‘Cashing out’ on the home was the final fillip of the credit revolution. Equity withdrawal was literally that: a bit of value was taken out of the home to pay for something else. In 2003, American households withdrew $139 billion this way, the equivalent of 6 per cent of their disposable income. In Australia, such withdrawal released an estimated 2–3 per cent of additional consumption into the economy.73 In the original Keynesian model, such extra injections came from the state. Borrowing on rising property prices replaced this model with a ‘privatized Keynesianism’.74 Perhaps as important as any direct transfers were the indirect links between the price of the home and the ability and willingness to spend. Economists have compared the effect of financial wealth and housing wealth on the propensity to consume and have found remarkable national differences. A rise in share prices had virtually the same effect on consumption in the USA, Japan and the Eurozone; people spent 6 cents for each additional dollar of wealth gained. When it came to the ‘wealth effects’ of housing, they were worlds apart. When a home shot up in value by, say, $100,000 in America, its owner would spend an additional $5,000. The Japanese or European owner responded to a similar property boom with a meagre $1,500. In all countries, rising house prices triggered rising consumption, but in some much more than in others. In addition to the Anglo-world, Finland, Sweden and the Netherlands have also seen bigger effects. Again, these had not only to do with the rate of home ownership but with the ease with which households could extract liquidity from their home and cash in on the rising value of their property, thanks to equity withdrawal, flexible mortgages and easy refinancing.75
GOING FOR BROKE
Where did all the money go? When the 2009 recession hit, many commentators had little doubt about the answer. The rising volume of private debt was an indicator of reckless ‘consumerism’, an addiction to shopping and living beyond our means. At one stage, the British prime minister Gordon Brown even urged citizens to pay back their credit-card bills; this probably would have brought spending to a halt and only deepened the crisis. The idea was that once people spent less on frivolous stuff, society would return to a healthier balance both at the personal and economic level.
If only it was that easy. Reality was more complex than moral conviction. Neither equity withdrawal nor credit-card spending was mainly for frivolous ‘wants’. Admittedly, car dealers in California estimated that on the eve of the recession every third car was bought on a home-equity loan.76 But, arguably, a car is a ‘need’ in most of the United States. In any case, car purchases made up a small fraction in the overall use of such loans. One third of home equity was withdrawn to fund home improvements – effectively, an investment – and one half to repay debts or buy other assets. Only 16 per cent went to finance consumer expenditure. Australia and the United Kingdom show similar patterns, though in New Zealand spending on consumption was higher. Far from financing mindless excess, surveys show that equity withdrawal has been disproportionately used by households to tide them over challenging transitions in their lives. Families with young children are especially high equity borrowers – making up for a temporary shortfall in earnings – as are divorcees and those suffering redundancy.77
The association of credit with shopping malls and ‘unnecessary’ stuff stems from a simple misunderstanding. National data captures the volume of unsecured consumer credit regardless of what households decide to use it for. ‘Private consumption’, similarly, refers to all household spending – medicine and education as well as clothes and holidays. It is a fallacy to suppose that anyone who takes out credit must be on an impulse shopping spree buying a flat-screen TV or yet another pair of designer shoes. One reason for the high volume of personal credit in Britain and America is that it pays for education and basic living expenses – and healthcare in America – and the costs of these services have been rising. In Britain, the average student loan in 2007 was twice the size of a car-finance loan. In the United States that year, a third of all instalment debt was for education.78 It is not surprising that American college students graduate carrying a millstone of debt around their neck – $20,000 on average – compared to their Danish peers, who pay no fees and receive a monthly allowance from the state on top. For many Americans in the 1990s and 2000s – a period of stagnant wages and rising inequality – the credit card acted as a private substitute for a missing welfare state, paying for medical bills and for food and housing in times of unemployment. The high volume of unsecured consumer credit in the Anglo-world therefore involves a bit of an optical illusion. Loans paid for goods and services provided for free by the state elsewhere.
This raises the intriguing question of how lopsided the American economy really has been. Between the 1960s and the ’90s, the household consumption rate (the ratio of household consumption to GDP) climbed from 69 per cent to 77 per cent. But this included spending on health, which multiplied in leaps and bounds in this period. Once medical expenses were taken out of the picture, economists found virtually no change in the consumption profile for these decades. In other words, Americans were not becoming spendthrift shopaholics, or at least not all of them. They spent more on pills, teeth and doctors. Not surprisingly, the increase in the propensity to consume was concentrated among the elderly. Rising spending was most pronounced among sixty to eighty-year-olds. In 1990, they consumed half as much more than their predecessors had in 1960.79 Looked at this way, the decline of saving and the rise in consumer credit appears in a rather different light from the customary morality tale of affluenza. Should the elderly have consumed less for the sake of a more balanced economy?
Aggregate trends highlight the expansion of credit-based consumption and variations between societies. As the previous observation suggests, however, it is equally important to recognize differences within societies. It is a mercantilist mistake to think of the nation as a household, just bigger. That Germany maintained high saving rates does not mean that every German was a heroic saver. National averages hide a variety of micro-cultures. A greater appreciation of these requires us to moderate some of the shriller condemnations of reckless consumers. A detailed study of Britons’ financial lives between 2006 and 2009 revealed that only 4 per cent were behind with their credit commitments by two or more months. The vast majority had no problem with their repayments; the ratio of repayment to income on unsecured debts was below 10 per cent for two thirds of people. Savings were low, but this still meant that 41 per cent had savings worth more than £5,000.80 A few years earlier, just one in twenty households used their credit cards to transfer balance from one card to another. Only 7 per cent decided ‘on the spur of the moment’ to buy something on instalment – the majority had planned it ‘all along’.81 Even in the United States, 40 per cent of credit-card holders routinely paid their balance in full. The Federal Reserve Board’s ‘Survey of Consumer Finances for 2007’ gives a fascinating snapshot of the diversity of family budgets in America. Of the respondents, 6 per cent reported that they usually spent more than they earned; 16 per cent broke even; 42 per cent saved regularly. The remaining 36 per cent saved primarily for retirement.82
Comparing national surveys can be treacherous, but it is difficult to resist the temptation to place the data from spendthrift America along side that from über-frugal Germany. In the same year, 49 per cent of German households saved – down from 59 per cent in 2003; interestingly, almost every second young household saved regularly. Most of these, however, saved only a small portion of their income. What made the difference was not that Germans in general saved more but that a tiny, rich minority (8 per cent) saved a stunning 30 per cent of their income.83
For all the millions of credit cards and TVs bought on the instalment plan, attitudes to credit have proved remarkably stubborn. In 1979, 31 per cent of Britons felt that credit was ‘never a good thing’. In 2002, after a twenty-year-long credit boom, that number had not changed a bit. In both years, only one in seven was happy to see credit as ‘a sensible way of buying’. Others felt it was a
convenience. In inter-war Britain, furniture bought on the instalment plan (‘hire purchase’) was routinely delivered by ‘plain vans’ to preserve a family’s standing.84 Such ruses, still present in the 1960s, may no longer be common today, but this does not mean that contemporaries openly flaunt credit either. For many, a moral cloud continues to hang over it.
So far we have seen how more consumer credit enabled more consumption. What about the reverse? Did a greater lust for things push people deeper into debt? The charge that excessive consumerism is to blame for excessive debt is an old one. Workers had developed a taste for champagne on lager budgets, social reformers complained around 1900. A century later, the rise in personal bankruptcies at a time of booming credit produced similar soul-searching across the developed world. In the United States, just under 1 million people filed for bankruptcy in 1992. Six years later, it was 1.4 million. In neighbouring Canada, personal bankruptcies rose by 9 per cent a year in the 1990s. In Japan, 217,000 individuals went bankrupt in 2005.85 Over-indebtedness was a global problem. International comparison is difficult – bankruptcy laws and definitions of over-indebtedness vary between countries and, in addition, have changed over time. One reason for the dramatic spike in bankruptcies was that virtually everywhere legal reforms made it easier for debtors to declare insolvency. Britain passed its Insolvency Act in 1986. Many European countries followed with debt adjustment and bankruptcy laws in the 1990s; Japan in 2005.86 Experts estimate that, from 1999 to 2004, roughly 2 per cent of Finnish households were over-indebted, 3 per cent in France, 4 per cent in the Netherlands and 7 per cent in Britain and Germany. In the United States, the number of households that declared bankruptcy reached 1.7 per cent in 2004, but the rate of over-indebtedness was probably closer to 12 per cent.87
How did they get into such a precarious position? From Germany to the United States, study after study has reached the same conclusion. The road to bankruptcy is paved by unemployment, low income, ill health and divorce. Single parents – and especially low-income mothers – are particularly vulnerable. Poor housekeeping or an excessive lifestyle are the case in only a minority. The descent into bankruptcy among middle-class families in America had more to do with keeping up payments on education and housing on falling incomes than with spending too much at the mall.88
The democratization of credit was neither complete nor egalitarian. In the 1980s and ’90s it did provide the poor and minorities with easier access to credit and mortgages. But it was no unmitigated blessing. While some joined the escalator, those who already had difficulty repaying their debts were pushed ever deeper into the abyss. As in the past, the very poor today are hit by a double whammy of low income and high credit rates. Financial and social exclusion have remained symbiotic. The location of bank branches gives an almost perfect map of inequality. Between 1975 and 1995, banks opened 30 per cent more branches across the United States. In poor areas, 21 per cent closed their shutters. The vacuum was filled by pay-day lenders and cheque-cashers. In Britain, 7 per cent of the population today lives completely outside the established world of finance, without a bank account, savings, a pension, insurance or a credit card. Over the course of a lifetime, American families without bank accounts pay an estimated $15,000 to pay-day lenders – in fees alone. The going rate of interest at British moneylenders ranges from 100–500+ per cent.89 This is what ‘the poor pay more’ means. It is not surprising that British researchers found ‘widespread resistance to the use of consumer credit among those on the margins of financial services, coupled with an acceptance that “lumpy” expenditure could not be met without it’.90 Credit was a last resort, taken out to buy shoes for the kids or a few Christmas presents, rarely to fund a shopping spree.
These numbers are interesting in several, related ways. Poverty, they suggest, not the inability to resist material craving, remains the single biggest cause of credit failure. They are, secondly, a reminder of how, in spite of a creeping upward trend since the 1980s, over-indebtedness in mature credit-based consumer societies is the fate of a small minority, and bankruptcy even more so. In England and Wales, one in a thousand filed for bankruptcy in 2004. The vast majority has handled rising volumes of credit without default. The idea of a more sober, restrained past is the stuff of myth, not history. In 1900, law courts from Prussia to England were clogged with suits for non-payment of outstanding credit on a scale unimaginable to today’s readers (and judges). The global proliferation of bankruptcy laws, finally, is a recognition that overindebtedness is a problem in all affluent societies, including social market and welfare states. The roads taken, however, continue to reflect rival views of the place of consumption in society overall.
Societies with the most liberal approach to credit have also treated bankrupts most liberally. The ease with which an American can file for the liquidation of debts under Chapter 7 mirrors the centrality of credit-based consumption in American society. It demands swift rehabilitation instead of eternal shame. An excommunicated debtor is a lost customer. Much better to give him a ‘fresh start’ and let him rejoin the pack. Bankruptcy legislation here has been first and foremost about making markets work smoothly, not protecting or educating vulnerable citizens. Debts could be written off easily; too easily, according to some estimates, which reckon that as many as 15 per cent of Americans filing for Chapter 7 could have managed a repayment plan instead. In 2010, 1.5 million Americans filed for $450 billion in debt relief. Americans receive more money through debt relief than from unemployment benefits.91 Here was yet another instance where consumers gained the privileges previously reserved for businessmen. Market-oriented societies such as Britain have moved closest to the American model, where bankruptcy is about regulating markets.
Social market societies which retained some credit regulation – Germany, for example, capped rates for consumer credit at 23 per cent – have found it more difficult to drop a paternalist attitude completely. In 1999, a new law gave consumers the chance to get rid of their debt, but first they had to undergo debt counselling and show six years of good behaviour. If the Social Democrats (SPD) had had their way, they also would have had to hand over three years’ non-exempt income before being discharged; the former Communists found even this too soft and pitched for five years – in vain.92 The insolvent German, then, was no longer condemned to life-long indebtedness and a shadow existence, but, unlike his American counterpart, he was not set completely free either. A fresh start had to be earned by good behaviour. Tellingly, whereas in America bankrupt citizens enjoyed exemptions in most states that allowed them to hold on to private property worth thousands of dollars (and, in Texas, to their home), German law laid down a tougher standard and protected ‘modest’ needs only; a colour TV could be repossessed as long as it was replaced with a black-and-white model. Scandinavian welfare regimes have gone furthest in treating over-indebtedness as a social problem calling for social protection; Finland in 2003 introduced ‘social loans’ to help the most vulnerable escape the vicious cycle of high debt and high interest. Those in debt are visited by a welfare officer, not the repo-man.93
INEQUALITY
Over-indebtedness at the bottom of society has been one sign of the rise in inequality that has afflicted most developed societies since the 1980s, from Anglo-Saxon countries to Germany and Sweden. The spectacular rise in millionaires and billionaires at the top has been the other. In the United States, the number of millionaires doubled between 1995 and 2005. By the early twenty-first century, the richest 10 per cent in Anglo-Saxon countries controlled 30–43 per cent of income, a concentration not seen since the 1930s.94 Inequality is most pronounced at the very top. The super-rich turned into the mega-rich. Between 1995 and 2007, the four richest people in America more than doubled their wealth to over $1 trillion.
The precise causes behind this new era of inequality are a matter of debate – technological change, the rise in single-person households, poorly paid and insecure part-time jobs and less effective tax redistribution are the pri
me candidates. A large literature shows that inequality is bad for well-being, mental health, civic life and tolerance.95 What interests us here is whether it is also responsible for over-consumption. Some commentators think so. To them, credit bingeing and an unhealthy lust for things (‘materialism’) feature as symptoms of the same underlying disease of rising inequality. Greater wealth and bigger bonuses, they argue, have unleashed a ‘luxury fever’.96 The new rich live in a ‘self-contained world’ of material excess – ‘Richistan’, in the words of the Wall Street Journal special reporter Robert Frank. ‘There are so many Richistanis today, with so much money to spend, that they’re creating an entirely new level of consumption. Being a truly conspicuous consumer has never been harder, since there are millions of millionaires competing for the same status symbols, and an even greater number of affluent consumers purchasing luxury goods to try to mimic the elite.’97 A once proudly owned 100-foot yacht suddenly looked embarrassing when a 450-foot yacht pulled up alongside. In a race to keep up with the newest rich on the block, cars, houses and jewellery were all super-sized. Such excess, it is argued, sets off an avalanche of spending, from the super-rich to the mere rich and, from there, to the middle classes and below, each feverishly trying to keep up with their immediate social superiors. Recent psychologists concerned about the mental disorders wrought by inequality add Erich Fromm’s distinction between ‘having’ and ‘being’. People, they say, identify themselves too much by what they own, not who they are.98
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