Worse than Scrooge
Underlying the frequently expressed concerns about personal debt is a distaste for popular consumption.
To say that contemporary attitudes to personal debt and consumer spending are Dickensian would be grossly insulting – to Dickens. It is true that in A Christmas Carol (1843) the Victorian novelist created a character, Ebenezer Scrooge, whose name has become a byword for being miserly. But the whole point of the story was that seeing visions of Christmas past, present and future changed Scrooge’s nature. Even a cold-hearted miser could become warm and benevolent if he went through the right experiences. For today’s misers, in contrast, we are all – in the phrase used in the recent Tory anti-debt campaign – ‘tossers’ (1).
Political parties, journalists, artists and novelists often take a scornful attitude towards mass consumption and debt (2). We are condemned for living in a culture of mindless consumerism in which we find it difficult to control our rampant urge to spend. Soaring levels of household debt are seen as the inevitable outcome of this process. Our reckless borrowing has created a situation where, it is argued, a debt bomb could explode leaving many of the most vulnerable in society hurt.
Often the ultimate target of such attacks – ordinary people – is not made clear. The video accompanying the Tory tosser campaign was unusual in being so explicit: ‘Inside all of us lives a conniving, dirty, little parasite – “the tosser within”. He wants you to spend, spend and keep spending until you’re in terrible debt. Ignore the tosser inside you! Take control of your money.’ (3) The Liberal Democrat response to the campaign was, in contrast, aimed at financial institutions. In a press release Vince Cable, the Lib Dem shadow chancellor, was quoted as saying: ‘Liberal Democrats believe that while borrowers clearly need to be prudent and would benefit from more financial advice and education, a large part of responsibility for the current debt crisis lies with irresponsible lenders.’ (4) Translated into plain English this would say: ‘ordinary people are pretty stupid so the banks should not encourage them.’
As for New Labour it cannot, as the governing party, overtly attack the rise of household debt during its time in office. Instead we have Gordon Brown, ‘the Iron Chancellor’, with his excellent impression of the dourest Presbyterian preacher. Rarely can a speech go by without Brown preaching the virtues of ‘prudence’ and ‘sustainability’. With debt, as with all things, Brown sees virtue as consisting primarily in people curbing their earthly desires.
Given this climate it is not surprising that there is a lot of discussion about household debt. At first sight, some of the statistics do look scary. Household debt is at record levels at almost £1.3trillion – twice its level in 1999 – while personal debt in Britain is reportedly increasing by £1m every four minutes (5). Meanwhile, individual insolvencies are at record levels with Individual Voluntary Arrangements (IVAs) growing particularly fast (6).
The problem with most of this discussion is that it wrenches these statistics out of their proper context. It is easy to quote spectacular statistics in relation to debt but it is much harder to interpret their meaning. The mainstream discussion of debt is not interested in economics because its concern is to draw a moral lesson from the debate – popular consumption is portrayed as distasteful. For those trying to develop a balanced view of the debt phenomenon it is necessary to delve further into economics.
It is certainly clear that, relative to the size of the economy, household debt in Britain is at record levels. Britain’s personal debt is also high by international standards although not as high as Denmark or the Netherlands (7). In fact, the rise in household debt is an international phenomenon with levels increasing across the developed world.
Several key factors must be taken into account to put the rapid rise of household debt into its proper context:
- The particularly stable character of economic growth over the past 20 years. (8)
Since the mid-1980s economic growth has become much more stable not just in Britain but around the world. The recessions which used to punctuate global growth, typically with many firms becoming bankrupt and unemployment surging, have become much more muted. As a result individuals have become less inhibited about taking on debt. They can borrow money from financial institutions with less concern that they are likely to encounter repayment difficulties as a result of an economic downturn. This development helps explain why the rise of debt levels is an international phenomenon.
- The rise in home ownership.
For example, home ownership in Britain rose from 60 per cent 20 years ago to 70 per cent today. (9) This means that although there is more debt it is spread across a larger number of people.
- Household assets have increased enormously and far exceed the value of debt.
At £3.6trillion the volume of assets is about three times the amount of household debt (10). Having a £65,000 mortgage, for example, is generally a manageable debt for someone with a house worth £200,000. Even if house prices were to fall substantially many people would have a substantial cushion to protect themselves against the impact of the drop.
- Legal changes have encouraged those with debt problems to declare themselves insolvent.
The Enterprise Act 2002, which came into effect in 2004, was designed to lessen the stigma of insolvency and smooth the process.
- Most debt is held by richer households.
Detailed studies commissioned by the Bank of England show that those with the highest debts also tend to have the greatest assets (11). Such people, who have the highest personal wealth, do not generally get into debt problems. The same studies show that the minority that does encounter difficulties is often from a small proportion of the population. Often rather than own their home they rent – so they tend to have minimal assets – and in many cases they are unemployed. Of course those families that get into serious debt problems can suffer terrible personal hardship. But the data does not support the view that the economy as a whole is on the edge of a debt precipice.
Whether household debt becomes a widespread problem depends primarily on the state of the economy. If economic growth is smooth and strong then rising incomes should ensure most people can pay off their debts. In contrast, a severe recession, with a related surge in unemployment, would substantially increase the number of people suffering debt repayment difficulties. But it is the health of the economy that determines whether debt can be managed rather than the extent of debt causing economic problems.
However, even with a booming economy the moralists will continue to despise household debt. What they dislike is not so much debt itself but mass popular consumption. They would prefer it if the majority of us maintained levels of consumption closer to those of Dickens’ time than enjoying twenty-first century living standards. The Scrooges of Christmas Present are beyond redemption.
Read Daniel Ben-Ami’s website at www.DanielBenAmi.com
(1) The Tory Tossers, by Rob Lyons
(2) For an example of an artist’s attack on popular consumption see Santa’s grotty. JG Ballard’s Kingdom Come (Fourth Estate 2006) is an example of a recent novel with anti-consumerism as its central theme
(3) The video can be viewed on the Sort-It website
(4) ‘Debtors are tossers say Tories – Cable’, Liberal Democrat press release 23 November 2006
(5) Aggregate data on personal debt is available on table A5.2 of the Bank of England’s Monetary & Financial Statistics, volume 10, November 2006. The figure on household debt doubling since 1999 comes from the Bank of England Inflation Report, November 2006, p15
(6) The Insolvency Centre. Policy Directorate: Statistics, 3 November 2006
(7) Has the rise in debt made households more vulnerable, in OECD Economic Outlook number 80, November 2006
(8) On this phenomenon see, for example, Ben Bernanke The great moderation speech, 20 February 2004 and Mervyn King speech on 11 October 2005
(9) Council of Mortgage Lenders, A trillion pound success story, 27 April 2006, p1
(10) Council of Mortgage Lenders, A trillion pound success story, 27 April 2006, p1
(11) The latest study in this series is Matt Waldron and Garry Young, The state of British household finances: results from the 2006 NMG Research survey, Bank of England Quarterly Bulletin Winter 2006
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