The debt dance

I’ve already written my piece about the latest Fed report that showed all young people are taking out less car loans and mortgages in the wake of the recession. The report showed that youth with student debt reduced their mortgage and car debt by slightly more percentage points than youth without it. Extrapolating anything meaningful from that trend — absent at minimum longer time series data covering other significant cyclical events — is a stretch to say the least.

I wont rehash that all here, but I do want to raise a flag about a related issue: the inconsistent way that debt is dealt with in these contexts. The brute fact is that average youth debt levels are falling. In the last five years, average youth debt levels have receded.

But commentators like Annie Lowrey shy away from that statistic and instead reach for polling data about the debt-to-income ratio of young people. According to Pew, from 2001 to 2010, the debt-to-income ratio for people under the age of 35 rose from 1-1 to 1.5-1, a 50% increase.

By itself, this statistic does not provide us any guidance as to whether or not we are facing a debt problem. The debt-to-income ratio has two parts: debt and income. We know that debt has been declining for young people (those aged 25) for the last five years. If debt is declining, but debt-to-income ratios are increasing, then falling incomes are what is driving all of the ratio’s increase. This is what you would expect of course when looking at the aggregate incomes of everyone below the age of 35 on account of there having been a giant labor-market-destroying recession.

Anyone looking at the debt-to-income ratio without an agenda would be sounding the alarms about an income crisis, not a debt crisis. Insofar as average debt levels and the number of households carrying any debt have actually fallen among the youth, the debt side of the debt-to-income equation is actually mitigating an even greater increase in the debt-to-income ratio.

What’s so fascinating about the backwards analyses you see about the debt-to-income ratio stuff is that it often comes from the same people who make the entirely opposite analysis when it comes to talking about the debt-to-GDP ratio. Conservatives have gone all chicken little about the debt-to-GDP ratio shooting up in the recession. But sober analysts realize that the biggest issue here is not debt (which is actually increasing in this example, unlike in the case of youths). It is GDP. The recession took a hammer to GDP, meaning GDP is lower than it should be, which has also contributed to debt being higher than it would otherwise be, and the debt-to-GDP ratio is higher as a result.

The case for a debt crisis in the context of the debt-to-GDP ratio is actually much stronger than the case for such a crisis in the context of the youth debt-to-income ratio. Why? Because federal debt is actually increasing. In the youth debt scenario, it is falling!

I fully understand the macroeconomic differences between sovereign debt and consumer debt and all of that. But this point is ultimately not a macroeconomic one; it is about interpreting data. If a ratio is changing solely due to one of the variables, surely that variable is the one you look towards.