Culture and Commerce November 2008

The Case for Debt

Public anxiety over “excessive” consumer debt has a long, and misguided, history. By Virginia Postrel
For many poor Americans, credit cards can still be a better deal than payday loans and pawnshops.
(Photo credit: Philip James Corwin/Corbis)

A couple of weeks after last Christmas, a newspaper reporter telephoned Todd Zywicki, a George Mason University law professor who studies bankruptcy and consumer credit. How, she wanted to know, were American families going to pay the huge credit-card bills they’d run up buying presents? Well, Zywicki responded, how had they paid their Christmas bills the previous year, and the year before that, and the year before that? “It never occurred to her that this was an old story,” he says.

Or, as we in the journalism business call it, an evergreen: always in season. Through good times and bad, Americans predictably rack up consumer debt, and that debt predictably generates public and private hand-wringing about how it will ever get paid. When two Federal Reserve economists examined all the New York Times articles on consumer credit from 1950 to 1995, they found that 60 percent were negative. The pessimistic tilt was even greater—topping 80 percent—when journalists generated their own stories rather than reporting on statements by politicians, business executives, or academics.

The evergreen story of people in debt becomes even sexier in an economic downturn, when debts inevitably get harder to pay. Witness a recent Times feature on “The Debt Trap,” described as “a series about the surge in consumer debt and the lenders who made it possible.” On the subject of credit, bad news sells.

Certainly politicians think so. “Over the past 15 years, average household credit-card debt has tripled. The typical family is now nearly $10,000 in the red,” said Barack Obama, decrying a “debt crisis” caused by “credit-card companies … pushing [consumers] over the edge.” At hearings last December, Senator Norm Coleman, the Minnesota Republican, declared, “This easy credit has gotten a lot of people in trouble.” He could have said the same thing anytime in the past century and been applauded for it. Today’s sluggish economy, home-equity- line-of-credit craze, and subprime-mortgage mess have amplified concerns about the general level of indebtedness. But while it’s true that, thanks in large part to declining home prices, American homeowners hold less equity in their homes than they used to, the subprime meltdown is less a problem of consumer credit than of new financial instruments and the difficulty of tracking mortgages that have been sold, then broken up and repackaged into derivative securities. And on closer examination, what looks like “unprecedented” consumer indebtedness turns out to have ample precedent, as do the anxiety and moralizing that accompany it.

Studying “Middletown” in the 1920s, Robert S. Lynd and Helen Merrell Lynd deplored the “rise and spread of the dollar-down-and-so-much-per plan,” which extended credit for such extravagances as cars, electric washing machines, and “$200 over-stuffed living-room suites … to persons of whom frequently little is known as to their intention or ability to pay.” In 1943, Jesse Rainsford Sprague, a defender of installment buying, nonetheless worried that the “temptations of easy credit” were luring young people to take out bank loans, rather than save, for vacations. Of one stenographer, he noted, “Had the young lady spent less on lip rouge and blood-red fingernail paint, she might have been in a position to pay cash for her holiday.”

“As the result of the consumer credit explosion, the total private debt is certainly greater than the combined private debt of man throughout history. Never have so many owed so much,” declared Hillel Black in Buy Now, Pay Later, published in 1961—more than a decade before using bank credit cards like MasterCard and Visa became common. Employing the big, scary numbers and dizzying examples typical of such critiques, Black elaborated:

Currently about one hundred million Americans are participating in the buy-now, pay-later binge. Furthermore, they can, if they wish, do anything and everything on credit. Babies are being born on the installment plan, children go through college on time, even funerals are paid for on what the English quaintly call “the never never.” Through debt people are buying hairpins, toothpaste, mink coats, girdles, tickets to baseball games, religious medallions, hi-fi equipment, safaris in Africa … The result has been a consumer credit explosion that makes the population explosion seem small by comparison.

Black was right about the trend but wrong about its significance. The expansion of consumer credit is one of the great economic achievements of the past century. One institutional and technological innovation after another has made borrowing easier and cheaper for rich and poor alike. With each development have come fears—sometimes fueled by the unforeseen problems that inevitably accompany new practices—that this is the change that surely will lead to disaster. Yet a half century after Black’s warnings, doomsday has not arrived, the “consumer-credit explosion” continues, and most consumers are much better off.

Gone are the up-front fees and intrusive interviews that used to be standard before taking out personal bank loans or establishing store credit. Except for those offering airline miles, most credit cards no longer have annual fees, while intense competition for new customers—think of all that annoying junk mail—has driven down the average interest rate, from 17.4 percent in 1992 to 13.1 percent in 2007. Today’s consumer credit is flexible, convenient, impersonal, and (excluding car loans and mortgages) largely unsecured. With a credit card, you can rent a $40,000 automobile, buy goods online from complete strangers, finance a business, make ends meet while you’re out of work, purchase a $5,000 wedding gown or a 10-cent photocopy—all without completing any forms or explaining yourself to anyone. And despite recent legal revisions, even bankruptcy is less painful than in the days of buying on time. If you default on your Visa bill, nobody comes to repossess your refrigerator or auction off your shoes. The biggest penalty you’ll face is trouble getting future credit.

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Virginia Postrel is an Atlantic contributing editor. She has a new blog at More

Contributing editor for The Atlantic and author of The Substance of Style and The Future and Its Enemies. Editor-in-chief of

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