Happy-go-lucky economics

In a PDF dated February 2000, Dea... // No, wait. Let me start again

In a PDF from the year 2000, Dean Maki of the Federal Reserve wrote:

Household debt is at a record high relative to disposable income. Some analysts are concerned that this unprecedented level of debt might pose a risk to the financial health of American households and ultimately lead them to curtail their spending...

A high level of indebtedness among households could also lead to increased household delinquencies and bankruptcies, which could threaten the health of lenders...

And then there's this:

In stark contrast to the view of growth of consumer credit as a negative force in the economy, a consensus seems to be emerging from recent research that consumer credit growth is positively related to consumption in future periods. Little evidence has been found that household debt service burdens are negatively related to future consumption, though some theoretical models suggest a more complex relationship may be at work. Specifically, high debt service burdens could make household consumption more sensitive to a drop in income...

It strikes me that the economic research seems to focus on current events without regard for macroeconomic principles. As long as everything's going along fine, the consensus emerges that everything is fine. Nobody looks at the subtle changes that could be a sign of troubles -- nobody looks at them as potential troubles, anyway -- because everything is going along fine.

It's happy-go-lucky economics.


From Maki's conclusion:

Consumer credit growth is often viewed in the press and on Wall Street as a negative force in the economy that will cause future consumption to slow. The available research on this question suggests quite the opposite: Strong growth in consumer credit tends to be associated with positive future growth in consumption...

From this point of view, high debt burdens are not a negative force in and of themselves; they should only be viewed as a problem to the extent that the expectations of future income on which the borrowing was based were too high.

Maki equates "growth in consumer credit" with "high debt burdens". Oh, these two are related, to be sure. But they are not the same. To equate "credit use" with "debt" is to equate "buy now" with "pay later". If you cannot distinguish between the two, you cannot understand the economic problem of our time.