The Economic Crisis, or Lack Thereof

The coming election season, just like the current primary season, is going to feature a lot of panicky talk about our dire economic straits--suffocating debt, economy a house of cards, middle class doomed, blah, blah , blah. So let's take a moment to splash our faces with the bracing water of fact and wash away the pore-clogging grease of rhetoric (this metaphor brought to you by Neutrogena).

First off, in a series of posts, Megan McArdle challenges the liberal trope that American middle class families are hanging by a thread because the government doesn't give them enough free stuff.

She then says "Whoa, Nellie" to the premise that US households are taking on unprecedented levels of debt; that they're creating an enormous debt bubble that will eventually consume us all in an explosion of fire and death and painful paper cuts and vicious, pecking birds. Oh, the humanity!

Now, in fact, I agree that people overleveraged themselves in the last eight years, encouraged by ultra-low interest rates... But I do not agree that this is the sort of financial holocaust that some argue. The housing bubble peaked in late 2005, meaning that we are now deep into the weeds of negative equity and teaser resets. This year should be the worst for mortgage performance, and yet the most recent figures show that the worst quality loans, subprime, have an overall foreclosure rate of 2% and a delinquency rate of 14%. These are not happy numbers--they represent hard times for a lot of families. And I expect that they will rise still further in the next report, due out in early June. But that's not "demise of the middle class" level; subprime ARMS, the problem market, account for only 7% of outstanding loans.

Nor is this as unique as many commentators seem to believe. The percentage of people who had negative net worth was about the same in 1962 as it was in 2000, the latest census year. The middle class certainly isn't in nearly as bad shape as it was in the 1980s, when high interest rates combined with falling inflation to make the debt they had hella expensive.

I am not trying to be a Pollyanna. Americans need to pay down some debt, and that process will be unpleasant. But they have adequate resources to do so, and the debt they have taken on largely represents an improvement in living standards and a transition to an ownership society that I think is overall a very good thing. More importantly, I find little evidence for [Harvard law professor and economic scare-monger] Elizabeth Warren's claims about why Americans have all this debt--which is to say that they're being forced into it by heartless capitalism, a lazy government, and rising inequality.

You're not going to hear many level-headed explanations for economic statistics like Megan's over the next six months. If all the prophecy of doom starts to worry you, I encourage you to check out her blog for some peace of mind.