In writing about household debt, as I often do, I sometimes feel a bit like Tom Wolfe writing the Electric Kool-Aid Acid Test: I’m trying to capture the character of a strange phenomenon while not myself taking part in it.
Throughout my adult life, I have avoided taking on debt as much as possible and have always repaid it on or ahead of schedule. This does not come from any sort of financial virtuousness, but just from observing at a fairly early age what a misery debt can make of people’s lives.
Which is why, while not participating in America’s debt culture, I think it is an important subject. While the phrase “addicted to debt” is often used broadly to describe the economy’s dependence on borrowing, I’ve come to think addiction might be the most accurate way to describe the relationship between some people and borrowing. It is an unhealthy habit that people often can’t shake until it steadily ruins them.
Perhaps if we thought about excessive borrowing as a form of addiction and treated it like a mental illness, we could make more progress in preventing it. So, the following is a discussion of borrowing as an addiction.
Evidence and anecdotes
Between mortgages and other forms of debt, American households currently carry a little over $14 trillion in debt. Spread among the nation’s 117 million households, this comes to an average of about $120, 000 in debt per household. While over $93, 000 of that is offset by an asset in the form of a mortgaged home, that $120, 000 still represents an amount that Americans are faced with repaying month after month, year after year.
Of course, that average figure does not tell the real story of how crushing a debt burden can be. Since some families have little or no debt, the burden falls even more heavily on others.
Beyond the numbers, debt may be best understood as an addiction by looking at some anecdotes of the irrational way people get into and handle debt. Here are four examples that came to my mind almost immediately; I’m guessing most readers can think of similar examples from their own circles of friends and family:
- Selling a car to raise money. When I heard that someone’s son had done this to meet some debts, it made me think of burning the furniture for fuel — it is an expensive solution, and a short-lived one at that.
- An obsession with this year’s model. Speaking about cars, I had a co-worker who was so dazzled whenever anything new came out that he bought a car every six to nine months. He was making $200, 000 a year back in the 1980s, but was steadily going further and further into debt.
- Long-term debt for short-term pleasure. I know one person who feels entitled to a vacation trip twice a year, even when he can’t afford it. Given that he spends more than a year paying off a week’s pleasure, no wonder he always thinks he needs another vacation.
- The future is always now. One sign of this problem is the refusal to think ahead. It starts by skimping on saving for retirement, and then it progresses to dipping into retirement funds ahead of schedule — even at the cost of a tax penalty. Junkies generally cannot see beyond their next fix.
If addiction to debt is a disease inflicting so many American households, what’s the cure? Here are some possibilities, moving from the societal to the individual:
- Effective regulations — dream on! If excessive borrowing is thought of as a disease, a case could be made for government regulation to prevent it, such as a hard cap on how much debt any family could take on as a percentage of assets or income. Realistically though, given the profits the financial sector makes off debt, this kind of strict limit on debt has no chance of happening.
- Tough love. When one person in a family has a problem with over-spending, it affects everybody else in the family. Husbands and wives need to take a stricter line when a spouse has this problem. People who cannot control their own spending need to have access to family savings and investment accounts limited, and if they need credit cards, then they should be given only pre-paid cards with strictly budgeted limits on them. Will this kind of strict treatment cause arguments? Probably, but so will driving the family to bankruptcy.
- Cold turkey. The only substance abusers I have known who have successfully gotten their problems under control have not tapered back a little; they’ve gone 100 percent cold turkey. People who recognize their own problems with excessive spending may want to swear off debt altogether.
These certainly are not universal or easy answers. I’m writing this mostly to try to open a discussion: Based on your experience with people who compulsively take on too much debt, what do you think the answer is?