In the 1950s and '60s, American economic growth democratized prosperity. In the 2010s, we have managed to democratize financial insecurity.
If you ask economists to explain this state of affairs, they are likely to finger credit-card debt as a main culprit. Long before the Great Recession, many say, Americans got themselves into credit trouble. According to an analysis of Federal Reserve and TransUnion data by the personal-finance site ValuePenguin, credit-card debt stood at about $5,700 per household in 2015. Of course, this figure factors in all the households with a balance of zero. About 38 percent of households carried some debt, according to the analysis, and among those, the average was more than $15,000. In recent years, while the number of people holding credit-card debt has been decreasing, the average debt for those households carrying a balance has been on the rise.
Part of the reason credit began to surge in the '80s and '90s is that it was available in a way it had never been available to previous generations. William R. Emmons, an assistant vice president and economist for the Federal Reserve Bank of St. Louis, traces the surge to a 1978 Supreme Court decision, Marquette National Bank of Minneapolis v. First of Omaha Service Corp. The Court ruled that state usury laws, which put limits on credit-card interest, did not apply to nationally chartered banks doing business in those states. That effectively let big national banks issue credit cards everywhere at whatever interest rates they wanted to charge, and it gave the banks a huge incentive to target vulnerable consumers just the way, Emmons believes, vulnerable homeowners were targeted by subprime-mortgage lenders years later. By the mid-'80s, credit debt in America was already soaring. What followed was the so-called Great Moderation, a generation-long period during which recessions were rare and mild, and the risks of carrying all that debt seemed low.Financial impotence has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it.
Both developments affected savings. With the rise of credit, in particular, many Americans didn't feel as much need to save. And put simply, when debt goes up, savings go down. As Bruce McClary, the vice president of communications for the National Foundation for Credit Counseling, says, "During the initial phase of the Great Recession, there was a spike in credit use because people were using credit in place of emergency savings. They were using credit as a life raft." Not that Americans--or at least those born after World War II--had ever been especially thrifty. The personal savings rate peaked at 13.3 percent in 1971 before falling to 2.6 percent in 2005. As of last year, the figure stood at 5.1 percent, and according to McClary, nearly 30 percent of American adults don't save any of their income for retirement. When you combine high debt with low savings, what you get is a large swath of the population that can't afford a financial emergency.