Household debt vs. GDP by Columbia business professor David Beim

You may have heard the conversation with David Beim, professor of business at Columbia University and NPR’s Adam Davidson, a conversation that was repeated on This American Life. Since the approach on these kinds of programs is to juxtapose happy talk, “journalists” giggling over Ken-Burns-like music that metonymically attaches itself to our emotions like cancerous tumors to our brains, you like me may have been scared silly by the claim that our household debt to GDP raio became the same in 2007 as it was in 1929: 100%.

This chart tracks the relationship between household debt and gross domestic product. You’ll see two years when Americans’ debt becomes 100 percent of GDP — 1929 and 2007. It’s the chart that made Columbia professor David Beim say:

“The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us… We’ve been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen.”

Laura Conaway

Beim referred to this graph as a pair of hockey sticks. Remembering that this plot is against time, to me the pair of peaks looks more like an avalanche. Note where the debt ratio ends up by the beginning of WWII, roughly 20%.  So either everyone paid off their debts, which we know didn’t happen, or everyone defaulted on their debts, their toxic assets to use today’s term for bad bank debts, and lost everything.

What I find most perplexing is the fluidity of economic interpretation. This seems like an incredibly important graph, yet we’re just hearing about it. What I don’t understand is why it’s important, a problem economics frequently seems to have. I’m looking for the fundamental constants and equations of the field, but keep finding instead a field that likes to suck us in with mushy ideas and false choices.

In other words, if we look at a good working model of how a productive society should function, what should this ratio be? Is this debt ratio a problem because Americans have been sending all their debt-leveraged cash overseas to buy flat-screen TVs and automobiles from Japan, anything small that’s boxed from China, and high-performance cars and knives from Germany? If instead we were buying these same goods from Americans made here in America, wouldn’t that be just fine since the profits would be taxed and our infrastructure and citizens would benefit?

It seems to me that the bigger problem than debt is that we can’t buy an American flat-screen TV or an American high-performance, reliable car or an American coffee maker packaged in a box made in America. And the reason we can’t do this is because American workers are no longer making what we want to buy, whether we buy with cash or credit. This strikes home in my classrooms because even if my students wanted to make a reasonable living making things, they couldn’t: those businesses are gone. Instead they need to work at Starbucks for the health benefits where they learn how to make a venti latté when the customer asks for a big espresso with milk and foam.

I’m not against globalization; I’m against the kind of greed and quarterly profit reports and ethical deficiencies that have been the philosophical cornerstone of Reganomics since 1980. It’s because of this economic philosophy that values money and profit over human needs and aspirations that a dollar spent is too often a dollar sent elsewhere with no structural benefit to your family and neighbors and friends and community and state and country.