adequate investments in the productive facilities that can provide higher standards of living. All the indications are that at every level, the U.S. economy is approaching the limits of its ability to buy now and pay later. The country's mountainous debts, if not dangerous today, imply lowered expectations and increased economic pain in the future.