[Second in a Series on Income Inequality]
The United States, more than any other country, raises consumer spending to a virtue and sometimes denigrates saving. Some believe that it is patriotic to spend rather than save. This is the finding of Princeton history Professor Sheldon Garon, in his book “Beyond Our Means: Why America Spends While the World Saves” (Princeton University Press, 2012).  After 9/11, President Bush encouraged Americans to go to the mall, or to Disney World. Public officials have told the nation that we can have growth in our Gross Domestic Product (GDP) through debt. This essay asks the question whether or not consumer debt is always a good thing. By examining the recent nature of debt in our country, it shows that,  along with consumer spending  and  increased personal debt, has come a rapid rise, through debtor interest and fees, in the wealth of some of the lending banks, corporations, and their officers. Critics have described them as parasitic on the middle and lower income ranks. We point to the consequences of the rise in borrowing  and the income gap, for distrust of government  and reduction in social mobility. We argue for your consideration of community banks as a family banking destination.


On July 14, 1979, the American economy was in a state of inflation. Prices at the supermarket were rising  every week or so. The OPEC countries redoubled oil prices. President Jimmy Carter gave a speech, partly on an energy program. It also contains these words,

In a nation that was proud of hard work, strong families, close-knit communities and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but what one owns. But we have discovered that owning things and consuming things does not satisfy our longing for meaning. We have learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose.1

At that moment, his audience, the American people, were used to spending money  because inflation made the dollar’s future value unpredictable. Nevertheless, William Greider reported  in his book Secrets of the Temple, that three-fourths of the public agreed with the President’s  point..2 In contrast, the financial markets did not like what they heard, taking it as one more sign that Carter did not know how to control the economy.  The price of gold went up. By the next  March, 1980, the President  appealed to the American people to stop borrowing and ordered controls over credit cards. Consumer spending  slowed down dramatically, as did business borrowing. The economy collapsed into recession. 3
Today, though borrowing remains high, it occurs in a setting where three key factors are not present, that were in place thirty years ago. One is that there was not as large a  disparity of income between the wealthy and the middle class/poor as there is now. Second, interest rates were  high, into the teens. Third, inflation remained high. The inflation was caused  by factors particular to that time period. One was the energy and oil crisis, due in part to the new Iranian regime’s  erratic release of oil and OPEC’ raising of  oil prices.  A report by the National Bureau of Economic Research noted that economic activity had already begun to slow down before the credit controls were implemented. The credit controls simply sharpened the decline. 4 Consumer spending  and attempts to control credit were not by themselves the causes of recession. Americans still remain ambivalent about thrift as a value, both receptive to pleas to be less materialistic, and simultaneously eager to buy and sell. Consumer spending can remain strong even as the economy weakens, because families will rely on borrowing rather than wages to get by.
If consumer debt is not necessarily a bad for the economy (as President Carter believed), might it be dangerous in some form, under certain conditions, for other reasons?


In 2012, Americans are aware of the national debt, owed to countries such as China and Saudi Arabia. They are less aware of the magnitude of our personal consumer debt. Based on the 2010 census it was nearly $2.4 trillion, or $7,800. for every adult and child in the country.  And these figures do not even include debt linked to mortgages. Consumers spend about 12% of their after tax income to pay off mortgages and the other consumer debts.5 About one third of the latter is credit card debt. In Britain in 2005, the average citizen owed $6,500 in credit card debt. Credit card payment delays pain, while paying cash or writing a check usually gives an immediate negative feeling of loss. Most of us use cards and regularly have some kind of debt. In good economic times many Americans  try to pay off the monthly accumulated credit card debt,  avoiding the high card interest rates   on unpaid balances. Often in the past, the details of the rate increases were undisclosed or the “fine print” was difficult for the average consumer to understand. However, especially in a time of economic crisis, job loss, and mortgage problems, the amount of consumer debt may rise to the point that it can create unexpected social consequences. The goal of the current blog item is to identify what some of those consequences may be and to raise questions to remember when we consider increasing our own debts.
Social Inequality and Spending
In the United States, people are regularly informed that the health of their economy is measured by  the GDP. Officials and some economists also encourage spending (by lowering interest rates on borrowed money). This also occurs as a result of financial institutions offering unsolicited credit cards as an enticement for vulnerable consumers to take on more credit card debt. About 70% of the GDP in American and Britain comes from consumer spending.6 In contrast, in the European Union, in 2010, the consumer spending of households accounted for at least half of the GDP (58.5%) in the majority of Members States. The highest was in Greece (75.4%) and the lowest in Luxembourg (37.2%, using 2009 data).7
A recent theoretical  study  by two economists (one at the IMF and one from the Paris School of Economics)  on the link in the U.S. between  borrowing  and the status of social inequality states,

Borrowing and higher debt leverage appears to have helped the poor and the middle-class to cope with the erosion of their relative income position by borrowing to maintain higher living standards.8

The Congressional Budget Office reported that the concentration of income among those in the upper end of the economic scale in the United States had dropped considerably during the two World Wars. But it started to change again around 1975, when inflation reached into the teens; people spent “today” even if they had to borrow, for fear that “tomorrow” the dollar would be worth less. Income disparity  came back to pre-World War I levels by 2000. Between 2005 and 2007, the after tax income of the top 20% of earners was more than that of the entire remaining 80%.9   The top 1% account for 24% of all income in 2011. Inequality beyond certain extremes in the distribution of wealth reduces trust in government  and generates  social  disruption. Occupy Wall Street reflect such distrust. The income gap also diminishes the opportunities for social mobility in the United States. Studies show that a person’s own upward chances depend greatly on the income status of her parents.
The Power of Big Banks
Certain economists have found that in their model, as the amount of debt by the lower and middle class increases, the wealth of people in the financial services industry and that of their banks, has grown.  They write,

The increase in the reliance on debt for the bottom group and the increase in wealth of the top group generated a higher demand for financial intermediation [borrowing from or investing in financial organizations]. Between 1981 and 2008, the U.S. financial sector grew rapidly, with the ratio of private credit to GDP more than doubling from 90% to 210%.10

Their conclusion is that with an increase in consumer borrowing, the people and banks in the financial industry get richer from the borrowers’ interest income and fees.  As the financial services industry grew from 5%-6% of GDP in the 1980’s to 16%-17% in 2006, large amounts of money shifted to the 1% of the population from the 99%.  Those in the financial industry are able to invest assets (for example, mortgages) backed by these loans to poor or middle class consumers. This has led them into risky financial activity such as the creation of certain kinds of derivatives.  Meanwhile, the middle and poor class consumers  increasingly have difficulty repaying what they have borrowed. The danger for the economy of a financial crisis increased , related to the unpaid debts and defaults. If this danger remains open in the U.S., then American people should ask, do these large banks do anything that is of social benefit for the country. The chairman of Britain’s Financial Services Authority described much of what the Wall Street banks do as “socially useless activity.”11 One may reasonably ask if they use their capital for the most productive investments in terms of the nation’s health. They certainly use their monetary power, through congressional  lobbying, to exercise their political power.
Weakening our International Competitiveness
In a NYT column, David Brooks reported that until 1980, personal consumption was stable (62 % of GDP), but rose to 70% by 2008. Americans saved 10% of their income in 1985; by 2008 it was 0.7%  12  If the  combination of consumer debt and national debt  can cause a lack of faith among foreign countries in the U.S. economy, this may, may in turn, reduce the demand for U.S. dollars. That would  weaken our international competitiveness, for example, with China.
What can be done to mitigate the link of debt and  income inequality?
The Moral Relevance of Debt Beyond One’s Means
Consumer spending, especially beyond current and near-future income, often includes spending for material  goods. Because of the inducement of “easy credit,” the spending may extend well beyond the usual necessities. A buyer might ask, “ How many of those goods do not meet a standard of being useful for the purchaser’s health or psychological well- being? “, providing the purchaser agrees that these are useful or appropriate guidelines for spending. An additional question might be “how can the resulting loans be repaid, particularly now that the common fall- back method of home equity credit has largely disappeared.”
The need to control as well as reduce dangerous levels of consumer debt could be met by improved economic growth providing middle class jobs and increased take home income, thus minimizing the need for taking on more debt and also giving consumers the means to reduce existing debt.
The Value of Community Banks
The priority of big international banks is service to large corporations, many of them international corporations. If this is the case, we need to ask, do they provide any social benefit or economic  health  to local communities or individuals? These questions suggest that here is a need for more emphasis on a national system of community-based and community-accountable financial institutions devoted to building community wealth.13
 There is already a history of successful community banking and savings  institutions. By definition,  they have less than $1 billion in assets, and until 1994 made up 94% of the banking industry.  Their focus is on the needs of local families, farms, and businesses. The community banks lend to depositors who live and work in the community neighborhoods, contributing to  their economic health.14 The officers of these banks are usually members of their local communities and feel a responsibility to their friends and neighbors.  They can promote economic  growth locally. This suggests that consumers should consider shifting some or all of their personal accounts to a community bank.

Consumer debt may not always be bad for the economy. However, when fostered by very wealthy international banks, today’s degree of debt may increase the degree of financial and social inequality. This inequality diminishes  trust in government. Given the reduction in upward social mobility, a function of the income disparity, many people’s hopes for their children rising in economic status will erode. Again, this weakens public trust.


1. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon and Schuster, 1987) 14.
2. Ibid. 15.
3. Ibid. 182-185
4. Ibid. 189.
6. www.huffington
8. www.naked, p. 3
9. Congressional Budget Office, Trends in the Distribution of Household Income Between 1979 and 2007 (Washington D.C., October 2011), Summary, ix, and 1. References cite, Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” inQuarterly Journal of Economics vol.  118, no.1 (February 2003), 1-39.
10. Nakedcapitalism, 3. Douglas Hollowell first alerted us to the relation between consumer borrowing and the rapid increase in wealth by some in the financial services industry.
11. Lord Adair Turner, quoted in John Cassidy, “What Good is Wall Street?” (The New Yorker, Nov. 29, 2010) 51.
12. David Brooks, “The Next Culture War,” The New York Times” (NYT) September 29,2009.
13. The New Economy Working Group, “How To Liberate America from Wall Street Rule,” a report. See
14. ICBA-Independent Community Bankers of America. http://www.


  1. donald j. munro Says:

    This article, the one on the housing crisis, and a new one, “For Community Banks Rather than Large Global Banks” alll provide depth and breadth to the theme of income inequality. This topic of inequaity will be significant in the election of 2012.

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