WILLIAM GALSTON MARCH 15, 2010
Two analyses released late last week underscore the rising importance of debt, both private and public, to average Americans. On Thursday, the Fed reported that after nearly doubling to $13.7 trillion between 2000 and 2008, household debt fell in 2009 for the first time since record-keeping began in 1945. Because household debt rose so much faster than disposable income during that period, debt soared from 90 percent of disposable income to a stunning 130.6 percent before falling back to 122.5 percent at the end of 2009. Much of the decline results from the forced liquidation of debt through housing foreclosures and credit card terminations; the rest reflects the use of higher household savings to pay down debt.
While this is a good start, households have a long way to go before reaching a sustainable balance between debt and income. With normal interest rates, many economists believe, the average household can afford debt totaling about 100 percent of disposable income. If so, the household sector has worked off only one quarter of the excess debt it accumulated during the past decade, and the economy faces another few years of foreclosures, stringent credit, and higher household savings. While laying the basis for renewed growth down the road, these trends suggest the continuation of a below-average recovery for some time to come.
As citizens begin to recover from their own debt binge, they are becoming increasingly concerned about the government’s. A Gallup survey out Friday showed that 31 percent of Americans think unemployment is “the most important problem facing the country today,” with the economy in general in second place at 24 percent and health care at 20 percent. The federal budget deficit was a distant fifth, at 8 percent. But when Americans were asked what they think will be “the most important problem facing our nation 25 years from now,” more (14 percent) named the federal budget deficit than any other issue. Gallup notes that “[t]his is the first time the federal budget deficit has topped the list of future problems, and indeed the first time it has exceeded 5 percent.”
For decades, the conventional wisdom has been that concern over public-sector budget deficits and debt was confined to a handful of elected officials and policy wonks. Although Ross Perot challenged that belief in the early 1990s, the consequences of his insurgency soon faded. But now, the massive spending and debt accumulation the government has used to save the financial system and stabilize the economy are in the process of effecting a sea-change in public attitudes. While President Obama’s fiscal commission may well deadlock, the problem that called it into being isn’t going away, and neither are the public’s concerns. The party that masters the emerging new politics of deficits and debt will seize the mantle of national leadership.