Consumers' debt burdens and the economic effects of their efforts to reduce them have been exaggerated a prominent researcher has concluded.
Michael E. Staten, director of the Credit Research Center at Purdue University, said the news media were too quick to blame the 1980s' debt buildup for holding down the recovery.
In "Consumer Debt: Myths about the Recession," an article he wrote for Capital Markets Assurance Corp., Mr. Staten said the expansion of consumer debt was a consequence of prolonged economic growth, demographic shifts, and a broader range credit opportunities.
"The image of the household sector tottering on the brink of insolvency under record-setting levels of debt isn't supported by the available data," Mr. Staten wrote.
Measure Called Misleading
He said a common measure of the debt burden -- the ratio of aggregate consumer installment credit outstanding to disposable income -- is misleading.
The debt-to-income ratio will rise as more people use credit, he said. Also, the ratio focuses on total debt instead of on monthly payments, which have been lengthened to meet the borrowers' needs.
Mr. Staten pointed out that since consumers can dip into assets to repay debt, a relevant indicator may be consumer installment credit as a percentage of household liquid assets -- their amounts in checking accounts, small savings accounts, and money market mutual funds.
This figure was 24% in 1990 and 1991 -- the same as in 1985 -- and has since fallen. In fact, this ratio has flattened or declined in recent recessions.
Spending on the Rise
Some analysts have said debt has gone out of fashion this decade, in part a reaction to the last recession. But recent government data show consumer spending is on the rise.
Retail sales increased 1.5% to $177.3 billion in October, following a 0.1% rise in September. It was the seventh consecutive monthly advance, and the largest since April's 1.9%.
Mr. Staten said the dip in consumer spending in 1991 and early 1992, accompanied by a brief decline in total installment credit, "was attributable to uncertainty, not frugality."
"The recession slowed the growth in consumer credit but did not trigger a large-scale reduction in consumer debt," said Mr. Staten's report for Markets Assurance, better known as CapMAC. "Assertions that consumers will continue to shun debt in the 1990s are unsubstantiated."
More Change Expected
"Debt makes sense when it makes sense," Mr. Staten said in a telephone interview. "People have not changed attitudes as fundamentally as writers would suggest."
Consequently, Mr. Staten believes, households will take on new debt in different ways, particularly through revolving credit and home equity loans.
"Households have become increasingly sophisticated," the researcher wrote. "Higher income taxes are likely to accelerate this shift, making home equity lending the fastest-growing segment of the consumer credit market" for the rest of this decade.
Banks took a chance in the '80s to make bank cards more available to baby boomers who moved to the prime credit-using years, and to riskier customers, Mr. Staten said.
Naturally, Delinquencies Rose
As expected, he said, delinquency rates rose and spiked in 1991, but "the bomb didn't go off as some analysts feared."
Margins were squeezed, but bank card issuers ended up with a wider customer base.
"Once you become confident, more willing to lend to marginal customers, it gives you a lot of freedom to attract riskier guys," he said. "But bankers beat the risk through segmentation."
Chargeoffs remain high, though they are down from the peak, Mr. Staten said. "It appears lenders have learned to live with the high levels. They've made changes in other areas to compensate for it."
