“Credit card debt drops to lowest level in 8 years” reads the headline on the AP story. The story is a pretty straight forward report on how and why Americans have been paying down their credit cards and reducing their household debt loads. This is good news. Our economy, particularly our household budgets are saddled with too much debt, much of it the result of spending too much on that which we cannot afford. Whether by choice or as the result of the sluggish recovery, more Americans are living within their means.
I should say “our means”. Alissa and I are doing the same thing. We reviewed our finances at the beginning of the year and found that we needed to reign in our spending and pay down our debt, and we’ve been working hard to do just that. So what does that mean? Well, we budget and establish reserves. We look ahead to plan for pending expenses. We put off buying toys and we eat out less. Our methodology is that espoused by Dave Ramsey, whose Financial Peace University is taught at our church. Other people use other methods, but if this report is any indication, we Americans are starting to make good choices about debt.
I should pause for a moment to say that Ramsey and I probably have significant political differences. He’s much more conservative than I am. When it comes to finances, he’s a deficit hawk. That’s not bad, in and of itself, but I think that government fiscal policy, particularly on the federal level, is a totally different animal than personal finance. (There’s a post on that topic in the works.) Ramsey seems to treat them more similarly than I think is prudent. That being said, I think his approach to personal finance is pretty good and I would suggest it to anyone who is trying to find a workable approach. Oh, and I do mean WORK-able. Unless you’re starting off debt-free, his plan is an austerity plan and it is hard work. It’s not an automatic, set-it and forget it plan, but it works if you work at it. It’s also somewhat forgiving if you encounter a setback, whether through circumstances beyond your control or by “falling off the wagon.”
My point in this post, however, is not to sing the praises of Dave Ramsey. It’s more speculative. You see, there are other impacts of people not buying on credit. We see it in various places. We see it in the reports that credit card companies are looking to increase revenue from “good” customers because they’re losing it from “bad” customers. It’s also probably an element of the slow recovery. If Americans are not spending as much, it would stand to reason that products are not moving as fast as they did in more prosperous times. If production and distribution facilities are set up for that higher level of demand, then their demand for workers is going to be lower as well, thus slowing the recovery of the labor market and the overall economy.
So that begs this question. Is the American economy too dependent on debt? If people continue to live within their means , which should be considered a good thing, will that actually harm the economy? There should be a long-term benefit to lower consumer debt, but will it come in time to avoid irreparable damage to the national economy? Or, do we need to rethink our economic values and assumptions?