Commonwealth Forum ponders middle-class debt crisis

MUCH HAS BEEN WRITTEN about federal and state governments spending beyond their means, but many middle-class American households are also awash in red ink. At the Commonwealth Forum “Going for Broke: Middle Class Families on the Financial Edge,” held on December 5 at the Omni Parker House Hotel in Boston, panelists discussed the reasons and remedies for the growing problem of household debt. Robert Keough, editor of CommonWealth, moderated the forum.

Elizabeth Warren, author of The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke (see “Doubling down,” CW, Fall 2003), said the idea that Americans are spending too much money on things like “cappuccinos and $200 tennis shoes” is a myth. “Families have cut much of their consumption to the bone,” said Warren, a law professor at Harvard University. She noted that the rising costs of necessities such as a home, health insurance, transportation to work, and day care leave families with almost nothing to cut back when times are bad. Warren also charged credit-card companies with taking advantage of families in tenuous financial situations. “We have deregulated the credit industry and set them loose,” she said. “It has become far more profitable to lend to people at the margins.”

Robert Frank, an economics professor at Cornell University and author of Luxury Fever: Money and Happiness in an Era of Excess, echoed Warren’s theme of American families struggling to stay in the middle class. Since the 1970s, he noted, “There has been an explosion of income distribution at the top, none in the middle, and a loss at the bottom.” But Frank argued that changed spending habits are also to blame for the growing number of families in debt. “More spending on top,” he said, “has an influence on people’s spending needs in the middle,” adding that “what you feel you need depends on what other people have.”

Frederick Breimyer, a regional economist at the Federal Deposit Insurance Corp., said that he didn’t want to judge the spending decisions of middle-class families. But he voiced concerns that today’s wage earners “are probably unprepared for their own retirement.”

Bringing the discussion to the political arena, MIT historian Meg Jacobs, author of the forthcoming Pocketbook Politics in the 20th Century United States, said that “moral condemnation” of consumer spending and borrowing has always been present in the United States, but what is absent today is the idea that “an increase in the buying power of the masses…is essential to promoting capitalism and democracy.” She pointed to the “stagnation of wages [and] the decline of the labor movement” as factors pushing middle-class families into debt.

Keough asked the panelists for ways to bring relief to the middle class. “We’ve got to get back to usury laws,” responded Warren. Noting as well that many families spend more than they can afford on housing in order to move into highly rated school districts, she added, “We must address the sense that public schools have failed us…[and] decouple zip codes from educational opportunity.”

Frank said he opposed a cap on interest rates but did feel that credit companies should be required to provide better disclosure to consumers. He also called for a more progressive federal income tax, saying that it is “the one lever we have” to address income inequality.

Breimyer was less convinced relief was necessary. “There was more angst about the future at the end of the 1970s” than there is today, he noted. “I am not caught up in the sense that this is a point of crisis.”

Meet the Author

Before the panel discussion, Boston filmmaker Tim Wright presented segments from a documentary-in-progress on the “culture of debt.”