Total Consumer Debt Down but Student Debt Up

America’s economy is looking better and better with each passing day.  Not only is the housing market contributing to growth, but corporations are flushed with cash and consumers are steadily paying down their debts.  Moreover, the net exports are meaningfully improving because of the energy renaissance in North Dakota and Pennsylvania.  GDP (gross domestic product, the measurement of everyone’s income all combined) could rise at a 3 percent rate in the first quarter as a result.  If such a growth rate can be sustained for the remainder of the year, then it would mark the first “field goal” success for President Obama.  Historically, GDP in America grows at 3 percent a year – the reason for using the 3-point field goal analogy.  President Bush kicked two field goals in his eight years, while President Obama has yet to make one to date.

Crawling out of a deep recession is not going to be easy because of the financial market collapse.  Generally the deleveraging process of consumers needing to save more and banks needing to rebuild capital (by lending less) take years to complete.  This transitional phase means less money circulating through the economy.  But the deleveraging process could soon be ending.  Re-leveraging of borrowing more to spending more could be in store to provide that extra kick to the economy.

The consumer credit card debt has fallen meaningfully in recent years.  Part of the reason was due to banks lowering the credit card debt limit amount, which automatically forced consumers to borrow less.  Interestingly, credit card delinquency rates have been tumbling down, far faster than mortgage delinquency rates.  Consumers evidently never want to lose the plastic card, though are willing to lose the house.  Or maybe only the homeowners in Illinois, New Jersey, New York, and other judicial foreclosure states, where not paying a mortgage does not mean getting kicked-out of a home for at least a couple of years, are keenly focused on keeping credit card payments current, though at the expense of a much slower housing market recovery in these states.

The rising student debt load should have policy implications.  Before automatically falling in love with the idea that more college students are good for society, we should look hard at what works and what doesn’t.  A look back at two past great revolutionary educational achievements may provide clues about the right public policy.  Kindergarten was introduced in Germany speaking regions in the 19^th century with the belief that earlier the start the better the outcome.  Germany at the time was not even a country, but a glob of hundreds of different principalities speaking a common language but with no single national cohesion.  But after a national unity orchestrated by Bismarck and better educated workforce, Germany experienced an economic miracle (and unfortunately, a military rise).  To this day a phrase like precision German engineering carries a very strong image.

Another educational revolution occurred in the distant reaches of the Soviet Union.  In places like Uzbekistan and Kirgizia, the literacy rate had been less than 5 percent not too long ago.  It was normal for women to have 10 or so children during that era.  But the introduction of the Russian language and forced schooling raised literacy rates to over 99 percent in few short years.  After acquiring education, women were having only 3 or 4 children as they wanted to spend more time reading about the happy and unhappy families in novels like Anna Karenina.  All good for the mind.  The eventual collapse of the state-run economy eviscerated people’s lifetime savings, both for men and women.

The lesson appears to be that promoting education just for education sake is insufficient.  The education must provide skill sets necessary for an ever-changing dynamic economy.  Only from having a secure job and rising income will it permit people the leisure time to read great books.