Working families in debt could be facing even rougher times

WASHINGTON — As usual, the Labor Day weekend has found politicians of both parties bragging about their devotion to working families. The emphasis is not misplaced, but the substance of their speeches is often suspect.

Here, for example, is a startling statement you are not likely to hear from anyone seeking office: "For the typical household, rising debt, not a rising stock market, was the big story of the 1990s. Household debt grew much more rapidly than household income in the last decade."

I did not know that, and my hunch is that you may not have been aware of it either. It is one of the thousands of facts embedded in a volume called "The State of Working America," a biennial report by three economists at the Economic Policy Institute in Washington, D.C.

The institute is a labor-funded think tank, and that sponsorship is reflected in some of the analysis. But Lawrence Mishel, its president, and co-authors Jared Bernstein and Heather Boushey buttress their arguments with data from the Census, the Federal Reserve Board and other establishment sources. And their emphasis on middle-class families is a welcome respite from all the stories about the ruin of corporate executives and the damage to people’s 401(k) plans.

So much has been written about this becoming "a nation of stockholders" that the Dow Jones average has turned into the most popular index of Americans’ well-being. It is important, but, as this study reminds us, jobs and wages and income are a lot more vital to most people than the state of their stock portfolios.

That is why the economic slump of 2001 and the slow-growth economy of 2002 are the central facts of life on this Labor Day. The main point of this analysis is that the hard-won, and often minimal, gains from the full-employment years of the 1990s are being jeopardized — and in some instances, reversed — by the current stagnation.

Take the question of income and debt. For the population as a whole, debt during the 1990s rose from an average of just over 80 percent of disposable personal income to well over 100 percent. For the middle one-fifth of all households, the increase in their debt was double the size of the increase in their stock holdings and also more than the increase in the value of their other assets, most notably their homes.

More telling is the squeeze that the debt burden is placing on household budgets. Federal Reserve Board figures show that toward the end of the decade, middle-income households ($25,000-$49,999) were using more than one-sixth of their income for the monthly payments on their debt. Even more striking, almost one in seven of those households had monthly payments amounting to at least 40 percent of their income. That was up almost 5 percentage points during the decade.

What has made it possible for working families to carry this growing burden of debt has been the fact that interest rates have remained low. Credit Alan Greenspan and the Fed for keeping them that way, but also note that during most of this past decade, the government was reducing its deficits and actually moving its budget into surplus for a few years.

But that cushion has been removed by the combination of the economic slump, the huge tax cut and the post-Sept. 11 increase in both defense and domestic spending. Last week’s report from the Congressional Budget Office said the federal government faces deficits of more than $100 billion a year for at least the next three years. And that does not include the additional costs of the war on terrorism and homeland defense.

It will be very difficult to keep interest rates down as federal borrowing increases. That means that hard-pressed working families could well face even heavier debt service burdens in the years just ahead.

For policy-makers, this reality suggests at least two things. Tax cuts that further reduce government revenues and boost borrowing — those already scheduled under the misguided 2001 Bush bill, whose provisions he wants to make permanent, and those additional cuts he is reportedly ready to propose now — should be viewed very skeptically.

And the congressional bill to make it harder for people to seek protection from their debts by filing for bankruptcy — which banks and credit card companies have lobbied through the House and Senate to the brink of final passage — should be re-examined in the context of this credit squeeze. The rate of personal bankruptcies is twice as high now as in the last recession. That part of the working-family safety net needs protection, not weakening.

David Broder can be reached at The Washington Post Writers Group, 1150 15th St. NW, Washington, DC 20071-9200.