Give us some credit
When it comes to understanding consumer debt, why do economists prefer pop psychology to statistics?
The BBC’s ‘Day of Action’ against consumer debt on 28 January, bizarre as it was, gave a disturbing indication of new trends in economic thinking.
The highlight of the day of UK television and radio programmes was ‘Hey Big Spender’ at 9pm on BBC1 (1), which brought together financial advisers and a psychiatrist to discuss the problem of consumer debt. There was also an audience of 100 people, including many who were suffering from serious debt.
Perhaps the lowest of the programme’s many low points was when a psychiatrist rigged a woman up with equipment to measure her ‘levels of arousal’ as she walked around a clothes store. This included a heart rate monitor, a skin temperature gauge and an eye tracker. The woman was found to get increasingly excited as she examined the clothes and approached the cash register. (The experiment was not repeated with a man to see if it would have the same effect.)
It was probably not surprising that the psychiatrist saw debt as a result of individual addiction. But the money men agreed. Alvin Hall, one of the show’s financial advisers, declared that: ‘Credit is the new drug of the century.’ His advice? ‘These addicts need some serious detox.’ Hall sees consumer debt in terms of individual behaviour, rather than broader economic trends. His advice is that people should cut down on their spending. The message is that individuals should only buy what they really need, rather than simply what they want.
To the extent that economic facts were mentioned they were not properly contextualised. For instance, the programme stated that consumer debt, at £930billion, was twice as high as 10 years ago. But it did not take into account the effect of inflation on the real value of the debt over the past decade. Nor the fact that debt service levels - the amount that borrowers actually pay - are lower than a decade ago thanks to low interest rates. Or the fact that with rising house prices, the value of household assets has risen much faster than inflation.
A balanced assessment of consumer debt would show a more mixed picture. The fact that consumer debt is at an all-time high is irrelevant - in absolute terms, debt is almost always at record levels, as are GDP and company profits. The key indicators to examine are debt relative to income (or to GDP at a national level) and debt service levels (the average value of repayments that borrowers have to make as a proportion of their income).
From this perspective, household debt, at over 80 per cent of GDP, is high by historical and international levels (2). But according to the Department of Trade and Industry, service levels on consumer debt are about half the level of the early 1990s (3). Indeed, according to figures released last week by the Council of Mortgage Lenders - and given little publicity - both household repossessions and arrears are at their lowest since the early 1980s (4).
Consumer debt is only likely to become a problem for a large section of the population if interest rates go up much more than expected or unemployment surges. The Bank of England base rate, currently at 3.75 per cent, is expected to rise to five per cent at most this year - which is still low by historical standards. If it rose higher, debt would become a much more serious problem. But the outcome depends on broader economic forces, rather than merely on individuals’ behaviour.
Of course, there are always a number of people who experience problems repaying debt. It is generally agreed that about 20 per cent of the population today has such difficulties. However, this is not a new problem - it has existed for a long time.
Unfortunately, the tendency to look at economic questions from a psychological point of view is part of a growing trend. Hey Big Spender may be an extreme example, but it is typical in examining an important economic problem from the narrow perspective of the consumer mindset. Once such an approach is adopted then banal conclusions, such as advising individuals to reduce their consumption, easily follow.
It is certainly true that conventional economics is a limited discipline. But at least it attempts to examine trends in broader ‘macro’ terms. In comparison, the current emphasis on the psychological failings of individuals simply obscures the significance of key developments. It would be far better if the discussion of economics took a more rigorous approach to the material world rather than indulging in amateur psychology.
Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).
‘Debt addiction’: don’t buy it, by Daniel Ben-Ami
(1) See the Hey Big Spender website
(2) United Kingdom: Underwhelmed by debt, Joachim Fels and Melanie Baker, Morgan Stanley Global Economic Forum, 9 October 2003
(3) Fair, clear and competitive: The consumer credit market in the 21st century, DTI White Paper, December 2003, p11
(4) ‘Property repossessions fall to their lowest level for 20 years’, Anna Fifield Financial Times, 29 January 2004; Repossessions fall to 1in 1500 but rising rates will squeeze some borrowers, Council of Mortgage Lenders press release 28 January 2004