unburdening america’s middle class

8/3/2019 Unburdening Americas Middle Class

1/31www.americanprogress.o

Unburdening Americas Middle ClasShrinking Families Debt Burden Faster Is Imperative for Strong

Sustained Economic Growth

Christian E. Weller November 2011


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Unburdening AmericasMiddle ClassShrinking Families Debt Burden Faster Is Imperative

for Strong, Sustained Economic Growth

Christian E. Weller November 2011


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1 Introduction and summary

6 Defining household leverage

11 Excessive debt laid the foundation for prolonged slump

16 Three pathways to deleveraging

25 Conclusion

Contents


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1 Cener r Amercan Prgre | unrdenng Amerca Mdde Ca: srnng Fame De brden r Faer Gr

Introduction and summary

Excessive leverageoo much household debremains he scourge o our econ-

omy. I holds back consumer spending and resuls ar oo oen in massive economic

disress or millions o American amilies acing record-high oreclosures. oo much

household deb also leaves banks relucan o exend new loans or home purchases

and business expansions because hese lenders already have billions o dollars in bad

loans on heir books and don wan o hrow good money aer bad.

Tis all slows business invesmen. Businesses wan o mee he exising demand oconsumers and oher businesses primarily wih heir exising capaciy. Businesses

have no incenive o quickly build up new capaciy unless households can dig ou

rom under he mounain o deb more quickly han has been he case so ar.

Helping American workers and heir amilies deleverage can occur hrough hree

channels. One is o leave he decline o deb o marke orces hrough massive home

morgage oreclosures and igh lending sandards ha preven he expansion o

much new credi. Anoher, less-painul possibiliy or households is he renanc-

ing o exising deb ino lower-ineres-rae deb, hus making i easier o repay heir

oal ousanding deb. And he nal way o deleverage household deb is an increase

in aer-ax incomes. Incomes can grow due o more jobs, higher wages, lower axes,

and beter unemploymen insurance benes, among ohers.

A closer look a he daa on household indebedness in he Unied Saes illusraes

he imporance o deleveraging swily or a srong economic recovery as well as he

value o a mulipronged approach in reducing deleveraging hrough aser declines

in ousanding deb, more renancing ino lower-cos deb, and quicker increases in

personal incomes. Consider ha:

Economic growh says oo low. Gross domesic produc, or GDP, grew a an

annual rae o 2.5 percen in he hird quarer o 2011. Te economy has expanded

now by 5.6 percen in inaion-adjused erms, he slowes growh during he rs

nine quarers o an economic recovery since World War II. Business invesmen


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expanded a a srong 16.3 percen in he hird quarer o 2011 , while expor

growh remained subpar wih 4.0 percen, consumpion regained some srengh,

expanding a 2.4 percen, bu only because personal saving ell precipiously.

And, governmen spending was a. Economic growh is sill oo low o creae

sucien jobs o subsanially reduce he unemploymen rae. Low personal

income growh is holding back consumer demand and scal roubles o govern-mens in he Unied Saes and abroad impede U.S. economic growh.

Te deb is highes among he middle class. Middle-income amilies beore he

crisis had a deb-o-income raio o 155.4 percen in 2007, he las year or which

daa are available, or amilies wih incomes beween $62,000 and $100,000,

which consiued he ourh quinile o income in our naion in 2007. Tis raio

is higher han or any oher income group. Families in he op 20 percen o

income (wih incomes above $100,000) had a raio o deb o income o 123.6

percen, and amilies in he hird quinile (wih incomes beween $39,100 and

$62,000) owed 130.7 percen o heir income. Households in he botom 40percen o he income disribuion (wih incomes below $39,100 in 2007) owed

well below 100 percen o heir income.

Tis high deb holds back consumpion in he curren recovery. Households

used heir homes as AMs beore he crisis, nancing record shares o consumer

spending wih deb. Bu his rend reversed wih he onse o he housing and

nancial crises, when households could no longer use heir homes as AMs.

Whas more, inaion-adjused consumpion expanded by only 4.3 percen

rom he sar o he recovery in June 2009 o June 2011, marking is slowes

growh o any recovery o his lengh since World War II.

All o hese highly indebed households ofer litle incenive or businesses o

inves more quickly. Highly indebed households also have high deb paymens

and hus less money o spend on oher consumpion iems. And businesses may

conclude ha here is a likely slowdown or uure consumpion because con-

sumers will remain heavily indebed ino he oreseeable uure. Businesses will

conclude ha here will be slow consumpion growh in he uure and hus inves

less. Te high deb levels o he pas may hus help explain in par ha business

invesmen is well below is long-erm hisoric rend.

So wha can policymakers do o correc his problem? Well, in some cases

Americans wih heavy deb loads simply have oo much deb or policy o iner-

vene efecively. Policy reorms canno help everybody, bu or mos Americans


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in he middle class, he wherewihal o pay of heir deb is wihin reach i given a

ghing chance. Helping ha process along more swily should be a op prioriy or

policymakers. Heres why:

I could ake many more years or deb o reach susainable levels i he decline in

household deb is le o marke orces alone. Deb levels could reach he levelso he 1990s, which wen along wih a as growing economy and srong nancial

markes, only by he end o 2017 i aer-ax income coninues o grow a he rae o

las year and deb says a. (see able 1 on nex page) Tis do-nohing scenario

means prolonged oreclosures and ighening lending sandards. I could alerna-

ively ake unil Sepember 2036 o reach he deb-o-aer-ax-income raio o he

1990s i income growh says moderae and deb sars growing a he modes rae

o 3 percen per year.

Renancing ino lower-cos deb, especially morgages, could accelerae deleverag-

ing and boos consumpion. Households, which oday are able o ake advanage ohisorically low morgage raes i hey are eligible or renancing, could reduce heir

morgage paymens by subsanial amouns and hus reach susainable deb levels

more quickly i hey received argeed help in renancing. Tey could hen use he

savings o pay back heir deb more quickly. Renancing alone would bring house-

holds o he deb levels o he 1990s abou 18 monhs earlier han doing nohing

would, assuming ha renancing lowers he deb service burden o consumers by 1

percen o heir aer-ax income and i he savings are used o repay he ousanding

deb. (see able 1 on nex page)

Booss o aer-ax incomes would allow household deb o all o susainable levels

years earlier han i oherwise would. Raising aer-ax income growh rom he 4

percen levels o he pas year o 7 percen could help households reach he deb

levels o he 1990s abou wo-and-a-hal years earlier han doing nohing. (see able

1) Te benes rom aser income growh are larger han rom renancing since

ineres raes canno all much urher rom where hey are now. Te combinaion

o renancing and aser income growh would allow households o reach he deb

levels o he 1990s more han hree years sooner han hey would by doing nohing.


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TABLE 1

Unburdening our middle class

Pathways to sustainable debt-to-after-tax-income ratios

Share of saving

explained by

change in

category,

previous

labor market

contractionsCategory

Share of saving

explained

by change

in category,

Great Recession

Relative

difference

Share of saving

explained by

change in

category,

two years after

labor market

contraction ended

Expected

change after

Great

Recession

Motor vehicles

and parts

Furnishings and

durable household

equipment

-102.8

-44.3

-27.3

-12.4

-73.4%

-72.0%

-60.00%

-4.70%

-15.9%

-1.3%

Recreational goods

and vehicles

Other durable

goods

-16.6

-8.1

-8.6

-2.2

-48.2%

-72.8%

-13.50%

-2.10%

-7.0%

-0.6%

Food and beverages

purchased for off-

premeses consumption

Clothing and

footwear

-62.7

-50.9

0.6

-9.4

-101.0%

-81.5%

68.80%

17.40%

-0.7%

3.2%

Gasoline and other

energy goods

Other nondurable

goods

-8.8

-10.9

-12.1

1.5

37.5%

-113.8%

-3.20%

-2.20%

-4.4%

0.3%

Services

Personal interest

payments

196

-3.7

-16.0

-18.2

-108.2%

391.9%

-90.20%

-8.30%

7.4%

-40.8%

Personal current

transfer payments

Housing and

utilities

13.9

46.60%

4.1

2.50%

-70.5%

-94.6%

-1.60%

-15.40%

-0.5%

-0.8%

Health care

Transportation

125.00%

-16.50%

22.20%

-9.70%

-82.2%

-41.2%

-32.00%

-10.70%

-5.7%

-6.3%

Recreation

services

Food services and

accommodation

9.50%

-15.70%

-5.40%

-6.30%

-156.8%

-59.9%

-9.30%

-7.10%

5.3%

-2.8%

Financial 28.60% -13.90% -148.6% -15.00% 7.3%

Notes: The scenarios assume a starting debt-to-after-tax-income level of 114.3 percent in June 2011. The average debt-to-after-tax-income ratio forthe period from December 1994 to March 2001 was 89.1 percent, which is one possible threshold for sustainable debt levels, as discussed in the text.

The scenarios further assume an after-tax income growth of 4 percent and debt growth of 0 percent for the baseline do-nothing proposal. Fastincome growth is assumed to equal 7 percent.

Renancing assumes a reduction of the debt service burdenmeasured as debt service to after-tax incomeby 1 percent of after-tax income, and itassumes that the savings will be used to repay the outstanding principal. See text for further discussion of the eect of renancing andafter-tax-income growth on deleveraging.

Source: Authors calculations based on Release Z.1 Flow of Funds Accounts of the United States. Washington, DC: BOG.


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Te coninued high deb levels ha households carry on heir shoulders pose a major

drag on household spending and on he economy. Policymakers hus ace a choice o

leave he adjusmen o high deb levels relaive o aer-ax incomes o marke orces

alone, wih all o he economic pain ha i enails. Or policymakers could do some-

hing abou i by:

Helping more borrowers renance a hisorically low ineres Boosing aer-ax incomes hrough aser job creaion by invesing in inrasrucure Enacing emporary payroll ax breaks Exending unemploymen insurance benes

In he pages ha ollow, hen, his paper will examine in more deail he conse-

quences o high indebedness o American amilies and he broader economy

beore exploring he benes o encouraging he more swi resoluion o high

indebedness in our sociey. We hen discuss some basic policy guidelines ha

policymakers should consider o make his happen in he coming years.


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Defining household leverage

Household leverage is he amoun o money ha a household owes relaive o is

abiliy o repay ha money. Ta simple concep ranslaes ino several diferen

measures, all o which allow or slighly diferen insighs.

Firs, here is he raio o deb o oal aer-ax income. Tis raio shows he

indebedness o a household relaive o is abiliy o pay back a loan now and in

he uure. Tis raio, hough, ignores he ac ha ineres raes can change over

ime, which may make i harder o repay he exising amoun o deb i ineresraes rise or easier i ineres raes all.

Tere is hus a second, relaed measure ha capures he repaymen burdenprin-

cipal and inereso all ousanding deb o aer-ax income. Tis measure shows

how much he average household currenly pays or is ousanding deb. Tis

measure, hough, provides litle direc sense o how much deb a household owns.

Specically, his measure does no give a sense o economic vulnerabiliies i ineres

raes rise again since higher deb levels can ranslae more quickly ino higher deb

repaymens i ineres raes go up han would be he case or lower deb levels.

A hird household leverage measure is he raio o oal deb o asses. I shows

how much money a bank could recover i asses ha a household owned were sold

o repay he loans. Tis measure, however, assumes ha asses can acually be sold

when he household needs o repay he loan. Te recen experience in he hous-

ing marke shows ha his is no always he case. Banks may no be able o recover

heir ousanding loans even i he household has an asse as collaeral or a loan.

Te discussion below uses all hree measures o household leverage bu he pre-

erred indicaors are he rs wo, which capure he burden ha deb places onhouseholds relaive o heir abiliy o pay back ha deb. Mos o he discussion

will in ac concenrae on he raio o deb o aer-ax income, and will use he

oher measures o illusrae key poins only where appropriae.


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Figure 1

Tracking high indebtedness

Household debt to after-tax income, 1952-2011

Leverage is still high after years of declining loans

Te recen economic and nancial crises go underway in 2007, alhough he Grea

Recession did no ocially sar unil he end o 2007. Te crisis sared when ami-

lies who had borrowed ever-larger morgages during he housing boom years o make

up or weak income growh and rapidly rising prices could no longer repay heir deb.Banks subsequenly oreclosed on he homes o millions o amilies while bad loans

coninued o pile up in a rapidly weakening economy. Te nancial crisis and eco-

nomic recession ed on each oher, leading o urher oreclosures, less new deb rom

banks, and he wors recession since he Grea Depression.

Te implicaions or he curren epid economic recovery are huge. High household

indebedness is one acor ha holds back consumpion growh in he recovery and

hus impedes aser economic growh and more hiring. Consumpion and economic

growh are inricaely linked since consumpion makes up more han 70 percen o

gross domesic produche broades measure o economic growhand since 87.6percen o economic growh during he economic recovery ha sared in June 2009

came rom consumpion.1 Bu consumpion growh amouned o only a oal o 4.3

percen or he rs eigh quarers o his recovery, which is he slowes growh rae

or any recovery o his lengh since World War II.2

Slow consumpion growh hence conribues o slow

economic growh in his recovery. High and alling

indebedness likely explains par o his slow growh

patern jus like rising indebedness during he boom

years beore he crisis conribued o aser con-

sumpion growh han oherwise would have been

he case, as discussed below.

Te daa on oal household indebedness illusrae

he boom-and-bus cycle o he pas years. (see

Figure 1) Household leverage is ypically dened

as he amoun o deb relaive o aer-ax income,

meaning he raio o wha is owed o households

abiliy o repay wha is owed. Households owed arecord-high 130.2 percen o heir aer-ax income

in Sepember 2007.3

Notes: Total debt reers to credit market liabilities. Sources: Calculations are based on: Federal RRelease Z.1 - Flow o Funds Accounts o the United States, available at http://www.ederalrese

Mar

52

Mar

57

Mar

62

Mar

67

Mar

72

Mar

77

Mar

82

Mar

87

Mar

92

Mar

97

Mar

02

Percent of after-tax income

Quarter

0%

20%

40%

60%

80%

100%

120%

140%
http://www.federalreserve.gov/releases/z1/http://www.federalreserve.gov/releases/z1/


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Te daa also show an unprecedened acceleraion in household deb jus beore he

nancial and economic crises. Household deb sared o gradually increase beginning

in he mid-1980s as inaion and ineres raes sared o all rom very high levels ha

made i easier or borrowers o aford more deb. Bu household indebedness rs

began o accelerae wih he recession ha sared in March 2001. Households needed

more deb o mainain heir consumpion as rs he recession in 2001 desroyed jobsand hen a very weak labor marke expansion hrough 2007 wen along wih he slowes

job growh o any business cycle since he Grea Depression. 4

Te raio o deb o aer-ax income increased each quarer a a rae o 1.4 percenage

poins rom March 2001 o December 2007. Household indebedness rose by less han

one-h his rae0.28 percenage poins on average each quarerduring he busi-

ness cycle o he 1990s, rom Sepember 1990 o March 2001.

Te nancial and economic crises o 2007 o 2009 reversed a decades-long rend o

ever-more household indebedness. Te raio o deb o aer-ax income sood a114.3 percen in June 2011, well below is peak level o 130.2 percen in Sepember

2007. Tis reecs an unprecedened drop in he raio o deb o aer-ax income,

largely because banks held igh on giving ou a lo o new loans so ha households

paid of old deb bu couldn ge new deb.

In addiion, many ousanding loans, especially morgages bu also credi cards and

oher orms o household deb, wen bad during he crisis.5 Banks wroe hem of

heir books, hus lowering he amoun o ousanding deb urher. oal inaion-

adjused household deb hence ell by $1.4 rillion (in 2011 dollars) or 9.4 percen

rom Sepember 2007 o June 2011.6

Leverage highest among middle-income households before the crisis

Te deb boom preceding hese crises was inimaely ied o a housing boom. Ta is,

households who owned heir own home or who bough a new home could go deeper

ino deb han reners. Tis implies ha he deb boom was concenraed among

middle-income amilies. Lower-income amilies were less likely han middle-income

amilies o own heir own home and hus had less access o home equiy againswhich hey could borrow. And higher-income amilies oen had more nancial

resources (savings and income) han middle-income amilies, which kep hem rom

going deeper ino deb o mainain heir spending.


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Diferen akes on he same daa show ha leverage was highes among middle-

income amilies, jus beore he crises. Tis auhor ndsbased on household

daa rom he Federal Reserves Survey o Consumer Financesha he raio o

deb o income or amilies in he ourh quinile o income (beween $55,331 and

$88,030) was 137 percen in 2004, higher han or any oher income group. (see

Figure 2) Families in he op quinile earning more han $88,030 had a raio odeb o income o 116 percen, and amilies in he hird quinile (beween $34,738

and $55,331) owed 108 percen o heir income. Households in he botom 40

percen o he income disribuion (earning less han $34,738) owed well below 100

percen o heir income.

Similarly, Brian Bucks and his colleagues a he Federal Reserve concluded ha

he share o deb o asses was highes among households in he ourh quinile in

2007, wih a raio o 25.3 percen o deb o asses, compared o 24.3 percen or

households in he hird quinile, and 23.4 or households beween he 80h and 90h

percenile. Households in he op 10 percen and in he botom 40 percen o heincome disribuion owed subsanially less han 20 percen o heir asses in 2007.7

Figure 2 shows ha deb was also highes among middle-income amilies beore

he crisis in 2007, he las year or which daa exis. Te median deb-o-income

raio or households in he hird and ourh quinile, earning beween $39,100 and

$100,000 in 2007, was higher wih 130.7 percen and 155.4 percen han or any

oher income group.8 Te daa also show ha very high-income amilieshose

in he op 5 percen o he income disribuion, earning more han $177,000 in

2007had less han 100 percen o heir income in deb.

Te increases in deb, relaive o income or relaive o asses, were larges among

middle-income households aer 2001, when ha eigh-monh-long recession

ended. Te raio o deb o income rose by more han 30 percen, or insance, or

households in he hird and ourh quinile o he income disribuion rom 2001

o 2004. Tis raio grew by less han 30 percen or all oher households, lower

income and higher income.9

In addiion, he raio o deb o assesan alernaive measure o leverage

increased ases or households in he ourh quinile, wih a jump o more han40 percen, rom 2001 o 2007. Households wih income in he second and hird

quinile and above he 80h percenile bu below he 90h percenile experienced

increases o more han 25 percen in heir raio o deb o asses rom 2001 o

2007. Lower-income and higher-income households experienced much smaller


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increases in leverage han middle-income house-

holds didindependen o how leverage is mea-

suredduring he boom years o he 2000s, when

household deb expanded ases.

Figure 2 also illusraes ha deb growh wasases among middle-income amilies rom 2001

o 2007. Te deb growh was mos pronounced

among amilies in he hird and ourh quinile

o he income disribuion, or households wih

incomes beween $39,100 and $100,000 in 2007.10

Households in he botom 40 percen o he

income disribuion, earning less han $39,100 in

2007, saw relaively sable deb-o-income raios

during he deb boom years, as did households in

he op 5 percen o he income disribuion, earn-ing more han $177,000 in 2007.

Notes: All fgures are in percent. All fgures are median debt-to-income ratios. Data apply only twho owe any debt. Sources: Income classifcations are rom: Historical Income Tables, availablcensus.gov/hhes/www/income/data/historical/household/index.html. Authors calculations bo Consumer Finances, available at http://www.ederalreserve.gov/econresdata/sc/scfndex.h

Figure 2

The middle class is most highly indebted

Debt to income, by income groups, 2001 to 2007

Income group

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Firstquintile

Secondquintile

Thirdquintile

Fourthquintile

Fifthquintile

T

2001 2004 2007
http://www.census.gov/hhes/www/income/data/historical/household/index.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.census.gov/hhes/www/income/data/historical/household/index.htm


14/31


Excessive debt laid the foundation

for prolonged slump

Te economy o he las business cycle, rom March 2001 o December 2007,

depended heavily on banks pushing ever-more deb on consumers. In each

quarer during ha period, households purchasing powermeasured as aer-ax

incomeincreased by an annual rae o 3.1 percen because o more deb on op

o acual income growh. Bu ha also mean ha he deb burden increased a an

unprecedened rae during he las business cycle, laying he oundaion or a lo

o economic pain o ollow.

Households buying power rose especially because households ook ou more mor-

gages, eiher bigger morgages or second morgages or home equiy loans. Households

needed he addiional money o pay or ever-more expensive homes bu hey also

nanced oher consumpion iems, such as new cars and college uiion, wih he

addiional deb.11 Figure 3 shows he diference beween new morgages minus money

spen on homes, relaive o aer-ax income.12 A posiive number shows when house-

holds used cashed-ou equiy rom heir homes o

nance consumpion ouside o heir homes.

Te daa are consisenly posiive and show

subsanial increases in households buying power

beore he crises, as amilies wen deeper ino

deb. Te quickly building-up household deb

levels, hopping o ever-new record highs, was he

uel ha anned he ame o he unsusainable

economic expansion beore he Grea Recession.

More household deb also ueled consumer spend-

ing beore he crises. Te increasing use o homeequiy wihdrawals rom more and more mor-

gages also shows up in rapidly rising deb-nanced

consumer spending on new homes and on oher

iems. Consumers can use new deb o pay or new

houses, oher consumpion, and o inves in socks

and oher nancial asses.

Notes: All fgures are fve-year average ratios to reduce volatility in the data.

Sources: Calculations are based on: Federal Reserve Statistical Release Z.1 - Flow o Funds AccoUnited States.

Figure 3

Borrowing to overcome flat incomes

Difference between new mortgages and the ratio of real

expenditures (after accounting for inflation) to after-tax

Percent of after-tax income

Quarter

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Dec

56

Dec

61

Dec

66

Dec

71

Dec

76

Dec

81

Dec

86

Dec

91

Dec

96

Dec

01

Dec

06


15/31


I is crucial o undersand ha he rise in consumer indebedness was he resul o

a or declining incomes coupled wih sharply higher prices or large necessiies,

such as healh care, cars o go o and rom work, gasoline, housing and uiliies,

and ood. Te evidence also indicaes ha amilies were becoming less oleran

o conspicuous consumpionheir willingness o borrow money o pay or a

vacaion, o buy jewelry, and o pay or a ur coa, among oher such iems, did noincrease aer 2001.13 Families rising indebedness was hus one way o loosening

a growing middle-class squeeze, even i only emporarily.

Figure 4 calculaes he raio o he sum o all new deb during a business cycle o

he sum o all consumpion plus he sum o all residenial real esae spending plus

he sum o all new invesmens in nancial asses during his period.14 Te average

deb-nanced consumer spending exceeded 10 percen during he business cycle

rom March 2001 o December 2007, a hisorical high and subsanially above he

levels o deb-nanced consumer spending during any oher business cycle.

Tis is especially impressive since consumpion ou o aer-ax income and

spending on new homes were a record highs.15 Te share o deb-nanced

consumer spending reached a record high when consumers were also spending

more o heir income han hey ypically had. Te daa clearly show ha he

economic expansion o he 2000s heavily relied on consumers dependence on

more and more deb.

Te nancial and economic crises in 2007 and he

years hereaer saw deb alling, placing a drag

on consumer spending. Households, or insance,

sared o again pu more money ino heir homes

each quarer han hey ook ou new morgages.

(see Figure 3 on page 11). Raher han wihdraw-

ing equiy rom heir homes, households pu more

money ino heir homes han hey borrowed in

new morgages.16 And he deb-nanced share o

consumer spending urned negaive or he rs

ime since he 1950s, suggesing ha deb no

longer ueled consumer spending bu raher pu adrag on i (see Figure 4), assuming ha some o he

decline in deb was caused by deb repaymens and

no all by loan deauls.

Figure 4

Borrowing to spendSharing income of consumer spending on consumption a

real estate financed put of new debt, business cycle aver

Business cycle start

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Sept - 53 Sept - 57 Mar - 61 Dec - 69 Mar - 01Sept - 73 Mar - 80 Sept - 90

4.9% 4.9%5.2%

4.5%

7.3% 6.5%6.1%

10.3%

Percent of consumer spending

Notes: Figures are in percent. The fgures represent the average ratio o the sum o new househsum o consumption plus the sum o residential real estate spending plus the sum o all net asduring a business cycle. Sources: Authors calculations are based on: Bureau o Economic AnalyIncome and Product Accounts (Department o Commerce, 2011).


16/31


Te lack o easy access o morgages and oher orms o consumer credi hus

was one acor ha conribued o slow consumpion growh during he eco-

nomic recovery ha sared in June 2009. Lenders became increasingly careul in

exending credi because bad loans were piling up on heir books as hey increased

oreclosures o unprecedened raes. And home values ell more rapidly han

homeowners could build up new equiy, which mean ha many homeownersremained underwaer on heir morgages, owing more han heir homes were

worh. Tis, o course, made lenders even more relucan o exend new credi.

Te resul: igh-sed banks and a massive recession drove unemploymen

higher, which urher slowed income growh and kep household indebedness

and he associaed nancial problems high. Te real economic efec was slow

consumpion growh hroughou he economic recovery ha sared in June

2009. High unemploymen and allen sock and house values are he oher acors.

Inaion-adjused consumpion expanded by 4.3 percen in he rs wo years

aer he recovery sared, rom June 2009 o June 2011. Tis was he slowes con-sumpion growh o any recovery o his lengh since World War II.17

High household indebedness also conribued o slow business invesmen.

Business invesmen has been below 10 percen o GDP hroughou he economic

recovery, well below is long-erm hisorical average o 11.2 percen o GDP.

Businesses may no see a srong reason o expand heir capaciy by invesing more

i households already pay a lo or heir exising deb.

Tere are wo reasons or his. One may be ha high indebedness oday may mean

ha households are spending less on consumpion and so businesses may expec

ha consumpion will no increase much in he uure because curren consump-

ion growh is low.18 Alernaively, high indebedness in he presen may help nance

consumpion in he presen, as was he case during he years beore he crisis in

2007. Bu his kind o renewed deb accumulaion is ulimaely unsusainable.

Businesses know ha households are more and more overburdened wih deb

and hus will evenually have o slow consumpion. Businesses know ha a pary

nanced by deb will be ollowed by an evenual deb hangover. Eiher way, com-

panies may expec ha consumers will consume less in he uure and hus slowinvesmen in subsequen years. Te upsho: High deb burdens oday should be

ollowed by low invesmen by businesses a leas in he near erm.

Te daa show ha low business invesmen ollows high household indebedness.

Te Federal Reserve calculaes a raio called he deb service raio, which is he


17/31


share o aer-ax income ha he average house-

hold pays or principal repaymen and ineres

paymens on heir ousanding deb. High deb

service burdens have led he way or lower busi-

ness invesmen in he pas ew decades as Figure

5 shows. Indeed, here is an eerie regulariy inhe daa since 1989 ha suggess ha high deb

burdens are ollowed by less business invesmen

in he near uure.19

Figure 5 shows he average deb burden o aer-

ax income over ve years, moved orward by ve

years, and he average raio o business invesmen

o GDP or he preceding ve years. Ta is, a each

quarer along he x-axis, he gure shows he aver-

age level o invesmen and he average deb burdenve years earlier. Te inerpreaion is ha inves-

men oday ollows household deb burdens wih

abou a ve-year lag. Te wo series move in oppo-

sie direcions in gure 3 on page 11, which indicaes ha high deb burdens are

ollowed by low invesmen ve years laer, and ha low deb burdens are ollowed

by higher invesmen levels.

Te run-up in consumer deb levels during he boom years may hus explain, a

leas in par, he low business invesmen perormance o he curren economic

recovery. Te deb overhang rom he deb-boom years hus plays a criical role in

slowing consumpion and possibly invesmen growh and consequenly eco-

nomic growh and new hiring in he economic recovery aer June 2009.

Furhering aser household deleveraginggeting rid o deb relaive o aer-ax

incomehus becomes a policy imperaive even hough i is no he only cause

o he slow recovery. High unemploymen and lower sock porolio and housing

values are also holding consumpion growh back. High unemploymen means

ha people do no have enough income o spend and low sock and house values

means ha people ocus more on saving and less on spending.

Bu reducing household leverage will have posiive eedback efecs o lower

unemploymen and higher sock and house prices. Hiring will likely no acceler-

Figure 5

High household debt, low business investment

Debt service ratio and investment, 1989 to 2010

Percent (of GDP/PDI)

Quarter

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

Dec89

Dec91

Dec93

Dec95

Dec97

Dec99

Dec01

Dec03

Dec05

Dec07

Dec09

Investment, 5-year average

Debt service ratio,5-yr avg, 5-yr lead

Notes: Investment is current investment. The debt service burden is the debt service burden recoearlier. The fgure thus shows how debt service burdens lead the way or business investment. Thage or the debt service burden is the average ratio, not the average o the debt service burden raAuthors calculations based on: Household Debt Service and Financial Obligations Ratios, availabederalreserve.gov/releases/housedebt/; Bureau o Economic Analysis, National Income and Produ
http://www.federalreserve.gov/releases/housedebt/;%20Bureau%20of%20Economic%20Analysis,%20National%20Income%20and%20Product%20Accountshttp://www.federalreserve.gov/releases/housedebt/;%20Bureau%20of%20Economic%20Analysis,%20National%20Income%20and%20Product%20Accountshttp://www.federalreserve.gov/releases/housedebt/;%20Bureau%20of%20Economic%20Analysis,%20National%20Income%20and%20Product%20Accounts


18/31


ae unless consumers sar o spend more and ha will no happen wihou lower,

susained deb burdens. Ta is, lowering households leverage will have a posiive

eedback o lower unemploymen and higher employmen.

Whas more, less household leverage will also mean less household economic

disressewer credi card deauls, ewer oreclosures, and ewer bankrup-cieswhich in urn should give banks an incenive o lend more again. Easier

access o morgages, or insance, should ranslae ino more demand or homes

and consequenly more sable home prices. Less leverage could hus have a

sabilizing eedback efec on household wealh, on saving and consumpion,

and hus on economic growh and hiring. Less leverage could creae a bene-

cial cycle, jus like he massive amoun o deb helped creae a hurricane o bad

economic news or he pas ew years.


19/31


Three pathways to deleveraging

Deb can become less burdensome in hree ways. Tere can be less deb, deb can

cos less due o lower ineres raes, and i may be easier or households o carry

he same amoun o deb i incomes rise. Les consider each pah in isolaion.

Reaching sustainable debt levels with slow debt growth alone

I would ake years, perhaps decades, o reach susainable household deb lev-els i we leave marke orces alone o solve he problem. Te mosly do-nohing

approach o deleveraging o he pas ew years shows ha his is associaed wih

remendous economic pain ha could las or many more years, especially since

curren economic circumsances may slow urher declines o household deb and

hus o he deb-o-aer-ax-income raio.

o be sure, households have already los a lo o deb. oal deb has allen by

$1.4 rillion (in 2011 dollars) rom is peak in lae 2007 o is mos recen bo-

om o $13.3 rillion in June 2011. Tis 9.4 percen decline o inaion-adjused

deb reecs boh enormous economic pain or households, which have los heir

homes due o oreclosure, ewer qualied borrowers due o high unemploymen,

sharply lower home values, and large credi consrains o amilies and businesses

alike as banks coninue o resric lending o many borrowers. Ye many qualied

borrowers, businesses, and households alike canno ge credi or desirable inves-

mens, and here are ewer qualied borrowers o begin wih. Te housing marke,

business invesmens, hiring, and he economy sufer as a resul.

I is clearly possible o coninue on his pah o shrinking he acual amoun o deb,

bu his will also mean ha he economy will be saddled wih slow growh andhigh unemploymen or a long period o ime. Te economy will only see sronger

growh i household deb levels reach susainable levels, dened as deb levels ha

do no cause crisis behavior among households, businesses, and banks. Households

will spend more, businesses will inves aser, and banks will become less resricive

in heir lending pracices once deb has reurned o susainable levels.


20/31


Tere is no clear measure o wha level o deb will be susainable. One reasonable

hreshold may be he poin a which deb equals aer-ax income again, meaning

when he raio o deb o aer-ax income is 100 percen. Anoher possible hreshold

or susainable deb levels may be he average deb level o he lae 1990s. Te iner-

es rae levels hen were comparable o wha we can expec in noncrisis imes, when

economic disress among households was manageable, alhough oen high, and eco-nomic growh hroughou he period rom December 1994 o March 2001 was solid.

Te average deb-o-aer-ax-income raio or his period was 89.1 percen, and any

deb level below his raio could poenially be considered susainable. Te hreshold

or susainable deb levels, hough, would likely be lower i ineres raes rose again

due o igher moneary policy or higher inaion. Mos imporanly, we are ar away

rom any o he hresholds discussed here since he raio o deb o aer-ax income

sood a 114.3 percen in June 2011. I will ake years i no decades o reach susain-

able levels o deb as able 2 (below) shows.

able 1 on page 4 shows a ew simple simulaions or possible pahs or deleveraging.

Te simulaions use hree diferen scenarios o model he raio o deb o aer-ax

income in he uure. Tis raio in he uure will depend on how as aer-ax income

and deb will grow. Tere are hree diferen ses o assumpions or deb growh bu all

o hem assume ha he average aer-ax-income growh rae remains he same across

all hree scenarios, wih an annual growh rae o 4 percen. Tere currenly is litle rea-

son o believe ha wihou susained policy inervenions, which are briey discussed

below, household income growh will accelerae beyond ha level.

Tis 4 percen growh rae is well below he hisoric average growh rae o 6.8

percen bu i is equal o he slow income growh o he pas year rom June 2010 o

Table 2

Three ways to speed reductions in household debt

Year of reaching sustainable levels of debt with continued deleveraging under

three select scenarios: do nothing, refinancing with lower interest rates, and

faster income growth

AssumptionsAfter-tax in-

come growth

Debt growth

Quarter, when

debt to after-

tax income

falls below 100percent for the

first time

Quarter, when

debt to after-

tax income

falls below 89.1percent for the

first time

Rapid deleveraging 4.0 -1.0 March 2014 June 2016

Flat return 4.0 0.0 December 2014 December 2017

Returning debt

growth4.0 3.0 December 2024 September 2036

Notes: All fgures are in percent. Sources: Calculations are based on: Federal Reserve Statistical Release Z.1 - Flow o Funds Accountso the United States; Bureau o Economic Analysis, National Income and Product Accounts.


21/31


June 2011.20 Te assumed average deb growh rae is -1 percen in he rs

example o capure he coninuaion o rapid deleveraging.21 Te second scenario

assumes zero deb growh going orward o capure some easing o credi marke

condiions in he near erm. And he hird scenario allows or some deb growh

o reurn by assuming ha deb will increase annually by 4 percen, alhough his

deb growh rae is well below he hisoric average beore he crisis o 9 percen.22

able 2 shows ha i could ake years, i no decades, o reach susainable deb

levels. A he rae o deb declines o he pas ew yearsabou 1 percen annu-

allyi will ake unil June 2016 beore he raio o deb o aer-ax income

alls again o he average o he 1990s. And his is only he bes-case scenario.

All oher scenarios show ha i could ake a lo longer, possibly decades, beore

household leverage alls o susainable levels, paricularly i deb sars o grow

again, even i jus modesly.

Te Obama adminisraion made some efors o help homeowners renance heirmorgages bu wih only limied success. Te Obama adminisraion launched

is signaure iniiaive o address he oreclosure crisis, called Making Home

Afordable, in he spring o 2009.23 Making Home Afordable consised o wo

primary programs mean o help sruggling homeowners. Te rs was he Home

Afordable Morgage Program, or HAMP, which was designed o encourage

morgage servicers o provide loan modicaions o homeowners who are eiher

in deaul or a imminen risk o deaul. Te second was he Home Afordable

Renance Program, or HARP, which was designed o help homeowners who

are curren, bu a risk o delinquency, by allowing hem o renance ino odays

hisorically low raes. Wihou HARP homeowners would be disqualied rom

renancing because heir loan-o-value raioshe amoun o ousanding mor-

gages o he presen value o a housewere oo high because o home price drops.

Homeowners could iniially renance under HARP i heir loan-o-value raios

were less han 125 percen, assuming ha heir morgage was conorming o

Fannie Mae and Freddie Mac sandards. Te Obama adminisraion announced

ha i would waive his cap on Ocober 24, 2011, allowing homeowners who are

deep underwaer o renance heir morgages as well. Homeowners who are sill

curren on heir morgage paymens bu who would no be able o renance dueo high loan-o-value raios ollowing sharp drops in house prices can heoreically

renance ino morgages wih much lower ineres raes han hey currenly have.


22/31


A homeowner, or example, who owes $250,000 on a propery valued a $200,000

and who pays 5 percen on a morgage could heoreically ge a new morgage a a

rae much closer o he curren marke rae o 4 percen. Bu lenders oen charge

large upron ees o borrowers wih high loan-o-value raios, hus making HARP

less efecive han iniially anicipaed, as Sarah Rosen Warell, David Min, and

Jordan Eizenga o he Cener or American Progress poin ou.24

Boh HAMP and HARP atemped o reduce he monhly morgage paymens

o sruggling borrowers, and HAMP allowed or some mechanisms o reduce he

acual deb owed. None o hese major programs had he efec hoped because o

lower-han-expeced paricipaion and barriers o more widespread adopion lim-

ied paricipaion by borrowers. Te HAMP program regisered slighly more han

800,000 loan modicaions since is incepion in March 2009. Bu he HARP pro-

gram, which regisered close o 900,000 renances perormed since i began in March

2009, is he ocus o renewed atenion in he Obama adminisraion and Congress.

Te Obama adminisraion las monh unveiled some changes o he HARP

program o ry o spur more renances, wih he deails o come in November.25

Broadly, hough, he Federal Housing Finance Adminisraion, which regulaes

Fannie and Freddie (boh o which are in governmen conservaorship), plans o

reduce he upron coss or borrowers who are curren on heir morgages or he

previous six monhs and wan o renance heir morgages by:

Subsiuing cosly morgage appraisals wih so-called Auomaed Valuaion

Models used by he wo morgage gians o appraise morgages more cheaply

Waiving loan-level price adjusmens ha increase ineres raes or borrowers

wih higher loan-o-value raios

Easing he requiremen or represenaions and warranies abou borrowers

incomes when renancing

Allowing borrowers wih loan-o-value raios in excess o 125 percen o parici-

pae in HARP

Tese are imporan rs seps bu more could be done.

Specically, borrowers should be able o roll he cos o appraisals ino heir mor-

gage o reduce upron coss urher, and hey should be able o conduc a more


23/31


limied ile search when renancing. Lenders should be encouraged o paricipae

in HARP by reporing heir paricipaion raes in he program or perhaps being

required o mee cerain arges. And he Federal Housing Finance Adminisraion

should launch a major adverising campaign o reach eligible and newly eligible

homeowners in HARP.26All o his, ogeher wih he efors already underway,

could lead more homeowners o ake advanage o low ineres raes by renanc-ing and hus reducing heir morgage paymens. Homeowners would have more

resources available han is currenly he case, hus allowing hem o save more,

pay down heir oher deb more quickly, beter mainain heir consumpion, avoid

oreclosures, or all o he above.

Refinancing existing debt as a quick way to free up money for

consumption

Renancing deb ino less cosly deb is anoher alernaive ha would resul inaser deleveraging and i would help bring down oreclosures rom heir his-

orically high levels. Lower ineres paymens mean ha households have more

money available o repay heir ousanding principal more quickly. Te average

ineres rae on morgagesby ar he larges share o household debsood

a 4.3 percen in Augus 2011. Tis is down rom is las peak o 5 percen in

February 2011. I is also close o a record low, wih he lowes monhly average

rae since April 1971, when he Federal Reserve sared o collec hese daa, being

recorded in February 2010 wih 4.2 percen. Ineres raes edged somewha lower

oward 4 percen in Sepember 2011.27 Some downward movemen or all mor-

gages may hus sill be possible.

Wha would ha look like or a ypical borrower? Les assume a borrower ook

ou a 30-year, xed-rae morgage or $250,000 ve years ago. Les hen assume

he borrower could renance based on he hree diferen ineres raes

5 percen, 4.75 percen, 4.5 percenino a new 25-year morgage or anoher

30-year morgage o urher srech he paymens ino he uure. I his were pos-

sible hen hese large drops in ineres raes and he lenghening o he paymen

schedule would reduce he monhly paymen on he exising morgage.

able 3 (on nex page) shows wha ha range o opions would look like o a

homeowner looking o renance. Te savings rom renancing such a morgage


24/31


could be subsanial. A household ha originally ook ou a 30-year morgage a 5

percen renancing ino anoher 30-year morgage a 4 percen could save $2,952

annually, which reecs a cu o is monhly paymen by 18.3 percen. Tis is he

larges-possible savings in he scenarios presened in able 3, wih all oher cus

being smaller. Te scenarios do no assume any renancing ees, which could reduce

he benes o renancing iniially. Te scenarios are hus a bes-case oucome orborrowers. I he household used hese savings o pay back principal aser, hey

would shed an exra $16,000 in deb aer ve more years and owe 8 percen less

han i hey did no use he addiional savings or quicker loan repaymens.

Pu ye anoher way, a households deb-o-aer-ax burden could reach susain-

able levels more quickly, possibly several years earlier han oherwise would be he

case. Wih an annual growh rae o personal disposable income equal o 2 per-

cen, or insance, i would ake he household in his example anoher ve-and-a-

hal years o reach a raio o 89.1 percen o aer-ax incomeassuming ha he

household sars wih a raio o 114.3 percen and a curren morgage rae o 5 per-cen oday. Te household would ge o susainable deb levels 12 monhs aser,

aer renancing o a 4 percen ineres rae, sreching paymens or 30 years, and

using he addiional paymens o repay he principal aseNoes: All gures are in

dollars. Te original loan amoun is se equal o $250,000.

Lower morgage paymens hrough renancing could make a major diference in

household deb service and or our economic recovery i i occurred a a large-

enough scale. Te household deb service burden in June 2011 sood a 11.1

percen, already much lower han he record high o 14 percen in Sepember

2007.28 A drop in he deb service burden by anoher 10 percen would bring i o

9.9 percen, which would be he lowes burden on record going back o 1980.

Table 3

Three ways to lower the household debt burdenThe consequences of refinancing at lower interest rates under different assumptions

Original

interest rate

New monthly

payment

Remaining

principal after

five years

Old monthly

paymentAnnual savings

25-year

mortgage

30-year

mortgage

25-year

mortgage

30-year

mortgage

5 percent 229,572 1,342 1,212 1,096 1,560 2,952

4.75 percent 228,745 1,304 1207 1,092 1,164 2,544

4.5 percent 227,895 1,267 1203 1,088 768 2,148

Notes: All fgures are in dollars. The original loan amount is set equal to $250,000. Source: Authors calculations.


25/31


Lower deb paymens, especially or morgages, alone could have a benecial

efec on economic growh in he near ermeven i he addiional savings are

no used o repay morgage principal. Lower deb paymens could ree up more

money or consumpion and hus provide businesses wih an incenive o inves

more. A viruous cycle, whereby aser consumpion leads o more invesmen,

would resul in more hiring and hus more consumpion.

Many borrowers would ake advanage o hisorically low ineres raes and renance

heir exising deb, especially morgages, i hey could persuade heir lenders o do

so. Many lenders may be relucan o allow borrowers o renance since borrowers

may already owe more on heir houses han hey are worh, borrowers incomes may

have declined since hey rs ook ou he morgage due o he weak labor marke,

and lenders may have ighened lending sandards subsanially o proec hem-

selves in he wake o massive oreclosures. Incomes and housing values would have

o rise o make lenders less relucan o help homeowners renance.

Te seps recenly unveiled by he Obama adminisraion will help. Homeowners

who owe a lo o money relaive o he value o heir houses because house

prices have dropped so much in recen years may nd i easier o renance heir

morgages han is currenly he case. A homeowner who has a 5 percen, 30-year

morgage aken ou ve years ago in 2006 and who renances ino anoher 30-year

morgage a 4 percen may save close o $3,000 per year. (see able 3)

Indeed, much o he efeciveness o ederal housing nance policy will ulimaely

revolve around wheher and o wha exen he ederal governmen coninues o

play a major role in his area. Congressional Republicans in paricular have been

ouspoken abou heir belie ha he ederal conservaorship o Fannie Mae and

Freddie Mac should end as quickly as possible, and ha hey should be replaced

wih privae sources o liquidiy in he secondary marke or home morgages

a marke where individual morgages are purchased in bulk and resold o insiu-

ional invesors a home and abroad. Te abiliy o policymakers o afec hous-

ing deb would be much more limied i his secondary marke did no direcly

involve Fannie Mae and Freddie Mac, which purchase and resell home morgages,

enabling morgage lenders o ofer new morgages o new borrowers.

Even he mos arden criics o he ederal governmens role in he morgage mar-

kes have empered heir calls or immediae privaizaion because o he conin-

ued weakness o he housing secor. In he absence o any obvious privae sources

o replace he $6 rillion in ousanding morgages currenly nanced by Fannie


26/31


and Freddie hrough heir purchases o morgages o be resold as morgage-backed

securiies, drasic acion on Fannie Mae and Freddie Mac is likely o be abled a leas

unil aer he 2012 elecion. Policymakers hus have an opporuniy o a leas empo-

rarily help homeowners renance heir morgages and hereby accelerae he decline

o households deb burdens by embracing he Obama adminisraions plan o enable

Fannie- and Freddie-guaraneed morgages o be renanced by individual morgage.

Faster income growth can lead to accelerated deleveraging

Te hird possibiliy is o encourage aser income growh han would oherwise

occur. Income can rise in a number o ways. People may ge more jobs, hey may ge

paid more, hey may receive a ax cu, and hey may ge higher social insurance pay-

mens, rom unemploymen insurance or rom Social Securiy. Presiden Obamas

proposed American Jobs Ac includes all o hese measures by:

Promoing more inrasrucure spending on schools (more jobs and hus more wages) Lowering payroll axes paid by employees and employers (more ake-home pay) Coninuing he exension o unemploymen insurance benes (more assisance)

able 4 uses he same deb reducion assumpions as in able 1 bu assumes annual

income growh equal o 7 percen insead o 4 percen or he average amily, which

could resul rom more jobs, lower axes, and more assisance, a leas emporarily.

Te efec is remarkable. I would ake 21 monhs less, or insance, han previously

calculaed o reach he average deb levels o he 1990s i deb coninued o all, and

i would ake wo-and-a hal years less o ge here i deb sayed a.

Table 4

Rising incomes means faster household debt reductionYear of reaching sustainable levels of debt with continued deleveraging with faster

income growth and three select scenarios

Assumptions

After-tax

income

growth

Debt

growth

Quarter, when debt to

after-tax income falls

below 100 percent for

the first time

Quarter, when debt

to after-tax income

falls below 89.1

percent for the

first time

Rapid deleveraging 7.0 -1.0 March 2013 September 2014

Flat debt 7.0 0.0 June 2013 March 2015

Returning debt growth 7.0 4.0 March 2016 December 2019

Source: Authors calculations.


27/31


Tese changes seem possible, a leas in he shor run, i Congress passes Presiden Obamas

proposed American Jobs Ac or similar measures ha arge job creaion hrough inrasruc-

ure spending, emporary ax cus or low-income and middle-income amilies, and ha boos

unemploymen insurance benes. Ta is, policymakers can emporarily boos incomes, hus

bringing leverage o susainable levels more quickly and hence bringing economic balance and

sronger economic growh back in he near erm.

Policymakers can emporarily boos incomes hrough emporary payroll ax cus and higher

unemploymen insurance paymens. And hey could boos jobs growh by creaing he condi-

ions or new hiring on ederally unded inrasrucure projecs. Tis could srenghen aer-ax

income growh, hopeully by several percenage poins, and hus reduce he household deb

burden o susainable levels poenially years sooner han would oherwise occur.

A ew more poins are worh considering in avor o emporarily boosing aer-ax income

growh and is link o deleveraging. Firs, he bigges deleveraging buck and hus he larges help

o he economy in he coming years or he policy inervenion buck could come rom empha-sizing help o middle-income amilieshose who were above he 20h percenile in income

in 2010 bu below he op quinile wih annual incomes o less han $100,065 bu more han

$20,000 in 2010.29 Te daa presened earlier show ha amilies in hese income caegories had

he larges deb-o-aer-ax-income raios when he crisis sared.

Second, emporary booss o aer-ax incomes are especially useul in helping households

deleverage aser. Lenders will remain relucan o ofer new deb a a as pace knowing ha he

aer-ax-income boos is emporary. Ta is, deb growh, beyond renancing exising deb, will

remain modes. Slower deb growh helps accelerae he decline in he deb-o-aer-ax-income

raio much more han modes deb growh, as shown in able 2 above.

Tird, booss o aer-ax income could help many heavily indebed households overcome em-

porary nancial sruggles such as a amily medical emergency or he las year o college uiion

or a son or daugher. Foreclosures may gradually decrease because households will become

less likely o have o choose beween paying heir bills and making heir morgage paymens,

and banks may end up holding ewer bad loans, which could ranslae ino an easing o lending

sandards or all borrowers, businesses, and households alike.

Te goal here is o nd he righ balance beween loosening overly igh credi markes andgraning excessive and ulimaely unsusainable credi. A boos in aer-ax incomes hrough

more jobs hanks o more inrasrucure spending, emporary ax cus, and unemploymen

insurance exensions, among ohers, may jus be he righ sep oward achieving his balance.


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Conclusion

High household deb is puting he brakes on U.S. economic growh. Household deb

relaive o aer-ax income is sill higher han i was a any poin beore he middle o

2004even hough we have now experienced almos our years o unprecedened deb

declines due o a massive wave o oreclosures, among oher acors.

Te numbers clearly show ha i could ake several more years o enormous economic

pain or borrowers o lower heir household deb levels amid slow economic growh and

high unemploymen i we leave he decline in deb solely o marke orces. Waiing orhe combinaion o deb desrucion via home oreclosures and igh-sed lending o do

is job will keep he U.S. economy in a holding patern or years o come.

American amilies deserve beter. Policymakers should ry o nd a quicker and less

economically painul way ou o his deb mess. Te wo alernaives are lower deb pay-

mens hrough deb renancing and a lower deb burden by boosing aer-ax incomes.

Te numbers sugges ha boh renancing and emporary booss o aer-ax income

hanks o aser job creaion ollowing more inrasrucure spending, emporary ax cus,

and more unemploymen insurance benes could be very benecial.

Each sep could shave years of he painul deleveraging rek or sruggling home mor-

gage borrowers. Tese seps are hus worh a ry, paricularly since we already know ha

he alernaive is painully slow economic growh and high unemploymen. Congress

should pass he American Jobs Ac as a criical sep o help American amilies dig ou

rom heir crushing deb burden more quickly han would oherwise be he case.

About the author

Christian E. Weller is an associae proessor a he Deparmen o Public Policy and

Public Afairs, Universiy o Massachusets Boson, and a Senior Fellow a he Cener

or American Progress.


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Endnotes

1 Cacan aed n: brea Ecnmc Anay, National Income and Product Accounts (Deparmen Cmmerce, 2011).

2 id.

3 De reer cred mare ae and excde andng axe and ecry cred rm rer. Arcacan aed n: Federa Reerve saca Reeae Z.1 - F Fnd Accn e uned sae, avaae ap://.ederareerve.gv/reeae/z1/.

4 Ar cacan aed n: brea lar sac, Current Employment Statistics (Deparmen lar, 2011).

5 te Mrgage baner Acan repr a e are mrgage n recre ared re rm a 0.99percen n Jne 2006. t are ad grn mre an 2 percen y e end 2007 and evenay exceeded 4 percenn a cnen a rm Jne 2009 Jne 2011. Prr e cr, e are mrgage n recre ad never eengreaer an 1.5 percen, gng ac 1979, en e daa ere ar. see: Mrgage baner Acan, Nana De-nqency srvey (2011). te are cred card a an re eac qarer ncreaed arpy drng e cr andexceeded 10 percen r r cnecve qarer rm sepemer 2009 Jne 2010. see: Carge-o and DenqencyRae n lan and leae a Cmmerca ban, avaae a p://.ederareerve.gv/reeae/carge/.

6 Ar cacan aed n: Federa Reerve saca Reeae Z.1 - F Fnd Accn e uned sae;brea Ecnmc Anay, National Income and Product Accounts.

7 bran k. bc and er, Cange n u.s. Famy Fnance rm 2004 2007: Evdence rm e srvey CnmerFnance, Federal Reserve Bulletin 95 (2009): A1A55.

8 incme red are aen rm: hrca incme tae, avaae a p://.cen.gv/e//ncme/daa/rca/ed/ndex.m. De--ncme ra are cacaed ny r ed ed any de n e daayear. Ar cacan aed n: srvey Cnmer Fnance, avaae a p://.ederareerve.gv/ecnre-daa/c/cndex.m.

9 Cran E. weer, Need r wan: wa Expan e Rn up n Cnmer De?,Journal of Economic Issues 41 (2) (2007):583591.

10 incme red are aen rm: hrca incme tae, avaae a p://.cen.gv/e//ncme/daa/rca/ed/ndex.m. De--ncme ra are cacaed ny r ed ed any de n e daayear. Ar cacan aed n: srvey Cnmer Fnance, avaae a p://.ederareerve.gv/ecnre-daa/c/cndex.m.

11 weer, Need r wan.

12 te daa n Fgre 2 ve-year average. te qarery daa mve arnd a , c a averagng e ervanmae e ne mer eer rae e n deryng rend.

13 weer, Need r wan.

14 Cacan aed n: brea Ecnmc Anay, National Income and Product Accounts;Federa Reerve saca

Reeae Z.1 - F Fnd Accn e uned sae.

15 Cacan aed n: brea Ecnmc Anay, National Income and Product Accounts.

16 i mpran ne a e are mener eqy e a vae er me decreaed drng perd. hmener n average ned a recrd- 38.1 percen er me n eary 2 011. ta , mener ea, even g ey eer mrgage and ey p ne mney n er me. te expanan ae vae a me drpped rg e cr and e enng ecnmc recvery, eavng ed evere ea. Cacan, n n ere, aed n: hed De servce and Fnanca ogan Ra, avaae ap://.ederareerve.gv/reeae/ede/; brea Ecnmc Anay, National Income and Product Accounts.

17 Cacan aed n: brea Ecnmc Anay, National Income and Product Accounts.

18 A p ve-year average de ervce rden and ve-year gr rae nfan-adjed cnmpn ndeed me cnemprane crrean, c a de rden and cnmpn gr mve n ppe drecn. wende rden are g, cnmpn gr , and en de rden are , cnmpn gr reavey g.Cacan, n n ere, aed n: hed De servce and Fnanca ogan Ra, avaae a p://.ederareerve.gv/reeae/ede/; brea Ecnmc Anay, National Income and Product Accounts.

19 Daa n de ervce rden g ac 1980, c a i can cacae cmpee ve-year average arng n 1985. teve-year average en nrdced a ve-year ead cmpare crren nvemen, c a e ere ar e a qarer 1989.

20 Aer-ax ncme gr cacaed aed n: brea Ecnmc Anay, National Income and Product Accounts. lng-erm average gr rae e gr rae rm Marc 1952 Decemer 2007, e a qarer ere e Grea Rece-n.

21 De gr cacaed aed n: Federa Reerve saca Reeae Z.1 - F Fnd Accn e uned sae.

22 id. lng-erm average gr rae e gr rae rm Marc 1952 Decemer 2007, e a qarer ere eGrea Recen.
http://www.federalreserve.gov/releases/z1/http://www.federalreserve.gov/releases/chargeoff/http://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/releases/housedebt/http://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.federalreserve.gov/econresdata/scf/scfindex.htmhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.census.gov/hhes/www/income/data/historical/household/index.htmlhttp://www.federalreserve.gov/releases/chargeoff/http://www.federalreserve.gov/releases/z1/


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23 te majr prgram anced y e oama admnran rgve ed prncpa a een e sr Re prgramcreaed y e Federa hng Admnran n Ag 2010. t prgram encrage prvae ender renancenderaer mrgage, ere e mener e mre n e andng mrgage an e e r, aFhA-nred an, e prncpa redced a eve 97.75 percen an vae r er. brrer d re-ceve a ne mrgage mre ardae paymen and ey g rm avng negave eqy pve eqy prgram. te prgram a ad ny 305 r renance n ne year exence (and ny 891 appcan).see: FhA snge -Famy o, avaae a p://pra.d.gv/dpra/dcmen/ddc?d=0811.pd.

24 sara Ren ware, Davd Mn, and Jrdan Ezenga, Renancng A-R hmener: te hme Ardae Renanc-ng Prgram Can hep saze e hng Mare (wangn: Cener r Amercan Prgre, 2011).

25 Federa hng Fnance Agency, FhA, Fanne Mae and Fredde Mac Annnce hARP Cange Reac Mre brr-

er, Ne reeae, ocer 24, 2011.

26 ware, Mn, and Ezenga, Renancng A-R hmener.

27 inere rae daa rm: Federa Reerve saca Reeae h.15 - seeced inere Rae, avaae a p://.eder-areerve.gv/reeae/h15/.

28 hed De servce and Fnanca ogan Ra, avaae a p://ederareerve.gv/reeae/ede/dea.m.

29 te c- pn r e 20 and 80 percene e ncme drn are aen rm: brea e Cen,Income, Poverty, and Health Insurance Coverage in the United States: 2010 (Deparmen Cmmerce, 2011).
http://portal.hud.gov/hudportal/documents/huddoc?id=ol0811.pdfhttp://federalreserve.gov/releases/housedebt/default.htmhttp://federalreserve.gov/releases/housedebt/default.htmhttp://federalreserve.gov/releases/housedebt/default.htmhttp://federalreserve.gov/releases/housedebt/default.htmhttp://portal.hud.gov/hudportal/documents/huddoc?id=ol0811.pdf


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dedicated to promoting a strong, just and free America that ensures opportunity

for all. We believe that Americans are bound together by a common commitment to

these values and we aspire to ensure that our national policies reflect these values.

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international problems and develop policy proposals that foster a government that

is of the people, by the people, and for the people.

unburdening america’s middle class

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