In recent years, government debt has dominated headlines, but a far more significant economic challenge looms in the shadows—the escalating issue of private debt. As of the end of 2022, private sector debt in the United States accounted for a staggering 165% of GDP, surpassing the 123% of GDP owed by the government. This mounting private debt, which includes student loans, mortgages, and small business debt, has more than doubled as a percentage of GDP since 1980. The burden it places on individuals and businesses stifles economic growth, posing a substantial challenge for the nation’s economy.
The Perpetual Growth of Private Debt:
Private debt perpetually outpaces economic growth due to the fundamental relationship between debt and expansion. To foster economic growth, individuals and businesses often resort to borrowing rather than reducing spending on other fronts. Whether it is financing a new house or purchasing a car, borrowing money stimulates economic activity and increases GDP. However, this growth relies on someone else’s debt expansion, and as a result, overall debt burdens continue to rise.
The Rising Tide of Debt:
The growth of debt, particularly in the private sector, has become an essential economic factor in modern society. Over time, total debt, comprising both private and government debt, has skyrocketed from 142% of GDP in 1950 to an astonishing 294% in the present day. This relentless march of debt necessitates new approaches to address its consequences and find sustainable solutions.
Addressing Student Debt:
One of the most pressing concerns is the scourge of student debt, which weighs down millions of Americans long after they have left university. The financial strain hampers individuals’ ability to buy homes, start families, and negatively impacts their long-term financial, physical, and mental well-being. To alleviate this burden, a government program could offer debt forgiveness based on substantial volunteer work performed for qualified not-for-profit institutions. Participants who fulfill at least 800 hours of volunteer community service and make consecutive payments for 90 months would have their remaining student debt forgiven. This relief should also extend to trade and technical school graduates.
Mortgage Debt Relief:
As the pandemic mortgage payment forbearance programs concluded in 2021, borrowers were required to settle deferred payments. One potential solution to alleviate mortgage debt could be a limited-time “debt jubilee” program. This program would allow borrowers to write down missed payments, accrued interest, and up to an additional 20% of the principal balance in exchange for the lender receiving a partial interest in any future gains when the house is sold. Such a program would provide substantial relief by significantly reducing payments and easing financial burdens.
Reforming Bankruptcy Laws:
U.S. bankruptcy laws are in dire need of reform, as they often fail to achieve their intended objectives. Currently, almost 90% of families declare bankruptcy due to uncontrollable circumstances such as job loss, medical problems, or family breakdowns. Revising bankruptcy laws to focus on repair rather than punishment is crucial. Modifying mortgages in bankruptcy, allowing renters to continue paying rent to avoid eviction, releasing debtors from future liabilities related to taxes and code violations, and discharging student loans in bankruptcy are essential steps towards empowering individuals and families to rebuild their financial lives.
Reevaluating Tax Incentives:
The current tax system in the United States incentivizes debt while penalizing equity, a counterproductive arrangement that exacerbates the debt crisis. By reducing or eliminating interest deductions for large businesses and wealthy individuals, policymakers can curb the relentless rise in debt levels. Simultaneously, removing taxes on dividends for the bottom 60% of households would encourage stock accumulation among these groups, fostering greater participation in the economy.
Conclusion:
The exponential growth of private debt poses a significant economic challenge in the United States. It is crucial for policymakers, financial institutions, and individuals to address this issue proactively. By implementing debt relief measures for students and mortgage borrowers, reforming bankruptcy laws, and reevaluating tax incentives, the nation can begin to alleviate the burden of private debt. Creating a more sustainable and equitable economic system will enable households to participate more actively and vibrantly in the economy, benefiting lenders, borrowers, and the nation as a whole.
