As of May 2024, the US economy looked pretty good on paper.
Inflation was a big fat zero: Prices did not rise at all on average last month. Unemployment was 4 percent — a rate lower than at any point in the Reagan, Obama, or either of the Bush administrations — and the economy added a healthy 272,000 jobs. Wages have been growing faster than prices for months now.
But Americans don’t seem particularly psyched about the situation. Consumer sentiment has improved since last year, when it plummeted due to anger at inflation, but the most recent report from the University of Michigan gives a sentiment estimate of 77.2.
That’s just an arbitrary index, but it indicates that Americans feel about the same as they did in the spring of 2013, when unemployment was about 7.5 percent and the economy was still struggling to recover from the financial crisis.
Past periods of similarly low inflation and low unemployment saw people much happier. Just before Covid, the sentiment index was 101; in February 2000, it was 111.3. Those economies look a lot more like the one we’re in now, but people aren’t responding the way they used to. (And to make things more confusing, the University of Michigan recently changed its methodology.)
Economists have floated several theories for why this might be. Stanford’s Ryan Cummings and Neale Mahoney have argued that much of the gap can be explained by partisanship (Republicans tend to say the economy’s bad when a Democrat’s in office), and by inflation hurting the country’s mood even long after the worst is over.
Others, like the pseudonymous Quantian1 and a team including former Treasury Secretary Larry Summers, have argued that high interest rates are the culprit. In 2000 and early 2020, interest rates were still very low; buying a house or car or rolling over credit card debt was relatively cheap. The situation is different now as those high rates boost such costs, and people are mad.
Evaluating this last theory is pretty difficult. Changes in interest rates are mostly caused by the Federal Reserve, which makes decisions based on the state of the economy. So are consumers reacting to interest rates, or to the economic conditions (like high inflation) that spurred the changes in interest rates to begin with?
So I don’t want to embrace the interest rate theory whole hog. But I do want to tease out one of its more interesting implications. High interest rates might be especially disruptive in the US because we rely on debt to boost middle-class people’s living standards more than most peer countries.
We have chosen to prioritize credit over building a welfare state, and that might make interest rate rises more painful here than they are in, say, Europe.
The United States of Debt
If you look at data on household debt, you start to wonder what’s wrong with countries that speak English. Australia is the world champion of debt, followed closely by Canada and then New Zealand. Next to those three and the UK, the US is actually the least indebted.
All of us, though, stand out compared to, say, France or Germany or Japan. Part of that is because English-speaking countries tend not to build enough housing, meaning that the cost of houses (and thus the number of mortgages taken out to buy them) has gone up a lot.
But part of it is related to the English-speaking world having a relatively stingy approach to social welfare compared to continental Europe. A number of scholars, most notably the Johns Hopkins sociologist Monica Prasad, have noted that there appears to be a tradeoff between household debt and government social spending.
You see this empirically (countries with more debt spend less on welfare), and the fundamental reason is pretty simple: Debt and social programs are both ways that people can access goods they don’t have the money for themselves.
Let’s say you can’t afford a place to live. One way to get you one is for the government to build social housing and charge you subsidized rent. Another way is for the government to create a massive regulatory apparatus designed to make 30-year, fixed-rate mortgages available to just about anyone who wants one. Some countries, most famously Austria, do the former; the US did the latter, driving its massive increase in homeownership since the New Deal.
One also sees this in health care. The US, famously, is alone among rich countries in not having a national health care scheme that sets prices and provides universal coverage. As a result, it has vastly more medical debt than anywhere else. A problem that other countries solve with price controls and social insurance, we solve with debt.
Within the US, debt can trade off with social programs: a recent study found that the rate at which people acquire medical debt fell by half in states that expanded Medicaid as part of Obamacare, but fell by only 10 percent in states that didn’t expand.
Even with automobiles this dynamic plays out: The US has more cars per capita than any country outside of microstates like San Marino and, for some reason, New Zealand. These are overwhelmingly bought with auto loans. Not coincidentally, we also have less access to public transit than peer countries. It’s another place where we’ve chosen debt over social spending. (Student loans, perhaps surprisingly, don’t fit the pattern as well, both because lots of other countries have loan-based systems and because the US has markedly more people finishing high school and going to college than most peer countries.)
No country for high interest rates
So what should you take away from this, besides “the US is a weird country that has made some weird choices”?
One possible takeaway is that all this makes inflation unusually politically toxic in the US.
The main way countries deal with inflation is to increase interest rates, making it more expensive to take out loans and reducing the rate of housing construction, business spending, etc. But if Americans are unusually vulnerable to interest rate hikes because of the debt-heavy way we’ve constructed our economic life, then the cure could be nearly as unappetizing as the disease.
The only way out would be to avoid needing to raise interest rates in the first place — and that, as we learned in the years-long aftermath of the financial crisis, sometimes means enduring brutal levels of unemployment. Maybe we just can’t win.
The more hopeful takeaway is that social spending by the government can serve somewhat surprising roles, ones that go beyond simply improving living standards for people. We know from countless studies that being in debt hurts people in ways that are more than just financial. By substituting for debt, social spending doesn’t just give people more monetary resources, but prevents the unique anxieties and indignities of being a debtor, even when interest rates are low.
You see something similar in how countries with richer safety nets handle lawsuits. Here’s a fact that always staggers me: By 1991, there were nearly 200,000 lawsuits in the US related to asbestos and asbestos-caused diseases. In the Netherlands, where asbestos-related diseases were at least five times as common as in the US, there were fewer than 10 lawsuits.
The reason wasn’t really legal; the Dutch had the right to sue their employers for damages. The reason, as scholar Robert A. Kagan has explained, was that the Netherlands had a generous disability and health insurance system such that the people affected didn’t need or want to sue.
Debt and lawsuits have come to feel like quintessential American institutions, like barbeque or refusing to use the metric system. But they’re a choice, and we could also choose to use a robust social safety net to avoid them.
