Lagging Behind the Wealthy, Many Use Debt to Catch Up

[question everything]

Lagging Behind the Wealthy, Many Use Debt to Catch Up

U.S. Borrowing Hits Record; Soul-Searching in Utah As Bankruptcies Surge
'Monster' or Sign of Progress?

By BOB DAVIS
Staff Reporter of THE WALL STREET JOURNAL
May 17, 2005; Page A1

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More and more Americans are turning to debt to pay for lifestyles their current incomes can't support. They are determined to live better than their parents, seduced by TV shows like "The O.C." and "Desperate Housewives," which take upper-class life for granted, and bombarded with advertisements for expensive automobiles and big-screen TVs. Financial firms have turned credit for the masses into a huge business, aided by better technology for analyzing credit risks. For Americans who aren't getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment.

To some, the expansion of credit is a milestone of democracy, giving middle- and lower-income people financial flexibility that only the rich used to enjoy. Others see the borrowing binge as a way for average households to make up for sluggish growth in income over the past several decades. Since 1990, income for the median American household has risen only 11% after adjusting for inflation, while median household spending has jumped at 30%, according to an analysis by Economy.com. How could the typical family afford to spend so much? Median household debt outstanding leaped by 80%.

Utah vividly illustrates the changes credit has wrought in the U.S. Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah's rate a decade earlier, according to Economy.com, a West Chester, Pa., consulting firm. Utahns often get married early and have the largest families in the nation on average. That makes for a lot of young parents with modest incomes looking for big homes and cars. The median monthly mortgage payment in Utah equaled 45.3% of a worker's average monthly income in 2002, the fourth-highest level in the nation, according to the Utah Foundation, a Salt Lake City think tank. In a conservative, largely Mormon state that favored George Bush over John Kerry, 72% to 26%, the surge in bankruptcies has led to soul-searching.

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Economists Fabrizio Perri of New York University and Dirk Krueger of Goethe University in Frankfurt, Germany, trace the credit surge to the widening income gap between the rich and the rest of U.S. society. The gap between the incomes of those at the top and the bottom widened substantially between 1970 and 2000, but the gap in consumption widened much less as moderate-income Americans turned increasingly to debt. Cornell University economist Robert Frank sees house sizes, which have grown 30% since 1980, as an indication that middle-income Americans are battling to keep pace with the wealthy homeowners who build king-size McMansions.

Despite the dicta of old sages, many economists -- led by Federal Reserve Chairman Alan Greenspan -- see the expansion of credit to lower-income families as a sign of progress. Some speak of the "democratization" of credit. In an April speech, Mr. Greenspan said that in colonial times through the late 19th century, only the affluent had access to credit and rates were high. In the early 20th century gasoline companies and retail stores started issuing credit cards, but cards didn't spread widely until the late 1960s when banks piled into the business. Now, Mr. Greenspan says, "innovation and deregulation have vastly expanded credit availability to virtually all income classes." Those who celebrate credit's new reach, such as University of Chicago economist Erik Hurst, talk about income "smoothing" -- the idea that debt enables people to borrow from their future earnings. In an earlier era, many people had no choice but to save first and spend later. Now, with credit, they can spend right away. For many young people, it's realistic to expect their earnings to rise. Their spending isn't just on baubles -- they may buy a house in a neighborhood with good schools, helping their children get ahead over the long term.

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Write to Bob Davis at [e-mail]

URL for this article:
http://online.wsj.com/article/0,,SB111629465416335402,00.html

[pretzel4gore]

1. hoisted on their own petard....

if anyone can recall, i believe it was gene roddenberry (of star trek fame) who said back in the 70's that the US didn't need to invade or conquer foreign countries, mainly 3rd world one, to dominate them....TV and our movies would do it! (i recall being appalled that a supposedly 'superliberal' like roddenberry could think in those terms, but that's another topic)....what's clear that is TV and movies have totally warped expectations not only in poor 3rd world countries but in places like UTAh....

[Deja Q]

2. So those who spend also MADE the luxury car and big screen tv commercials

And the bankruptcy "reform" bill does nothing of consequence to the wealthy (as usual), so Donald Trump can go bankrupt as many more times as he likes and nobody will care.

It's a game to them.

It's our death to us.

They're hoisting us by their petard.

Now if those people peed on an electric fence they had set up to keep people out of their yards, then they'd be hoisted by their own p...

[pretzel4gore]

3. the wealthy/powerful are an undefined group.....

i think they like it that way.....
i recall a bio of george orwell, in which orwell wrote about seeing a little boy leading a water buffalo along a levee, his only weapon a switch... orwell said he suddenly realized that was the entire human drama, played out in plainest terms....humanity is a water buffalo, a monstrous implacable uncontrollable force that the 'rich' control using nothing but habits ingrained over generations...that's why the upper class has always written the books, told the stories, controlled the money and monopolized the best educations.....one good thing about bush/blair and the recent bs is that the twits have been exposed not only as just as depraved as any brain damaged junkie but also as stupid, and THAT will cost them (i hope)