Consumer debt is not to blame

James Surowiecki

The New Yorker

Many pundits have called Americans’ staggering household debt the “silent assassin” of the recovery, said James Surowiecki. Their theory is that consumers are so focused on paying off their debts that they can’t spend the economy out of its doldrums. But this idea is a myth. U.S. consumer spending has actually increased for the past nine quarters, and Americans aren’t saving any more than they usually do. Given the circumstances, in fact, consumer spending is pretty consistent and pretty healthy. It’s only when compared with the extravagant, unsustainable spending of the bubble years that today’s spending looks anemic.

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The recovery is sluggish not because people are paying off debt, but because the steep drop in housing prices has left them “much less rich than they were—or thought they were.” If your house is worth half what it was, you are going to spend less, whether you’re carrying debt or not. That means that solving the debt problem “is not the panacea for the economy that many have made it out to be.” Even if we could somehow wipe away all the underwater mortgages, people still wouldn’t feel wealthy enough to spend us into higher growth.