Household debt: the silent dimension of the financial crisis

It is households that are suffering as a result of the broken Anglo-liberal growth model

“I’m broke!” We have all heard this popular expression describing the state of a person’s finances. In the strictest sense ‘broke’ means being without money or penniless, but in current parlance describes being without money to spend – rather than without income or bankrupt. This nuance is not trivial; it signifies an important change in perceptions of what constitutes financial distress and the growing number of people experiencing it. Indeed, it is indicative of the overlooked financial crisis facing many households: incomings scarcely match outgoings and debts are increasingly difficult to service. Indeed many key elements of middle-class life, like a owning a home or university education, are now unaffordable.

Anglo-American households are broke. Too many households have endured years of declining real incomes, bouts of unemployment, rising indebtedness and without sufficient savings; they are bearing the brunt of the economic downturn and are disproportionately paying for the costs of fiscal austerity without any evidence of a lasting recovery. Yet, in the many manifestations of crisis since the credit crunch began in 2007 – whether it’s the financial or liquidity crisis facing banking or the Euro sovereign debt crisis – there is little acknowledgement of households at all.

Occasionally the precarious state of household finances is mentioned as part of the euphemistically named ‘balance sheet’ recession but without any consideration of the profound political and economic consequences. Most often households are evoked metaphorically in the political rhetoric around deficit reduction and justifications for austerity: either by equating state borrowing to households ‘living beyond their means’ or moralising about the intergenerational inequality of passing government debt on to ‘our children’ – even though households, especially those with children, are the worst affected by austerity measures.

The rolling crises since 2007 and persistent economic malaise demonstrate that problems facing households are indicative of wider difficulties: the Anglo-American growth model is broken. Continuing to overlook the growing financial instability of households takes for granted their central importance as the bedrock of domestic and global economic growth. In both the United States and United Kingdom household consumption makes up over two-thirds of GDP, by far the largest component of output and source growth. Equally important is their role as a key end market for globally produced goods and services, in effect Anglo-American households act as consumers-of-last-resort for the global economy. It is the building of a mobile and prosperous household sector that evokes notions of the Golden Age of Capitalism and remains central to maintaining social cohesion in the present-day. As the bedrock of the Anglo-American economic and political power globally, analysing the household is essential to any understanding of the current economic malaise.

What is at stake here is the Anglo-America households’ way of life. Typically, decline is understood as a nation’s ability to project primarily military power globally; but what does the decline of a way of life look like? What does it mean for the people living it and how does this change the global political economy? David Boyle’s newest book ‘Broke: who killed the middle classes?’ and Sophia Parker’s edited volume ‘The Squeezed Middle: the pressure on ordinary workers in America and Britain’ are the latest in a growing body of literature detailing the lived experience of economic decline and putting (middle-class) households at the centre of discussions of economic renewal. These efforts are an important counter-weight to the current political consensus over the need to muddle through our political-economic problems.

During the boom years warnings of the inherent instability of easy credit and booming asset prices were quickly dismissed as a failure to understand how new financial instruments and technologies change the world we lived in. When crisis struck, calls for fundamental reform were ignored because the priority was bringing back market confidence and stability. Several years on, Anglo-America is mired in political divisions and economic stagnation, but efforts at fundamental change are thwarted by claims it will inhibit the promised recovery, which is always somewhere over the rainbow.

Households have been hard hit by the financial crisis – not only are households expected to cope with their own much weakened financial position and growing financial insecurity they have received comparatively little government intervention and support. As a result of this politics of abandonment the majority of households find themselves in a double-bind: curtail spending now to pay down existing debts and prolong the economic downturn or continue debt-led spending and risk insolvency. How households recover from the boom, bubble and bust will determine the course of economic renewal.

Knowing what is broken allows us to see what needs to be fixed. If the events of 2007 are considered a simple banking or financial market crisis, then technical fixes, like changes to capital reserves, or institutional fixes, like tasking the Central Bank with monitoring overall stability of the financial sector, are sufficient. Yet, it is increasingly clear that the Anglo-American growth model cannot go on as it once did because this will only lead to more stagnation while more radical solutions, like increasing interest rates, will destroy the fragile economy and market confidence altogether. Indeed, the events of 2007 were the beginning of an economic depression, so as Paul Krugman suggests: the solution is entirely political.

If the emergence of the rhetoric around the ‘new normal’ – where we all accept higher unemployment, slower growth and continued dips in and out of recession – is anything to go then only more trouble lies ahead. Even if we accept the credulous story of restoring global growth through emerging middle-class demand in China, Brazil and India it requires the Anglo-American households to willingly abdicate their privileged position as consumer-of-last-resort and simply accept their heyday is over. Decline is not that easy.

Therefore, economic renewal cannot be achieved without addressing the financial crisis facing households as much, arguably even more than, the problems in the financial services industry or the Treasury. Any political or economic strategy that does not address the financial hardship and instability facing households will fail. Not least because current attempts to restore growth seek to solve today’s problems with the same thinking that caused the crisis in the first place. Therefore, to modify a turn of phrase: if it’s broke, fix it!