What to do about Household Debt?
It’s a funny old economy we live in. The release of today’s national balance sheet accounts has aroused great concern about the rise of the ratio of household debt to personal disposable income to a new record of 148%. Mark Carney and our banks want – quite rightly – to discourage further borrowing to prevent a disaster for highly leveraged households as and when interest rates rise, or unemployment rises.
Meanwhile, on the asset side, households and unincorporated businesses are sitting on a mountain of cash and short-term depositsÂ to a total of $946 Billion, or about one quarter of all financial assets.
It seems that those with money are sitting on big piles of cash earning next to no interest, while those without it are borrowing far too much.
We need much more information on the incidence of debt across the wealth distribution. Yes, savers tend to be older than borrowers, but there is much more to it than that as shown by episodic surveys of wealth. Those at the top of the wealth and income spectrum have much, much greater net financial assets than those at the middle and bottom.
Could it be that an appropriate policy response to the rising indebtedness ofÂ lower and middle income households, especially younger families with big mortgages,Â might be toÂ increase income transfers such as child benefits and earned income tax credits , paid for by higher income taxes on the high income earners who are most likely to be big savers?
With the economy still operating well below potential, should we not remember the Keynesian insight that it is stimulative to transfer resources from those with a low propensity to consume, to those with a high propensity to consume?
In short, rather than lecture often struggling households about taking advantage of those low interest rates to stay afloat, maybe Mark Carney, Jim Flaherty and Bay Street should be out there talking about the merits of using the tax/transfer system in a re-distributive way to shift resources from those sitting on cash, to those who would surely spend it if given the chance?