March 08, 2023
Like much of the rest of the media, NPR is determined to convince the public that the economy is terrible under President Biden, regardless of what the data show. In Real World Land, there are lots of good things about this economy.
We have the lowest unemployment rate in a half century. Real wages for workers at the bottom end of the income distribution are rising rapidly (that means wages are rising faster than prices). Workers have unprecedented freedom to quit jobs they don’t like. Tens of millions of homeowners are saving thousands of dollars a year in interest expenses as a result of refinancing their mortgages. And tens of millions of workers are saving thousands a year in commuting costs, as well as hundreds of hours in commuting time, as a result of the explosion in work from home since the pandemic.
But the media don’t want to let reality get in the way of their terrible economy story. Therefore, they highlight or invent bad things to say about the economy.
In pushing the bad economy line, they take advantage of the obvious fact that tens of millions of families are struggling in this economy, as is always true in the United States. The point here is that we have a terribly weak welfare state.
This means that even in the best economy, say the year 2000, which was the peak of the late 1990s boom, we still have tens of millions of people struggling to pay the rent, put food on the table, or pay for their kids’ child care. As a result, a reporter who wants to tell people the economy is terrible will never have any problem finding people in terrible straits to support the case.
However, the issue is that they are choosing to do this in a big way now that President Biden is office. They had even more opportunities to find people in bad straits when Donald Trump was in the White House, but they instead largely chose to tell a good economy story.
Anyhow, NPR got into the fray yesterday with a piece telling us how credit card debt is soaring. They found a family who does appear to be in very bad straits and has run up large amounts of credit card debt.
The women highlighted in the piece earns $40,000 a year and has three young children to support. Her major financial problem seems to stem from a divorce. Presumably, she had the income of a second worker to help support the family previously, and possibly also help with child care. She cities paying child care as her biggest problem. This would be a nonissue in the many countries with free or low-cost child care.
The ostensible reason for the story is the rise in credit card debt, which NPR tells us is due to the fact that households can no longer make ends meet. The family they profile is in this situation.
While many struggling families are undoubtedly turning to credit cards to cover their bills, there is another obvious explanation for the recent jump in credit card debt: mortgage refinancing has fallen through the floor.
In 2020 and 2021, there was a massive surge in mortgage refinancing as people took advantage of extraordinarily low interest rates. More than 20 million households refinanced their mortgages, often reducing their interest rate by a percentage point or more, which translated into savings of thousands of dollars a year on interest payments.
When people refinance a mortgage, it is common for them to borrow more than the outstanding amount on their prior loan in order to get money to pay for extraordinary expenses, like remodeling their home, buying a car, or possibly to just have some cash available. The jump in mortgage interest rates following the Fed’s rate hikes have eliminated this option. Under such circumstances, it is hardly surprising that people would turn to other sources of credit, like credit card debt.
This has led to a big increase in credit card debt over the last year. Is this a crisis? Here’s the relationship between credit card debt (revolving credit is overwhelmingly credit card debt) to personal income over the last half century.
As can be seen, there is a jump in the ratio of credit card debt to personal income, but we are still not back to the pre-pandemic level. We are far below the ratios we saw during the housing bubble at the start of the century, and even below the level we saw in the late 1990s boom.
In short, it is hard to see a crisis here. That could change, of course. If we get the recession and jump in unemployment that many are rooting for, the ratio of credit card and other debt to income will surely rise. The media will then have cause for talking about a bad economy, but they don’t now. This is their invention, not the real world.
 I used personal income rather than disposable income, which is more common. The reason is that there has been a big increase in tax payments over the last year, as people were paying capital gains tax on stock they had sold at a gain. This lowers measured disposable income (income minus taxes) but does not correspond to people actually having less money, since they sold stocks at a gain.