‘Debt addiction’: don’t buy it

If recent sensationalist discussion is to be believed, a new addiction is plaguing Britain. It may not be as deadly as cocaine or heroin addiction, but it could apparently destroy many more lives.

The new addiction is to debt. According to media reports, many people could suffer as a result of their appetite for debt. The moral message behind this campaign seems clear: individuals should restrict their consumption rather than live on tick. The authorities are also condemned for allowing debt to build up, and financial institutions are attacked for lending the money.

Yet closer inspection shows that it is not really consumers who have become addicted to debt. Household debt has risen sharply, but this is largely because individuals have pragmatically taken advantage of low interest rates. The idea that the mass of the population cannot control its urge to spend is a caricature. High levels of debt in the economy – which are not restricted to the consumer sector – are a result of macroeconomic weakness rather than of lax personal morality.

The moralistic assumptions behind the ‘debt addiction’ debate were apparent in a statement by the National Consumer Council (NCC) on last week’s interest rate rise – the first increase in almost four years. Ed Mayo, NCC chief executive, said: ‘This is a wake-up call for the one in five people on the edge of the debt precipice. Now is the time to change our spending habits, reassess our budgets and start to live within our means.’ (1) This sounds more like a sermon, telling consumers to behave responsibly, than a serious examination of the rise of debt.

Mayo’s statement was the latest in a long line of warnings about debt addiction. Liberal publications have generally been the most explicit on the issue. A New Statesman cover story by Ann Pettifor, a director of the New Economics Foundation, described consumers as ‘compliant’, ‘gullible’ and ‘obedient’ (2). Pettifor also appeared as a guest on BBC1’s Breakfast News, alongside psychologist and author Oliver James, to kick off the programme’s week-long series on ‘the debt trap’ (3).

Larry Elliott, economics editor of the Guardian, recently took the argument to its logical conclusion. He called for the government to crack down on debt in a similar way to its campaigns against smoking, drinking and obesity: ‘It is hard to square the government’s laissez-faire approach to debt with its commitment to environmental sustainability, with little or no consideration being given to the long-term consequence of indiscriminate and wasteful consumption made possible by living beyond our means. A green approach to life means thrift: weighing up whether something can be afforded before it is bought, whether something is actually needed.’ (4).

The tabloids have also joined in. According to a headline on the front page of the Daily Express on 9 September, ‘We are a nation of credit addicts’.

This kind of media comment is not based on original thinking. Commentators are simply stating in a more vocal form themes that the authorities have said in guarded language and without the explicit moralism. For example, Charles Bean, chief economist at the Bank of England, has warned of the dangers of debt to those with no assets. In an academic paper, he argued that: ‘High and rising debt burdens increase the vulnerability of households to adverse shocks – to incomes, for example – and raise the risk of a sharp correction to house prices and consumer spending.’ (5)

To understand what is really happening it is necessary to examine the rise of debt in a broader context. Lectures about weak-willed consumers will not do. The rising importance of debt is an economic rather than a moral question.

The credit system is vastly complex – but one way to understand it is that it enables economic activity to continue when it would otherwise be slow. For example, consumers or corporations can buy goods or services they would not normally be able to afford. They take out credit in the expectation that an economic upturn in the future will enable them to repay what they have borrowed.

Governments can also borrow money to help finance public spending – in the hope that such expenditure will help to kickstart economic activity when it is becoming sluggish. If growth does start to pick up, the government will typically try to repay some of its debt.

The problem facing borrowers is that their strategy can only work in the short term. If they build up too much debt they will face even greater problems. Not only will they have to repay what they have borrowed, but they will also face the prospect of substantial interest payments.

It is certainly true that household debt has risen substantially in recent years. Investment bank Morgan Stanley calculates that the level of household debt in Britain, at 80 per cent of GDP, is high by historical and international standards. Only American and Dutch households have higher levels of debt (6).

But it is simplistic to explain the build-up of such debt in moral terms. Individuals have taken advantage of low interest rates to buy goods or houses rather than deferring their spending. They have simply taken advantage of relatively low repayment levels. Many would have been aware of the possibility of higher interest rates but decided that the risk was worth taking.

In any case, the Bank of England has not kept interest rates low because of an altruistic attitude towards consumers. The Bank has bolstered consumer demand as a way of propping up business. With companies suffering as a result of an economic slowdown one way to counteract the problem is encouraging consumers to purchase more. When Dixons or some other firm offers consumers the chance to buy goods on credit, it is no charitable exercise. By allowing cheap credit to encourage personal consumption the authorities are indirectly boosting British companies and compensating for the underlying weakness of the economy.

Low interest rates have also helped create a surge in the level of corporate debt. Although it is very high by historical standards it has not become the subject of public discussion in the same way as consumer debt (7). But the Organisation for Economic Cooperation has recently warned that ‘in the United Kingdom in particular, corporate debt levels have increased substantially and could make companies highly vulnerable to shocks.’ (8).

But arguably the most important debtor of all is the government. This was disguised in the late 1990s because the financial boom helped to boost the government’s revenue from taxes – so there was less need to borrow. But the public deficit, and hence the government’s need to borrow, is now rising far faster than the Treasury predicted it would.

Another way that public debt is hidden is through applying Enron-style techniques to the national accounts. Debt which would in the past have been classified as public has been taken ‘off-balance sheet’ – accountant-speak for hidden. For instance, public-private partnerships have allowed the government to shift debt off its own books. But in reality it remains a liability of the public sector.

So it is true that the economy has become reliant on debt in many ways; not only the consumer sector, but companies and the government are heavily dependent on debt. But such dependence should be seen as an indication of economic weakness rather than a sign of the personal failings of credit-hungry individuals.

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)).

(1) NCC’s comment on interest rate rise, 6 November 2003. Also reproduced in ‘Rising interest rates spell trouble for debt-ridden Britain’, Independent, 7 November 2003

(2) ‘Coming soon: the new poor’, Ann Pettifor, New Statesman, 1 September 2003

(3) For a summary of the week’s discussion see:
The debt trap: help fom Breakfast , BBC News, 9 December 2003

(4) Obesity, binge drinking and smoking are targets – so why not debt?, Guardian, 25 August 2003

(5) ‘Bank warns on consumer debt’, Sumeet Desai, Reuters, 19 August 2003

(6) Morgan Stanley Global Economic Forum, 9 October 2003

(7) See, for example, The financial stability conjuncture and outlook in the Bank of England’s Financial Stability Review June 2003

(8) ‘OECD Financial Market Trends’, October 2003, p8