So I was looking for the missing $1.6 trillion of household debt -- searching the components of household debt at Google Scholar -- and this text turned up in the search results:
… Figures 11–13 break out the average and median levels of various components of household debt. They show that, while mortgage debt may not drive the proportion of older households with debt, it does drive the level of indebtedness of Boomers. Page 12 …
The various
components of household debt, in three graphs. Three components of household debt, maybe, in The impact of rising household debt among older Americans by Z Ebrahimi of the Employee Benefit Research Institute.
Son of a gun. The PDF has graphs of the debt owed each year by people age 50 and over, comparing two cohorts: birth years 1931-1945, and birth years 1946-1964. (The latter group is baby-boomers.) Figures 11-13 show the comparison for these three components of household debt:
- Mortgage Debt,
- Other Home Loans, and
- Consumer Debt.
Hm... Zahra Ebrahimi may have solved my problem. Let me do a quick search at FRED.
Son of a bitch! Thank you! (I didn't check it yet, but that's gotta be it.) That's gotta be it. Wow.
The
PDF is just full of charts and graphs about debt, so you know I love
it. Plus it identifies the missing piece of household debt that I was
looking for, so I love-love-love this PDF. In addition to that, it
presents evidence that supports and adds to everything I know about our
economic problem. For example:
- A increasing percentage of us old people are in debt. Things are getting worse.
- We are also deeper in debt. Things are getting worse.
- Younger old folk are more in debt than older old folk. Things are getting worse.
However, in the conclusion of the paper I ran into a problem. The last sentence just doesn't do it for me:
...these findings point to the importance of financial education and support when it comes to maintaining reasonable debt levels going into retirement and throughout retirement.
I don't need somebody to teach me that debt can get me into trouble. I already know that. Most of us already know it. What I need -- what we need -- is better economic policy.
We need to rely more on cash and less on credit: more on debit cards, for example, and less on credit cards. More on income (and rising pay) and less on borrowing to get by. And businesses need to rely more on equity (and profit) and less on borrowed capital. The arithmetic is simple: When less business revenue goes to pay interest on business loans, more business revenue is available for payroll.
When the Federal Reserve would set their targets for money growth, decades back, they would make the credit-growth target higher than the money-growth target.
By design, policy encouraged credit and debt to grow faster than the
quantity of money. This sort of policy is the root of the problem.
By design, policy increased the cost of using money by encouraging the reliance on credit rather than income. We don't usually look at it this way, but it's not just interest rates that create financial cost: The greater the amount of debt we owe, the greater the cost of finance.
And the greater the cost of finance, the less we can do with the money that remains.
That's
the monetary side of policy. The fiscal side is no better. People used
to say that debt gets better tax treatment than equity. They still say it. It's still true.
It's convoluted, but business interest expense remains at least partly deductible. Mostly deductible, I want to say. According to the IRS 2020 Publication 535:
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can generally deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is generally not deductible. See chapter 4 ...
In other words, you can generally deduct all business interest expense. Hey! -- I didn't say it. The IRS did.
Under the heading "Interest Expense Limitation", Publication 535 says
The business interest expense deduction allowed for a tax year is generally limited to the sum of:
- Business interest income,
- 30% of the adjustable taxable income, and
- Floor plan financing interest.
As I wrote in my 2019 evaluation of the interest deduction since the Tax Cuts and Jobs Act of 2017:
... all of the interest on floor plan financing is deductible, plus all but the highest reaches of annual business interest expenditure. If you still have more interest expenses you want to deduct, you can turn to a third option: the limit set by your business interest income.
Remember, you get to add the three limits together to find your maximum interest deduction.
The Thompson Greenspon page explains this third option:
you can use an unlimited amount of business interest expense to offset business interest income
By this one limitation alone, if your business interest
expenses are less than or equal to your business interest income, all of
those expenses are deductible. This so-called "limitation" is extremely
favorable to income from finance. It is just one more example of how
policy encourages the growth of finance.
It is just one more example of how policy leads to the growth of debt in the private sector.
No one says this anymore, but people used to say we have all this debt because consumers were enjoying life too much. We were spending too much, supposedly. It sounds ridiculous, given today's economic situation, but I did hear it said more than once since the 1990s.
Even back then, it was ridiculous. It's not too much spending that created all the debt. It's too much policy encouraging the growth of finance. The size of our debt is otherwise inexplicable.
By the way, this same narrative explains the massive Federal debt: Not spending, but the policies that promote private-sector finance and the cost of it.
Finance is great, if you only consider one side of it. But for every dollar of financial income, there is a dollar of financial cost.
To make matters worse, for every dollar of financial cost there is less than a dollar of financial output.
The
single most important thing we can do to improve our economy is limit
the size of finance. This does not mean you borrowed too much. It means
we have to change the policies that cause people to end up so deep in
debt.
Oh, by the way, the unlimited deduction for corporate interest payments originated in 1918 as a temporary measure.
And that's the kind of "financial education" I think we need, to solve the debt problem and the cascade of economic troubles that flow from it.
No comments:
Post a Comment