High debts mean deeper recession

Visa credit card in wallet

TEXT OF INTERVIEW

Scott Jagow: I've been reading stories about people buying food and gas on their credit cards cause they don't have enough cash. That's not a good sign for the economy, which is very much driven by consumer spending. If people have too much personal debt, they won't be buying anything but food and gas.

Economics professor Steven Fazzari says what this adds up to is a deeper recession than normal.

Steven Fazzari: The recession of 1990 and 1991, as well as the recession of 2001, were somewhat milder because consumer spending held up reasonably well. If we look back to the middle 1970's or the early 1980's, when we had deeper recessions, consumer spending dropped during those periods rather significantly. So as we go into this period, when high debt is likely to cause cut-back in the household sector, we have to expect that the recession will be deeper than what we've seen the past two downturns in the economy.

Jagow: But exactly how does that personal debt affect the bigger economy?

Fazzari: When consumers are building up that debt, it's a stimulative factor for the economy, because it allows them to spend more and creates more revenue for business. But when they have to pull back, when they have to pay down that debt, consumer spending necessarily has to fall, the saving rate has to rise to make the pay-off of the debt possible. The economy is going to slow unless there's some other source of spending that comes in to fill the gap where consumers have left.

Jagow: What do you think we should do about this?

Fazzari: It's a hard problem. In the short term, it's going to be very difficult to do anything to prevent a recession, and probably to prevent a rather long and deep recession. Over the longer term, it would probably be better to have a system that relied less on consumer debt, maybe more on higher incomes, faster wage growth, stronger investment, stronger export markets to help sustain the economy in the future. So we don't rely so much on building up debt or having a housing bubble or a NASDAQ bubble or the other kinds of things that have supported the economy in recent years.

Jagow: Professor Steven Fazzari at Washington University in St. Louis. Thanks for joining us.

Fazzari: It's been a pleasure.

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