economics politics

Ignore your debts, and save the economy

[Disclaimer: the title of this post is sarcastic. Don’t actually do that.]

I’m afraid you’ll have to excuse another UK politics post, but for the second time this week, I’ve heard something from a national politician that doesn’t quite make sense economically.

The first was the Transport secretary’s claim that an 80 mph speed limit would boost the economy. The second is from David Cameron and his comments on debt. In the early drafts of the Prime Minister’s speech to his party conference, he appeared to call for Britons to pay off their debts. “The only way out of a debt crisis is to deal with your debts” David Cameron was due to say. “That means households – all of us – paying off the credit card and store card bills.”

The line didn’t appear in the . All the papers had already reported it, so there has been considerable speculation about why it changed. Apparently it wasn’t meant to be a suggestion, but a statement of fact. “The only way out of a debt crisis is to deal with your debts” is how it came out in the actual speech. “That’s why households are paying down their credit card and store card bills. It means banks getting their books in order. And it means governments – all over the world – cutting spending and living within their means. ”

The thing is, it doesn’t matter much whether Cameron was telling people to pay off their debts or just saying that they are paying off their debts, because I’m pretty sure he’s wrong either way.

Here’s why:

First of all, if Cameron meant it as a suggestion, it’s a bad one from a macroeconomic point if view even if it’s responsible household management. If people actually followed through and paid off their debts right now, it would cripple the economy. Collectively, we owe £57 billion on credit cards and £152 billion in other loans. According to Nick Pearce of the , if we paid that off in a year, it would lower GDP by 4% per quarter. Even spread out over the remainder of the parliament, it would depress GDP growth by 1% per quarter.

But let’s give Cameron the benefit of the doubt and assume that he was referring to something that was already happening, rather than something that should happen. That’s no better, firstly because it’s not entirely true, and secondly because the budget is based on the opposite.

Are people paying down their credit and store cards? Well, lending behaviour is certainly changing. More people are paying off their balance each month and avoiding debt, and fewer store cards are being issued that a couple of years ago. But the actual total of debt outstanding hasn’t fallen, and there has been a big increase in things like pay day loans. According to , consumer credit lending grew by 2.3% in the last year, which rather undermines the idea of a responsible nation taking responsibility for its overspending.

What’s worse is that if Cameron is right and we are paying off our debts, then the treasury is wrong. The Office of Budget Responsibility has predicted a sharp rise in household debt, and the budget is based on this presumed extra debt. The OBR believes households will continue at the same standard of living as before, even though income will remain the same. Consequently, the this year shows a rise from £1.6 trillion to £2.1 trillion by 2015 (that’s total household debt, which includes mortgages). If the budget is going to balance, the government needs the opposite of what Cameron is saying here.

I’m not surprised by the muddle though. We’ve been asking the impossible of our economy for some time. We want the banks to simultaneously re-capitalise and increase lending, and we want the economy to grow while we contract our spending. In short, we’re in desperate need of some fresh economic thinking.

10 comments

  1. The retraction also indicates that Cameron’s speech writers really don’t understand how money works; if the people and the country spent all of their money on debt repayment, there wouldn’t be any money left, because ; furthermore there would still be unpaid debt, so more money(debt) would have to be created to pay off the original debt.
    So yes of course, people should pay off their debts for the sake of their own autonomy and peace of mind. But in a debt money system, the interests of the economy at large are not the interests of the individuals. This whole discussion points towards the profundity of the changes that are needed. There is much soul-searching about the economy, but very little understanding of the money system it is predicated on.

    1. That’s the most worrying thing really, is how little our politicians seem to understand the situation. They tell us they’re taking decisive action, but they’re just bumbling through.

  2. Please excuse my ignorance, but I don’t really get it… Does this mean that we shouldn’t be encouraging people to pay off their debts for the sake of the wider economy and therefore ‘common good’?

    I think it’s easy for us to criticise the current system and criticise politicians for having to work within that system and not doing it very well. But what is this ‘fresh economic thinking’ and the actual result of the ‘soul searching about the economy’?

    Will it be an economic system in which businesses are able to make profit and yet individual wellbeing (by which I mean people being content; having the freedom to make choices about their lifestyle; having dignity and being able to be creative) is seen as progress rather than a rise in GDP?

    How can our economic system start serving the people, rather than the people being slaves to the system?

    1. Well no – everyone needs to take responsibility for their own finances. The title is there to illustrate the debt trap we’re caught in. The only way to grow right now is more debt, and that’s either got to come from individuals or the government.

      And yes, that fresh thinking includes non-GDP measures of success, banking with low or no interest, much more use of leasing and cooperative consumption rather than ownership, and probably debt forgiveness too.

  3. “According to Nick Pearce of the Institute for Public Policy Research, if we paid that off in a year, it would lower GDP by 4% per quarter. Even spread out over the remainder of the parliament, it would depress GDP growth by 1% per quarter.”

    Are you suggesting (or Nick Pearce) that the ‘Income’ generated by credit card companies is actually productive? Of course not. These are exceedingly high rates for small amounts of credit. Comparing credit card rates to any other form of lending reveals their pseudo-criminality, and you’re suggesting that by taking away this debt we’d actually be hurting ourselves? Get real. GDP numbers are interesting but paying off your debt should always be a priority (as is avoiding high-interest bearing debt in the first place), because you increase your monthly discretionary income, and boost your personal Balance Sheet (ahem, the one with Assets on one side and Liabilities+ Equity on the other).

    It’s revolting for anyone to prescribe more laziness in favor off paying down debt.

    1. Fair enough, just lump my sentiments in with CK’s, and you responded in kind. At the Macro level we may be in a ‘trap,’ but I just want to go on record, if it turns out that we are in a downward debt spiral, we shouldn’t be casting Credit Card companies as saviours but parasites who figured out how to crack the ‘average buyer’ so well that (as you suggest) they might ‘TILT’ the shopping engine (Consumer Spending).

      Asking agencies around the world to ‘forgive debt’ is the ultimate example of that. Not a good thing, but a very very very bad thing. Let’s all throw in the towel, hit the reset button and go bankrupt then, and carry our bad credit history around for the rest of our lives, having learnt nothing — recovering credit addicts and recovering shopaholics alike.

      1. Indeed, the title is sarcastic, and I think explains why Cameron pulled the call for people to pay off their debts. ‘Credit’ is a serious trap, and paying it off is the most responsible thing for us to be doing. And more importantly, avoiding it in the first place of course. I don’t have any credit or store cards myself, and never have done. (and consequently, probably have no credit rating…)

        Not sure I agree on debt forgiveness though. I think there’s an opportunity there – although I’d need to seriously think about it to know if/how it would work and not be a cop out or a reward for laziness.

  4. Credit Card Debt..their intrest rates are un-fair, if a payment is late your late fees are $50.00

    We have this because people don’t pay their bills, we absorb the loss to credit card companies,
    by paying high interest rates on every thing from credit cards to the rent being late, I would pay $50.00 a day that my rent is due, if rent is due on the 1st, and you don’t get you check on the first, better find a way to have it paid on the 1st any way,even it’s a holiday, your in the hospital, ect.
    The people who have no jobs are expected to have Health and Dental Insurance, Car Insurance, and We pay dearly if we don’t. The poor pay the same amount of money for a
    tooth to be pulled or a root canal , ect. as the rich. The ER..Medical treatment, surgery, if you have no health insurance because you have no job, what happens to that person? It’s sad that
    the people who are not supposed to be here, we educate people like the 9-11 killers, then there are the people who come to our States, Country, make good money, and send it home, they get free food, have babies 100/% free, and get food stamps, the more babies they have the more money, and food stamps they get.I tell it
    like it is,what I have said here is just a scrach on the surface of what the future will be.

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