Readers might think that they would after reading Wonkblog's piece, "Five facts about household debt in the United States." The piece begins by telling readers:

"The U.S. economy has been growing glacially for the last four years. And, by almost all tellings, the overhang of debt from the pre-crisis years is a big part of the reason why."

Is that so? There seems to be a very simple story that does not hinge on debt overhang. When the housing bubble collapsed it destroyed $8 trillion iin housing wealth. This bubble wealth was driving the economy in two ways.

First, record high house prices led to an extraordinary construction boom. Residential construction, which is normally around 3.5 percent of GDP, surged to more than 6.0 percent of GDP at its peak in 2005. After the collapse of the bubble, the overbuilding led to a period of well-below-normal levels, with construction falling to less than 2.0 percent of GDP. The difference of more than 4 percentage points of GDP implies a loss in annual demand of around $640 billion in today's economy. (Residential construction is now recovering and is currently a bit more than 3.0 percent of GDP.) 

The other way that the housing bubble was driving the economy was through the housing wealth effect. Economists estimate that homeowners increase their consumption by 5-7 cents for each additional dollar of home equity. This would imply that bubble wealth increased annual consumption by $400 to $560 billion a year. When the bubble wealth disappeared, so did this excess consumption.

The question then is where does debt figure into this picture? The answer is it doesn't really. People will spend based on their equity, net of debt. This means that we would expect a person with a $300,000 home and a $100,000 mortgage to spend roughly the same amount as a result of her housing equity as a person with a $200,000 home and no mortgage. It is the amount of equity that matters, not the amount of debt.

This doesn't mean that there may not be some differences across households. If the value of Bill Gates' home rises by $10 million, it would probably have less effect on consumption than if 100 miiddle income homeowners saw the price of their homes increase by an average of $100,000. But this has nothing directly to do with debt. It is a question of the distribution of wealth.

In fact, it is just wrong to imply that consumption is currently depressed. It isn't. The saving rate in the first half of 2013 was less than 4.3 percent. This is less than half of the average saving rate in the 1960s, 1970s, and 1980s. It is lower than the saving rate at any points in the post-ware era except the peaks of the stock and housing bubbles. Unless we see a return of a bubble, there is no reason to expect consumption to increase further relative to income.

The reality is, consumption is high, not low. This is yet another which way is up problem in economics.

We still see a slump because of the unmentionable trade deficit. We need a source of demand to replace the demand lost to this deficit, as widely recognized by fans of national income accounting everywhere.