Deeper in Debt

Ben Franklin might seem, at first glance, to have little in common with Karl Marx. But when the German philosopher wrote in the Grundrisse that "the individual carries ... his bond with society in his pocket," the author of Poor Richard's Almanack might well have agreed. One of our most enduring American faiths is that how people spend money tells us something about their moral character. Thrift is a sign of virtue, profligacy one of sin, and filing for bankruptcy calls not only for a financial accounting but a spiritual one.

About 1.4 million Americans wound up in bankruptcy court in 1998; the standard narrative explains the phenomenon in updated fall-from-Eden terms, with the Visa card playing the role of the snake.

A generation ago, sociologist Daniel Bell decried the frivolity of the American consumer. He wrote in The Cultural Contradictions of Capitalism that "the greatest single engine in the destruction of the Protestant ethic was the invention of the installment plan, or instant credit." (It's interesting that while Bell excoriated credit, he never criticized its inverse--interest payments--though these, too, would seem to give people money for doing nothing.) Social critics on the left, meanwhile, object to the prevalent association of the good life with the eternal quest for consumer goods. Most recently, economist Juliet Schor has linked the modern demands for longer workweeks with a compulsion to spend too much (see The Overworked American and The Overspent American). In the late 1970s, Christopher Lasch, in The Culture of Narcissism, wrote about how credit-powered materialism corroded genuine autonomy.

But there is another way to look at what drives people to bankruptcy. The Fragile Middle Class, by sociologist Teresa Sullivan and legal scholars Elizabeth Warren and Jay Lawrence Westbrook, examines the issue not as a matter of consumer choice but of real economic strain. Based on surveys done in 1991 of 2,400 debtors from across the United States, the authors argue that the real issue isn't the immorality of hyperconsumption but the inegalitarian, unstable American economy itself. Most bankrupts aren't driven to the brink by bacchanalia at the mall. They file after losing a job, getting sick, or ending a marriage. The Fragile Middle Class, a well-written work of social science that is about as gripping as the genre gets, forces us to re-evaluate notions about consumerism. Thinkers like Bell and Lasch--by focusing on the magic of credit and the evils of consumer culture rather than economic inequality and the power of the business elite--transformed a political problem into a moral and cultural one. The Fragile Middle Class directs our attention back to where it belongs.

The book opens with the paradox of the 1990s boom: Despite economic growth, the number of personal bankruptcies climbed throughout the decade. At its peak in 1998, the number of bankruptcies had quadrupled since 1979. (It fell in 1999, just as working-class wages began to rise for the first time in a quarter-century.) The median income of the bankrupt population surveyed in The Fragile Middle Class was $18,000, half the national median in 1991. About a third of the incomes in this study were poverty-level. Debt loads were staggering. Most people owed creditors two to three times their annual income.

It may seem like a tautology that people who go bankrupt don't have a lot of money. But perhaps the most striking fact about those filing for bankruptcy is that they are sociologically members of the middle class. Debtors are not "a substratum of day laborers or housemaids" who've acquired plastic and racked up bills beyond their means; they include doctors and bankers, clerks, and factory workers. In terms of education and occupation, the bankrupt are a cross section of the population, not irresponsible spenders who've always been poor.

How can it be that the American middle class hides so many deadbeats? It turns out that credit card profligacy in and of itself accounts for only about one in 10 bankruptcies--not an insignificant number, but certainly not the whole story. Indeed, two-thirds of the debtors surveyed in The Fragile Middle Class, reported employment problems as central to the reason they were filing. Losing a job and not being able to find another one--or one at comparable pay--seems to be the most important factor driving Americans into financial collapse.

To illustrate this trend, the authors provide several compelling stories. Willis Creighton, former president of a failed savings and loan, says, "I have been unable to find a permanent job for the past 2 years." A steelworker from the Midwest describes the main reason for his bankruptcy as "being laid off from U.S. Steel off and on the past couple of years and then the shutdown of the mill this past year." (One problem with The Fragile Middle Class is that it uses data from a recession year; one wonders whether the story was really the same in 1997.) Perhaps the book's saddest example is a single mother who cites "lack of fulltime work--worked 5 part time jobs to meet rent, utilities, phone, food & insurance" as the reason she fell behind on her debts. Other problems include divorce--divorced people, especially women, are far more likely to file than married ones--and not having health insurance. The authors estimate that medical problems account for about 200,000 bankruptcies in the United States each year.

None of this is to say that credit card debt is unimportant. As the authors put it, adjusting to a lower income level "becomes acutely difficult" if you've "already committed most of your earlier, higher disposable income to debt repayment at high interest rates." Maxing out can be perilous. "High consumer debt loads increase families' vulnerability to every other problem--job, medical, divorce, housing--that befalls them. Six weeks of unemployment for a worker with $200 in short-term, high-interest credit card debt may be tough but manageable. That same six weeks without a paycheck is a disaster for a worker who must feed a $20,000 credit-card balance with interest accumulating at 18 percent and penalty fees added on at $50 a pop." Heavy borrowing is one thing that makes families more financially fragile than they have been in the past. But the crusher is living on a stagnant salary without health insurance and adequate workers' compensation, and without help from the institutions--like labor unions--that would grant a measure of security in an ever changing economic environment.

The findings of The Fragile Middle Class give cause for concern about the future health of the American economy as a whole. Economists such as Wynne Godley of the Jerome Levy Institute have argued that debt-fueled consumption is what's driving the current boom. Economic growth has been powered by a dramatic expansion of private expenditure--even though economic inequality has widened substantially and purchasing power for the majority of the population has increased only slowly. How was the rabbit pulled out of the hat? A swift decline in savings, and the rapid growth of both business and consumer debt. Household debt now nearly equals a historically unprecedented 100 percent of personal disposable income; corporate debt is a record 74 percent of corporate GDP. The Fragile Middle Class suggests that the demand driving the past decade's boom has been created largely by borrowed money. If anything happens to disrupt income flows, there will be widespread defaults and the expansion will stop short in its tracks.

But the book also implies that the culture of this debt-driven boom is not, as Lasch or Bell might have it, one of frivolous materialism. People take on debt--and, if they're unlucky, enter bankruptcy--by dint of their efforts to live up to older bourgeois norms. One sign of this trend is that the self-employed are disproportionately represented among the bankrupt. Another is that about 50 percent of those surveyed are homeowners; often, it's mortgage debt that drives them into Chapter 7. Cultural theorists and conservative moralizers claim that a childish consumer ideology undermines the upstanding, decent norms of a simpler era. But bankrupts appear to rack up debt in a struggle to achieve a material position that will grant them the autonomy they're supposed no longer to want. They aren't buying fancy gimmicks or diamond necklaces; they are starting businesses, buying homes, trying desperately to act like members of the old-fashioned middle class. In other words, they, too, accept the idea that whether they stay "middle class" is a question of personal rectitude, not one of social policy.

In highlighting the ways in which consumption masks a longing for financial autonomy and respectability, Sullivan, Warren, and Westbrook differ sharply from social critics such as Juliet Schor. In Do Americans Shop Too Much? (a collection of essays that first appeared in Boston Review)Schor argued that American consumers have entered "a new consumerism" in which there is a "growing disconnection between consumer desires and incomes." No matter how much we raise wages, she suggests, consumer wishes will only continue to grow, since people want to buy things for all kinds of irrational psychological reasons. Whereas Sullivan, Warren, and Westbrook suggest that Americans drive themselves into bankruptcy in a quest for financial security, Schor argues that hyperconsumption of luxury goods is the primary way in which people demonstrate their social status and that therefore, regardless of their actual financial situation, they will want to acquire ever more elaborate symbols indicating material well-being. So instead of focusing primarily on economic problems, Schor suggests that we must rethink the role of consumerism in our culture: "Somebody needs to be for quality of life, not just quantity of stuff."

This is a radical position for an economist to take, but it is very much in keeping with Americans' reluctance to consider economic or cultural problems in terms of political power rather than personal mores. Bell and Lasch bemoaned the mania for consumption in the late 1970s, the very moment when unions were being crushed and the welfare state attacked. Instead of treating the destruction of the egalitarian economic institutions of the postwar era as a political crisis, they would have had Americans turn inward and examine their own consumerism. Perhaps in early-nineteenth-century America, when most economic activity really was centered in the home, the idea that individual ingenuity could provide financial security made sense. But in a modern society, only collective, political action--labor unions, pensions and health insurance, full-employment policies, and protections for the unemployed--can guarantee security for anyone.

These kinds of social reforms, after all, are precisely what created the American middle class in the decades after World War II; now that they're being dismantled, it should hardly come as a surprise that an alarming number of American workers are in desperate financial shape. What is surprising is how many of our social critics want to portray this problem of political economy as one of cultural crisis, with solutions to be found in the realm of private morality. This "great evasion," as William Appleman Williams put it, of problems of class and political power, can only lead to apathy, confusion, and deepening uncertainty for the fragile middle class. ยค