Tuesday, October 2, 2012

Sources of Demand Leakage: Student Loan Debt

Why do we have persistently elevated unemployment? I would say it is due to debt overhang mostly, over structural issues or Casey Mulligan's all too serious assertion in The Redistribution Recession that government handouts are to blame. Student loan-debt is just one facet of this, but an increasingly important one.

This Pragmatic Capitalism post demonstrates that the gap between tuition costs for college and disposable income is higher and growing.

What are the macro-economic implication of this rising student loan debt? On the margin, it seems that people in early adulthood are being forced to reduce or forego consumption to handle monthly payments in the hundreds of dollars. Consider the following:

"Those without a monthly student loan payment bought new and used vehicles at about the same frequency. But the likelihood of buying a new vehicle, rather than a used vehicle, was influenced by student loan payments. Fifty-two percent of those in the Wisconsin survey who had never had a student loan were likely to buy a new vehicle, rather than a used vehicle, compared with 32.8% who were paying a student loan."
(see here)
These couple hundreds of dollars a month for young people starting families -- on a case by case basis insignificant, but taken as a whole, a huge total -- likely dramatically reduces their marginal disposable income. 

Consequently, they not only reduce consumption but also save more of their remaining income able: both problems. The first hurts present demand, obviously, while the second is also a problem, as young peoples' inability to accumulate savings will lesson the market for future investments such as homes, as few will have the requistie down payments. 

Boomer generations blase about our student-loan debt problem may be more interested if they know that it will impact the ability of younger families to buy their current homes at acceptable prices when they decide to retire in the not too distant future. 

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