Commentary

Give Credit the Credit It’s Due

By Will Wilkinson
This article appeared on Marketplace on June 18, 2008.

It used to be a lot harder to borrow money. You’d have to grovel to your rich uncle or talk with some guy named Rocco, whose debt collection techniques emphasized mangled fingers.

These days it’s hard not to have a credit card. Home loans are within easier reach, and there’s even such a thing as a “reverse mortgage.” And if you find yourself in a tight spot at the end of month, there’s always a payday loan.

Last week in his New York Times column, David Brooks complained that our increased reliance on personal debt is a sign of “rampant decadence.” But I say we need to give credit credit where credit is due. Saving and borrowing are both transfers from one stage of life to another.

We begin at the bottom in our 20’s, and slowly work our way up until income peaks in our early 60’s. Then, we retire and live off savings and pension checks.

When we’re young, we typically need a lot more than we make. When we’re a bit older, in our peak earning years, we typically make a lot more than we need. That’s why it’s rational for younger adults — who might need to pay for an education, a car, or a house — to borrow money from their future, flush selves. The difference between borrowing and saving is paying to use money now versus being paid for waiting and letting others use it.

Credit markets allow us to distribute consumption more evenly, and more optimally, over our lives. That leaves us better off than we would have been without them.

Of course, managing debt can be complicated, and it’s important to be responsible. But it also looks like we’re doing fairly well. According to a new Gallup poll, 60 percent of Americans say they usually pay the full balance on their credit cards each month, and the percentage of people who carry balances is going down.

And how about this virtue of thrift stuff? Does credit make us self-indulgent and lazy? Well, my student loan debt isn’t paying itself off.

Media Appearance Will Wilkinson discusses the credit market on Marketplace (June 18, 2008) [MP3]

Will Wilkinson is a research fellow at the Cato Institute