You got a raise. So why does it feel like you’re still struggling?
New research finds that rising debt payments have swallowed more than half of real income gains for a typical one-earner household since late 2022. Angela Hanks of The Century Foundation joins Goldy and Paul to explain how debt is deepening America’s affordability crisis, trapping workers in bad jobs, and weakening their bargaining power. And why fixing the problem requires more than just getting people out of debt.
Angela Hanks is Chief of Policy Programs at The Century Foundation and a coauthor of the report: Half of Every Dollar: How Household Debt Eats Into Workers’ Income Gains.
Social Media:
Further reading:
Half of Every Dollar: How Household Debt Eats Into Workers’ Income Gains
Men at Arms by Terry Pratchett
Sam Vimes ‘Boots’ Theory of Socio-Economic Unfairness
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle out economics is the answer.
Goldy:
Because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
Paul.
Paul Constant:
Hi.
Goldy:
You’re not Nick.
Paul Constant:
I am not Nick. Sorry.
Goldy:
But speaking of which, Paul, as you know, we both met, we were at The Stranger where we were these low paid alt weekly journalists. And I had spent almost a decade blogging before that where I was mostly an unpaid blogger/journalist. And one of the great things about working for our plutocratic overlord, Nick Hanauer, who is not with us today, is that he pays us a very generous white collar wage.
Paul Constant:
It’s true.
Goldy:
For you, the first time in your life, for me for the first time in like 20 years. So I spent my peak earning years earning very little money. And by the time I started working for Nick, I had about $30,000 in credit card debt. I had a car loan on a car that was getting old. I had a mortgage, which put me in a better position than most of our colleagues at The Stranger, almost all of them at the time. And the first thing I did was I paid off those credit cards and then I actually bought a… Not only did I pay off that car loan, I bought a new car for cash eventually. And then I paid off my mortgage, which I think financial advisors would say it was a stupid thing to do. It was not a high interest loan at the time, but it felt really good to be debt free.
Paul Constant:
Well, while we’re giving out bad advice, I also have to say before I worked at The Stranger, I made even less. I’ve worked at Walmart, I’ve worked at Wendy’s, I’ve worked at Sears. I worked in a lot of retail. I worked in bookstores, both corporate and independent. And I think one of the reasons I was able to do that is I followed my parents’ advice of not getting a credit card and not picking up any debt at all. And this meant that I was scraping absolute bottom. I was literally living paycheck to paycheck, but I did not have the temptation of digging myself a hole that would get worse and worse as things went on. Of course, when it came time for me to, once I worked at The Stranger and saved a little bit of money, and then when I started working for Nick and saved a little more money and it became time to buy a house, the person at the bank informed me that it would’ve been better for me to have bad credit than no credit at all.
And so it was a little bit of a challenge, but honestly, I think if I had access to credit cards, I could have gotten myself into a lot of trouble.
Goldy:
When I started working at The Stranger, I had no credit card debt. I knew I needed, I told them I needed $50,000 a year, which was not a lot of money. They gave me $40,000 a year. I was there three years before they fired me. And lo and behold, my budget was right. I was now $10,000 a year was what I went into debt. And I had a child and a house and a car and an old house where things kept breaking. It wasn’t going out for fancy meals and taking vacations. It was just scraping by, which in fact is how most Americans are using their debt. When people fall into credit card debt, it’s because they need to use that to get by. When they have student loan debt, it’s because that was the only way they could afford a college education. When they have auto debt, car loans, it’s because you need a car to get to work.
It’s not people, mostly people who are being irresponsible with their money. It’s people who don’t earn enough money and incurring debt that is at very high interest rates.
Paul Constant:
And one of the more interesting things about debt I think is that a lot of our economic metrics have not considered how debt impacts people’s lives. And that’s part of the reason why we’ve seen all those headlines from 2023 on saying the economy’s doing great. Why are working people so upset? And we’re seeing sinking consumer confidence numbers and things like that. And a lot of that is because of the debt that is not showing up in a lot of these economic reports.
Goldy:
Right. We know that the Biden administration, people in the Biden administration struggled with this. All the mainline economic numbers said the economy was doing great. Inflation was coming down-
Paul Constant:
Yeah, we were leading the world.
Goldy:
… real wages were up, consumer spending was up, unemployment was low, yet people were really upset about the economy. And the Trump administration is facing the same thing because they look at those top line numbers, Bessent and others saying, “This is the best economy ever.”
Paul Constant:
Golden age.
Goldy:
Yeah. If you’re in the top 10%, especially if you’re in the top 1%, or especially if you’re in the Trump administration because you’re just raking in money hand over fist with all that corruption, best economy ever. And they’re having trouble connecting. Well, they’re not even bothering trying to connect with voters because in their world it is the best economy ever. And those numbers support it, low unemployment, what else more do you want? Turns out if you start looking at debt and how it is distributed unequally throughout the economy, those rising real wages, which we don’t have anymore, past six months we’ve had declining real wages. But even when it was rising, it really wasn’t rising in terms of compared to not just inflation, but also your debt payments.
Paul Constant:
Yeah. And that’s why I was so excited to see this new report from the Century Foundation and Protect Borrowers that looked into how debt is actually eating into workers’ incomes, particularly over the last four years and what that means to actually live in the economy. So the report is called Half of Every Dollar: How Household Debt Eats Into Workers’ Income Gains. And let me tell you, Goldy, I read a lot of reports. Every week I work doing research for our newsletter, The Pitch, and I read a lot of reports. And this report is one of my favorites in recent memory because it clearly identifies a problem, it breaks new ground, it’s well considered. I feel like it breaks some walls in a way that a lot of economic reports don’t. It really puts a finger on a real problem that people were having trouble articulating.
Goldy:
Yeah. I knew the basics that this was an issue, but man, the way they break it down in this report, the clarity is very impressive. And we will of course provide a link in the show notes. We encourage you to read it, but also we encourage you to listen to our conversation with one of the report’s authors, Angela Hanks, chief of policy programs at the Century Foundation.
Angela Hanks:
I’m Angela Hanks. I’m the chief of policy programs at the Century Foundation. We are a more than 100-year-old think tank that has its roots in the New Deal and has worked on a variety of domestic and international policies from the beginning up till now. We focus on health, labor, education and the economy. And I’m here today to talk about some of the work that we’re doing on consumer debt, really diving deep into consumer debt as a way to understand what’s happening in the economy and why people are so concerned about their financial futures.
Goldy:
We just saw there were report that real wages have declined now for six to eight months and people talk about that creating a lot of the pain in the economy right now and all the voter unhappiness. But your report, it’s actually, when you look at consumer debt, it’s far worse than that. Tell us what you found.
Angela Hanks:
Yeah, so I think over the last several years, we’ve all kind of heard and seen the same things where we see unemployment going down, save the last six months, which we can talk about. There was a period where real wages were rising and yet in survey after survey, when you look at consumer confidence, consumer sentiment, you see that people and you look at, I mean, we’re doing polling on this, you see what people are saying about their own financial lives and it’s pretty disturbing. People are deeply concerned and pessimistic about the economy. They’re worried about their own financial lives. They’re telling us in polls that they are struggling to pay for medication. They’re struggling to pay for meals.
We did a survey last year that showed one in three people said that they or someone in their household had skipped meals in the last year in order to make ends meet. When you look at the top line indicators that we use to measure the strength of the economy, it tells a quite different story. And really, I think we’re starting to see that those things are really starting to deviate from people’s lived experiences. And so this is not to trash the traditional economic data. We should still look at the unemployment rate every month. And I think we’re all still waiting for the clock to turn from 8:29 to 8:30 to look at the CPI and other data. And I think what we know is that it’s not telling us enough about what’s happening in people’s homes and in their pocketbooks.
So we did this report trying to better understand actually as a starting point, how consumer debt was impacting the labor market. So really trying to take an issue that is often thought of as a question of prices and think about the labor dynamics at play when it comes to consumer debt. And along the way, we found some pretty striking things about what’s happening to real wage gains. So first of all, like you said, we actually know that real wage gains are a fiction. At this point, we’re not getting them, but when we were getting them, what our report found is that since the end of 2022, a significant portion of people’s real wage earnings is actually going straight out the door to debt payments. That amounts to over the last four years or three years, people have seen about $109 of real wage gains on average. 57% of that has gone toward debt, which means that 52 cents on every dollar of real wages earned in the last couple of years has gone immediately out the door to debt.
Now that’s credit card debt, auto loan debt, student loan debt in our analysis. It doesn’t even include a variety of other debt, but really this shows that even if you paint sort of the rosiest picture of what’s happening with people’s debt, you see something that’s pretty disturbing. Real wage gains actually feel a lot lower to people than the data showed that they are. And as a result, you kind of start to understand why people feel so pessimistic about the economy. It’s because they’re being told over and over again, “You’re doing great. You’re getting these real wage gains. Don’t you see you’re up 0.3% from last month or at least they’re not going down or whatever.” And the reality is for some people for quite a long time, they’ve been not nearly as high as we thought they were. And for many people, we’re actually seeing that real wages are declining because so much of this is going out in debt service.
Goldy:
And those numbers you just gave us, those are in the aggregate. What you find is that the lower down the income scale, the larger these debt payments play a role. In fact, when you count this in, people are losing out there. They’re seeing negative wage gains.
Angela Hanks:
Yes, that’s right. I mean, we started out, again, trying to tell a story about the labor market, which this does, but really it tells a story about income inequality and wealth inequality more broadly. So we looked at households by income tier, and if you look at the top income quintile, that percentage that I mentioned, 57% going to debt service is somewhere closer to 32%. But if you look at the bottom income quintile, it’s 72%. I mean, that is stunning. That is like three quarters of your dollar is going straight out the door to debt payments month after month. And meanwhile, things are getting more expensive. You’re trying to figure out how to make ends meet. And these are people who don’t have a lot of extra breathing room in their lives to begin with. And that’s when you start to get into the real consequences for people in their actual lives where they don’t have the kind of cushion where they can bear not getting a raise for years at a time as prices go up.
They can’t bear having something like a car accident or your kid gets sick. Any of these things for people who are living that kind of marginal economic life are going to be catastrophic. And this really lays out why people are feeling increasingly strapped and increasingly worried that their own financial footing is on pretty uncertain ground.
Paul Constant:
One of the things that really struck me about the report is the revelation that not all debt is created equal. The median car payment is $462 a month for borrowers in the bottom fifth of the income and 495 in the top fifth. It’s almost the same bill and they’re both obviously drawing very different incomes. And there’s also sort of a contrast between people borrowing against their homes and assets to build wealth and others borrow to cover daily necessities. And I was wondering if you could talk a little bit about the differences, what it means to be in debt if you’re rich and to be in debt if you’re poor.
Angela Hanks:
Yeah. I mean, I think one of the things that this report does is really kind of challenges that good debt assumption in a couple of ways. So I would say one, as we were looking at the amount of money that people are paying toward debt service and their real income gains, we didn’t include mortgage debt in the equation for a couple of reasons. One, we wanted to be able to compare the kinds of debt that are really weighing people down. And like you said, mortgages are a little bit different. I would say there’s even nuances in there when it comes to what neighborhood do you live in and your race and your income. And even there, the question of good debt still looms large, but I think it’s hard to argue that as you’re paying your car payment month over month, that you’re getting an appreciating asset.
We all know it loses value the moment it goes off the lot. And cars in particular are really interesting actually. So we did a previous report looking at auto loan debt a couple of months ago, and there a couple of things stand out. Like you said, there is very little difference in the monthly payment between people who are at the top of the income spectrum and the people who are at the bottom. And there’s a few reasons for that. One, frankly, there’s just no cheap cars anymore. So this isn’t people going out and buying a Lexus when they can really afford a Honda. This is actually now the Honda cost what a Lexus used to. And so people are just having to take on bigger and bigger loans in order to have something that helps them get to work, that helps them keep their job, that helps them get their kids to school.
Most people in America require a car to maintain their employment, to maintain their daily lives. And so this is an expense that is not optional for most people. And there are very few people in the world who can afford to lay down $30,000, $40,000 $50,000 for a car and walk out the door debt free. Most people, almost everyone is putting this into some kind of installment payment. And so as we’re seeing fewer cheap cars, we’re seeing a lot of riskier lending terms pop up in order to meet demand for cars, but also this is coming at the expense, especially of lower income lenders. So in addition to seeing really high rates, we’re talking a 10% loan on average for a car, we’re also starting to see a lot of extended loan terms. So more and more people are getting a seven-year loan on their car.
And this is, again, 30-year loan on your house is a relatively safe bet. You’ll pay it off at some point or you’re likely to pay it off and you’ll have that asset that’s appreciated at the end. Seven-year loan on a car is a huge risk. You don’t know what’s going to happen seven years into your car. I don’t know cars, but the engine might stop working or there’s some kind of mechanical failure that costs you thousands of dollars that you’re having to roll over into a new loan. You have to get a new car because someone hits you.
This is something that really doesn’t pay off for people over time, but is taking, especially for people who are lower income, a huge amount of their paychecks in order to be able to have this thing. And it’s kind of creating this hamster wheel for people where they never can get out of something like auto debt, which is supposed to be the temporary thing that gets you to a place where you own your car outright. And now that’s just like you get less and less time of that the more people are taking on seven-year loans.
Goldy:
Right. 50, 60 years ago, the average auto loan was 24 to 36 months. Now it’s 60 to 72 months that you’re paying off your car. The line that really jumped out at me, we talked a little bit about housing versus auto loans, housing debt versus auto loans. This one line, “The groups that carry more of the debt that drains income hold less of the debt that builds wealth.” And you’re not even including the mortgage numbers in there, but it’s a very different type of debt.
Angela Hanks:
Yes, exactly. You don’t pay off your credit card debt and then get to sell it to somebody else, right?
Goldy:
At a gain.
Angela Hanks:
Right. At a gain. You don’t have those same avenues for recouping your investment for these other things. What they are is ways that people are figuring out how to get from point A to point B. So with credit card debt, the way that people are using this, and we know this mostly from polling and other survey data that’s available out there, is they’re using it to meet their basic needs. They’re using it for gas, for groceries, for things that they are not able to afford with a debit card or their bank account or whatever. These are really for purchases that are out of reach for people, and it’s not an expensive vacation to Disney World. It’s like being able to put gas in your car to get to work, be able to put food on the table, be able to go to the doctor and take your kid to the doctor when they’re sick.
And so those kinds of expenses are both incredibly necessary to people’s lives. And some of what this report shows is that people’s paychecks are just not going far enough. The credit card ends up being sort of the source of income of last resort for people who just aren’t getting paid enough. They’re seeing prices rise. They’re maybe seeing their incomes rise, again, not lately, but at the same time, they’re not really seeing the kinds of income gains that would get them out of this cycle. The monthly fluctuations that we see in the wage data are not enough to fundamentally change the way that people can approach decisions about their healthcare or their childcare or their education. They’re really just enough to keep up with what’s happening at prices, and again, not even in any cases recently. And so people are using this debt just to stretch their very last potential dollar.
And then the consequence at the other end of it is they’re doing that just to meet their basic needs, and then they’re paying for the product twice. You’re paying for it on your credit card and you’re paying that over time, but you’re doing it at 20%, 22%, 25% interest. And so these products that are already too expensive are rendered much more expensive when they’re on a credit card. But again, most people find themselves in a position where there just really isn’t a choice.
Goldy:
Right. And these differences, the inequality we see is not just across income levels. It’s very clearly across race and gender at the same income level. And I don’t need to tell you, it’s like the worst is for Black women. They’re getting the rawest deal of all.
Angela Hanks:
Yeah. I mean, so we did a bunch of breakdowns in this report on race and gender, and I’m really glad you asked about Black women because I think this is where you really see the story of how this shows up as a story about income inequality, labor market inequality, and wealth inequality all at the same time. So Black women have lower wages than their peers and they have higher levels of education than their peers. And so Black women, we end up in this situation where we have lower income but more debt in part because part of seeking out that debt in the first place is to raise Black women’s fortunes on the income side. So you’re taking on debt for student loans in order to be able to increase your prospects in the labor market. And what happens in the end is you don’t see those returns in the labor market as the same as your peers who are white or male, and you still have the debt that you have to pay off.
And that debt is often higher because of the household wealth inequality that we know exists between Black and white households. So you’re sort of in this situation, particularly for Black women, where it’s the combination of having little financial cushion in terms of wealth in order to be able to weather financial storms, but also take on big expenses like an education and the rewards that you get for that in the labor market are lower often because of outright discrimination because of your identity. And so it puts those workers in particular in a really compromising place. And we see this show up in the data where Black women are sort of at the most risk of seeing their paychecks being eaten up by debt because of that sort of inequality on the debt and the wage side.
Paul Constant:
And there’s also Hispanic women devoting about 23% their take home pay to debt versus 14% for white men. Sticking with race, what kind of choices disappear when you can only afford your own debt compared to other households who can’t because of this structural inequality?
Angela Hanks:
I mean, pick your financial decision that people make in their lives. We talk about the debt and income, but people use their income to pay for their lives. It’s decisions about what childcare you can enroll your kid in, whether you can send your kid to college, whether you can afford groceries, whether you can afford a car that’s safe enough to drive to work, or do you have to stick with the thing that the mechanic is like, this maybe is going to crap out, but you got to drive it anyway. All of those decisions are taken away from you when you’re spending all of your money just to keep your head above water and pay down your debt. And so it really does create a situation where people are in a position that again, we see from the polling that we’ve done, where they’re making impossible choices about their lives every day. They’re choosing between food and medicine.
They’re choosing between a roof over their heads and a vehicle to drive them to work. They’re choosing between going to the doctor and not. I think that was one of the more disturbing things we saw in some of our polling last year is just the number of people who are putting off medical care because they can’t afford it. And so these sort of start and I think sound like problems of debt, but when you zoom out, you start to see that these are problems with labor market that’s not functioning well enough for people, a healthcare system that’s not functioning well enough for people, an education system that’s not functioning well enough for people. They are really kind of left on their own to piece together what should be kind of systems that work for all of us with debt in a way that makes their lives even more precarious.
Paul Constant:
You’ve said that many of the measurements, the economic measurements we use to gauge how consumers are doing just don’t even count debt. And you did a good job of capturing some of that, but you acknowledge you don’t get only about 85%, 90% of the debt payments. And I was wondering if you could talk a little bit about those that are not in the report. You’ve already mentioned some of it, and also what is the most important part of the life as an American worker right now that we’re not measuring in our regular reports and measurements?
Angela Hanks:
On the things that we don’t measure in this report, so that 52 cents on a dollar figure that I mentioned earlier includes just student loan, auto, credit card debt. What it doesn’t include is quite broad. And that means that when we’re talking about 52 cents on the dollar, we’re talking about the rosiest picture possible. The actual figure is actually probably quite a bit higher and we don’t know for sure because it doesn’t show up in the data that we have access to. But as folks are looking at this, I would caution you to think about this as kind of best case scenario. This is what people are holding, but it’s actually probably a lot greater and probably you can see the differences showing up, again, much more significantly depending on the income quintile that you’re looking at with more debt held at the bottom quantiles.
But the types of debt we don’t include is buy now pay later loans, so-called earned wage access loans, which is a payday loan from your employer, which exists for reasons that we can get into later. We don’t include medical debt. We don’t include rental or mortgage debt. We don’t include any other kinds of installment loans that people might have, like that might be your actual payday lender in the corner or others. And so this is sort of the best case scenario. If you’re just looking at these three products, it’s about half of every real dollar in wage gains earned, but more likely it’s much higher than that. The data that’s out there, I love the BLS. I want them to continue what they’re doing and do it unfettered, and that data is really important to understanding how the economy works. And I think that the big wake up in this report is that we need more and better and more comprehensive data in order to be able to really analyze what’s happening.
I mean, we couldn’t do this analysis without the wage data from BLS and from Census to be able to understand this, but I think the analysis that we’re doing really sits alongside the other indicators that are out there. And actually this paper proposes a new indicator that can sit alongside all the others that are out there. It’s called Real Income Net of Debt or RIND, and it is exactly how it sounds. It’s a very descriptive name, but basically looking at this real income, both in the straight out what you get from the Bureau of Labor Statistics, but also then taking into account how much of that is going directly out the door to banks, to credit card companies, to your auto lender, to your student loan servicer in order to better understand how people are experiencing those wage gains. It’s complimentary, it’s not in substitute of, but I think really gives us a new dimension by which to look at the economy.
And then I think your last part of the question was about workers and how-
Paul Constant:
I think that debt strips workers of a certain amount of freedom, right?
Angela Hanks:
Yeah.
Paul Constant:
If you have all this debt that you have to pay off every month, if you walk off the job, you’re not able to pay those debts and then you have even more debt and it just feels insurmountable. So yeah, can you talk a little bit about what that debt is doing to workers?
Angela Hanks:
As a starting point, we talk in the report about debt as a source of job lock for workers. It really is limiting on worker mobility. We know that best way to get a raise is to quit your job and go to a different one. When people have debt, it’s harder and harder to do. You might not be able to afford even one or two days without a paycheck. You might not be able to afford taking a risk on a job that might lay you off a week later because you’re the last in the door and potentially the first out if there’s a round of layoffs. It really does put workers in a more precarious position when they have no financial cushion that can help them move from one job to the next. In addition to the job lock, it also prevents people from using their limited resources to invest in the types of education or training that might help them improve their mobility in the labor market.
And so that is another constraint. But what this kind of boils down to for workers is it really is a limit on bargaining power. One of the best bargaining chips that you have with your employer is your ability to get up and walk away. And when you can’t do that, it means that employers have more power over you and your livelihood and your wages than they should have in the first place. And so debt really acts like an anchor both for workers individually, but also on the labor market more broadly. And we even kind of zoom out in the paper to think about that in terms of the macroeconomic costs as well. If we have a labor market where workers are tightly constricted into the jobs that they have and no one moves, which by the way happens to be the labor market we have right now, as folks have said, a low hire, low fire labor market, that makes for a less dynamic labor market and economy overall.
We want people to be changing jobs. We want people to be getting better jobs. We want people’s incomes to meaningfully go up so they could afford to put that money back into the economy as consumers. And none of those things can happen if you are stuck toiling away at a job that you cannot leave because you cannot even afford a few minutes between paychecks or else your family is going to be completely underwater. So the stakes for workers here are incredibly high as individuals, but I would also say for our economy writ large, it really puts us in a more precarious place overall when workers don’t have that kind of mobility that they need.
Goldy:
Right. It’s interesting because on the right, one of the pushbacks to this idea that of rising income inequality is that, “Oh, but not if you count government transfers. If you count government transfers, the inequality…” So they’ll want to work that back in, but they don’t work in the disparity in terms of debt. And also, we don’t really have good numbers, unless you know something I don’t know, on the CPI on inflation and how it impacts different groups, both by income and when you get to housing by race as well. So all of that is missing from these broader numbers.
Angela Hanks:
It is hard to square how at this particular moment where we are reaching robber baron levels of wealth at the top and increasingly concentrated stock market among a couple of companies that are propping it up and the introduction of trillionaires into our economy and society that the income inequality isn’t a problem. So I think we could just dismiss that as unserious because it seems kind of silly. But on this question of are we measuring the right things, I think that’s exactly right. We’re missing a lot in the existing data on what’s happening to people and people are finding new and creative ways to navigate around that. We actually hosted a paper from an academic that he released over the summer looking at Nielsen data to show the differences in inflation by income group. And one of the purposes of that was to say when the top line inflation data tell us this, what people are actually experiencing fluctuates quite significantly across households.
And so some people are experiencing much higher inflation than their peers. And you see that kind of bear out similar to this report, again, by income where lower income people are experiencing higher inflation than their higher income peers. And so there’s a lot of ways to understand what’s happening to people, but I would say the thing I feel most clear on is that we have enough evidence between what we’re proposing and the kind of analysis that other people are doing that’s kind of digging into what’s going on with people to be able to say that people are not making this up. They actually are experiencing a real crunch in their household finances and they are feeling like they’re on their own. That’s the reason these debt products are getting so much play because they don’t have anywhere else to turn. The transfers that the right would tell you are good enough to get people by clearly are not enough.
And there’s different ways to solve that. Of course, there’s policies that you would want to increase the transfers that we’re making to people, but also people need a raise. They just need more money in their pockets and that’s a good place to start. And it can’t be this piecemeal, you get 0.1% month over month or whatever, really has to be meaningful in order to make a difference in people’s lives.
Goldy:
But you also proposed debt cancellation as a possible solution. We know how controversial that was when Bernie Sanders and others proposed student debt forgiveness. And part of the pushback on that was that, “Oh, this would just be welfare for rich people because they’re the ones sending their kids to college.” But your data actually shows the burden falls disproportionately on the lower income deciles.
Angela Hanks:
I’m so glad you asked about this because this gives me an opportunity to talk about one of my, I don’t know, favorite, most hated myths, which is we’re going to help rich people with college loans. I [inaudible 00:33:18] people when I went to college who would talk about how their parents frowned when they had to write a check. I had no idea that people had the amount of money where they could just sit down and write a check for college and just send it off in the mail. That was new information to me that that kind of wealth even existed. And that is how rich people pay for college. They do not take on a student loan that they hold for 30 years and can never pay off. People who do that are people who have low incomes, who don’t have any household wealth, who are using student debt as an instrument to try to get to the next thing to try to improve their fortunes for the next generation.
It’s not rich people. And so anyway, just that’s a little…
Goldy:
And we’re not just talking about percentage of income. It’s actually actual dollars that lower income student loan borrowers have higher debt payments in dollars-
Angela Hanks:
Right. Exactly.
Goldy:
… than people with higher income.
Angela Hanks:
And that’s where the wealth inequality shows up because you’re seeing people who the first dollar that they’re paying for college is a loan. There’s not like you or your parents grimped and saved to be able to put some kind of initial payment down. It’s that every dollar that you need to pay for college is a loan when you have no wealth that supports that endeavor. And so you see that show up in student loans in particular, but I think in other places as well. And of course this impacts people’s ability to get medical care or housing or other things when they don’t have those resources to draw on when they have a major financial expense come into their lives like college. But the reason we start with debt cancellation is, I don’t know, this may sound scary to say, but I would say debt cancellation in some ways is the low hanging fruit here.
It’s relative to some of the other things that we mentioned in the report. It could be somewhat inexpensive depending on what you’re talking about. I mean, you hear stories all the time about how cities and states are able to purchase medical debt for pennies on the dollar much more cheaply than you can rewrite your whole healthcare system at the state or municipal level or whatever. And it’s something that would immediately give workers a raise. So I think obviously that’s not a substitute for the things that we can do more directly to raise workers’ wages, but when we’re talking about changing that 52 cents on the dollar figure, if you just wipe out a bunch of sources of debt, that’s one way to get the balance to shift pretty immediately. And I would say it’s just the beginning. That is the first step to help people get on stronger footing, but really the kind of big challenges that are creating this debt for people in the first place live way upstream.
And so we have four sets of solutions that we talk about in the report that begin with debt, but end with some bigger structural changes to our economy that would help people live better economic lives. So again, starting with things like debt cancellation, we also have quite a bit in there about going after predatory financial products and institutions. So this is where you get into some of the loan products that we can’t even cover that people are increasingly turning to like buy now pay later, earned wage access. The fact that your employer can become your debt collector certainly has an impact on your job mobility because now they have even more power over you. And so addressing some things like that as well. Again, there’s a lot we need to do to more directly raise wages for workers, including raising the minimum wage, but also increasing worker bargaining power through organizing that can help people bargain more directly with their employers either at the firm level or the sectoral level in order to get those higher wages over time.
We need a labor market that’s free of discrimination. We talked about this when we talked about Black and Hispanic women, but you see people who are going to school, getting the education that is supposed to be a ticket into a higher paying job in the labor market, not see those gains in part due to discrimination. So having a really strong enforcement arm helps with that. And then finally, highest upstream, we have to solve these big financial problems that are holding people back. And that stuff like healthcare, childcare, the cost of education, really the things that are the biggest sources of people’s paychecks every month going to things like very expensive and rising healthcare premiums, very expensive childcare, very expensive education that’s making it harder for people to get ahead. I think all those things kind of work together. I would love to see Congress act on any one of them would be wonderful, but really it is about solving the problems for people right now and then really solving at the root for these things that are driving people into debt in the first place.
Paul Constant:
So we always ask our guests the magic wand question, which was if you could wave a magic wand and change anything about our economy, what would you change? I think you might have already addressed that. Were there any other policies that you’ve talked about in the report that you wanted to discuss?
Goldy:
Or one that stands out far above the others is the first thing you would do.
Angela Hanks:
Oh gosh. I mean, I really can’t pick. It’s like picking your favorite child. I can’t do it. But I will say this, and I was warned about this question, so you would think I would have a better answer, but I think maybe I’ll talk about a way that I would know it had happened. So I mentioned a little bit at the beginning the reality that labor share of income is at the lowest level on record and what that means for our economy writ large. And I think if I had a magic wand, I would just flip it to get back to where we were 50 years ago, in part because that is the things that we lay out in the report are a path to get us there. And so magic wand, we’ve already done it and we flipped labor share back to where it was a generation ago, but absent that, let’s do all these things and then try to push it in that direction over time.
Paul Constant:
Wow. I think that might be my favorite magic wand answer on record, so thanks for that.
Goldy:
So we’re just going to reverse that whole $79 trillion upward redistribution of income and wealth.
Angela Hanks:
I mean, this is why it’s a magic wand.
Paul Constant:
Exactly.
Goldy:
That’s right. Well, orthodox economics is all about that invisible hand and it’s got a wand in it.
Angela Hanks:
Right, exactly.
Goldy:
[inaudible 00:39:21].
Angela Hanks:
Invisible hand is pushing up corporate profits over time.
Paul Constant:
So the last question-
Goldy:
Final question, Paul.
Paul Constant:
The last question we ask everyone, why do you do this work?
Angela Hanks:
Because I live it and my family lives it and my community and everyone I know and people who I don’t know live it every day and we got to do something. I mean, people are really struggling. It’s both depressing to see it show up in the aggregate data we look at. And I find myself increasingly talking to people in my life and people I know who know other people who really are just struggling so deeply to just afford the basics. The number of times I feel like I hear in just casual conversation things are so expensive or people worried about their jobs or about whether they’re going to get a raise or laid off or whatever. People are really sort of suffering from this lack of power in our economy. And I don’t know, I think we should fix that and we have the tools to do it and so we should.
Paul Constant:
There’s this economic theory that I think about a whole lot, and I bet you haven’t heard of it, Goldy.
Goldy:
I haven’t heard of an economic theory?
Paul Constant:
I know. I know. It’s hard to believe. This one, are you familiar with the author Terry Pratchett?
Goldy:
Yes.
Paul Constant:
Terry Pratchett was a wonderful fantasy author. I had the great gift of interviewing him once in Seattle. He was a wonderful, smart, very funny man. He wrote an amazing series of books that I recommend to anybody age 13 to 130 called the Discworld Series. And in one book in particular, he came up with the Vimes’ Boots theory of the economy. The character’s name is Vimes. And the theory is that because poor people can’t afford luxury products, they wind up spending much more by buying cheap things. And the case he uses is boots. You can’t afford a good pair of boots that will last five years if you’re working on a night watchman salary, which is the character in the book is living on. And so you buy cheap boots with some cardboard in the soles and the boots fail after six months or so of working and walking on the job.
And so you’re spending more for boots in the aggregate over time than rich people who are able to afford luxury boots that last for 10 years and then can get them resold and things like that. And so the aggregate cost of being poor is so much larger than the cost of one good pair of boots because you can’t afford to buy the damn good boots when you need them. So that kind of made me, this whole report and this whole conversation made me think of that, that corporations, financial institutions, things like that have gotten very good at providing just enough money for people to get by in such a way that they can reap tremendous profits in the form of debt payments.
Goldy:
I’m sorry, did I disappoint you that I was familiar with the Vimes’ Boot theory?
Paul Constant:
Yeah, I thought I got one on you. Sorry.
Goldy:
Yeah, you thought you stumped me.
Paul Constant:
I did.
Goldy:
But it speaks to a larger issue because, and that this report gets to, in that it’s really expensive to be poor. A lot of people don’t get it. It is more expensive to be poor than it is to be rich. And for a number of reasons, one of them is what you said, that cheap stuff is more expensive in the long run, but also when it gets to this, the fact that you have more debt, you need more debt, you could buy that good pair of boots on a credit card and then you’re paying 26% interest over the life of the boots as you pay them off and soon to be higher because the Fed is raising interest rates to deal with rising and… Oh, we wouldn’t want that inflation caused by a war in Iran. So we’re going to raise interest rates. So now your credit card bills are going to go up in everything.
Your mortgage rates are going up. If you have an adjustable rate mortgage or you’re looking to buy a house, you’re really shit out of luck right now. So that increased your cost. It’s expensive. It’s just more expensive to be poor than it is to be rich. Now, the rich spend more money, that’s because they can, but they don’t have to. And that’s where most of the debt comes from is what you have to spend your money on.
Paul Constant:
Yeah. And that was why I really appreciated what Angela was saying. I mean, first of all, her repeated saying that we need to raise wages and recognizing that wages are a significant part of the problem. That is something that we don’t hear enough of, I think, when people are talking about debt. But also I think the proposal for the rind measurement of debt I think is really important because this is something that we were not capturing before fully. We were not getting the full picture of what it’s like to be poor and all the expenses that poor people are paying in the economy that are pulling them out of the economy and making the economy weaker for everyone.
Goldy:
One more insight from this report that I think is important to highlight is I love the way they bring labor power into this equation, that when you have these higher debt levels, it makes it harder to quit your job, to look for a better paying job. It actually reduces labor mobility and labor power. And this is not some radical lefty assertion. This is right there in Adam Smith’s Wealth of Nations. He points this out that employers inherently have more power than their employees because they can last out a strike because they’re not going to have a problem putting food on their table or paying their rent. Whereas if workers strike or quit, they and their kids could be starving within a month or two. It’s really important that what happens is when this increase in debt at lower income levels actually ends up depressing wages.
And that’s just not part of the equation that people tend to think about.
Paul Constant:
Well, look at that, Goldy. I started out by talking about a humorous series of fantasy novels and you brought us all the way back to Adam Smith and that’s why you get paid the big bucks.
Goldy:
Well, one would argue that some of Adam Smith is a fantasy novel, at least the way it’s interpreted by orthodox economics. I mean, one mention of an invisible hand and it’s just as magical as Terry Pratchett’s books.
Paul Constant:
Well, in any case, we encourage you to check out the report, Half of Every Dollar: How Household Debt Eats Into Workers’ Income Gains. There is a link in the show notes. I encourage you to read it and to share it. And if you found this conversation interesting, please share it with your friends.
Freddy:
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