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A nation of borrowers

Using credit cards and retirement funds to get by.

Jared Bernstein

is a senior economist at the Economic Policy Institute

Hey, we thrifty Americans should all take a bow. Our national savings rate just crept above zero, clocking in at 0.2 percent of income in the first quarter of this year, up from a goose egg at the end of last year!

OK, so we're not a nation of savers; at least, not anymore. Our long-term savings decline is worrisome in and of itself; many economically stressed households currently have little to fall back on. But of even greater concern are (a) our continuing dependence on debt, and (b) the sources of our more recent borrowing.

Home values are tanking, and more traditional credit lines are chilled from the fallout of the bursting housing bubble. So a lot of folks are borrowing from some not-so-advisable sources, including their retirement accounts and, much worse, their credit card companies.

Just over the last two years, the share of people borrowing from their 401(k) retirement accounts doubled, to 18 percent from 9, according to the Boston College Center for Retirement Research. And Federal Reserve data reveal that credit card debt grew at a yearly rate of 8 percent so far this year, compared with 3 percent in 2005.

Relative to bank or home equity loans, borrowing from these sources is both risky and costly. As it is, most of us are not saving enough for retirement. Only half of the workforce participates in a pension plan at all, and borrowing against it chips away at the principal, leaving less to compound over time. And given the high rates, fees and penalties associated with credit card loans relative to bank loans, that's an even worse deal.

None of this is rocket science, and it's fair to presume that a main reason for this new trend is that folks don't have a lot of choice right now. Moreover, there's a lesson regarding the new economy here: Debt became a much larger driver of growth in the 2000s than before. Now that the main channels that financed all of that borrowing are closed, we've got some tough lessons to absorb.

Consider this. Forever in American economics, the mantra was that "consumer spending is two-thirds of the economy." Yet, during the last decade, that share climbed to 71 percent, the highest on record, a shift equivalent to $575 billion today.

At the same time, real incomes for most families were flat. Even though the 2000s have been a period of fast productivity growth, the nation's real median income - the income of the family smack dab in the middle of the income scale - was actually a bit


in 2007 than in 2000.

So how do we end up with flat income growth yet soaring consumption? Two ways.

First, note that I said "most" families' incomes haven't gone much of anywhere in recent years. Well, all of that productivity growth had to go somewhere, and most of it accumulated at the top of the income scale. The top five hedge-fund managers earned $12.6 billion last year, the equivalent earnings of the bottom

nine million

workers. Those high-enders generated a lot of that extra spending.

But the second source is the bigger story, and it is, of course, borrowing. As incomes stagnated for many yet consumption soared, we made up the difference with borrowing. Household debt, including mortgages, just about doubled in seven short years (2000-07), from $7.4 trillion to $14.4 trillion.

With saving rates hovering around zero, where the heck were we borrowing from? From our homes, of course, appreciating at double-digit rates, leading to a powerful so-called wealth effect. That's the phenomenon of feeling and, more important, acting wealthy when your assets are growing in value, even if it's just on paper (which is why economists don't include such wealth in our estimates of national saving rates). So we borrowed and we spent.

That was then. Now, with home prices once again obeying the law of gravity, millions of homes are worth less than their mortgages, and banks are both writing down losses and spooked by their exposure to loan defaults (which is also why the Fed's interest rate cuts have been less effective at freeing up credit this time around).

At the same time, we have a fading job market and paychecks that have lagged behind inflation for the last seven months.

In this climate, it's no surprise we're stuck borrowing from our retirement funds and our credit cards. We (not all of us, of course, but enough of us to bring down the house) bought into a bubble, felt a lot wealthier than we were, got hooked on debt, and our consumption grew untethered from our incomes. Meanwhile, key policymakers, both at the Federal Reserve and the Bush administration, watched it all unfold and even egged it on, as deregulatory fervor and market ideology swamped common sense.

Well, here's a call to return to good old-fashioned economic common sense, where regulators stay awake at the switch, growth is broadly shared, and households prosper through fairly rewarded work -


through borrowing against their retirements or their credit cards.