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Economics correspondent, Paul Solman of WGBH-Boston, looks at mounting consumer debt.

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PAUL SOLMAN: Retailers had high hopes today, as customers pulled out their credit cards to kick off the busiest shopping season of the year. Holiday sales historically account for about half of retailers' annual sales and profits, but are shoppers already too heavily in hock?

Consumer debt, which includes credit card charges and auto loans, but not home mortgages, has risen to 1.4 trillion dollars nationwide. Moreover, the annual rate of consumer debt has been growing twice as fast as wages and is now roughly 20 percent of annual income.

Finally, estimates show that by the end of the year, there will be more than 1 million personal bankruptcies in 1996, passing the previous high of 1992, when a recession was just ending. How big a problem is consumer debt?

To discuss that, we're joined by Lawrence Chimerine, an economist at the Economic Strategy Institute and consultant for MasterCard International, and Robert Manning, an economist and sociologist at American University. Gentlemen, thank you both for coming in. Mr. Manning, first and foremost, do we have a consumer debt problem?

ROBERT MANNING, American University: Well, as you noted by the statistics of 1 million bankruptcies, it's clear that certain consumers have found the limits about how much more they can charge. Of course, the key issue is: Why have they reached that limit, and why has it taken down the long road of bankruptcy?

PAUL SOLMAN: Is that the only statistic you would cite? Are there others? Are there other ways looking at it, besides just personal bankruptcy?

ROBERT MANNING: Well, no. We've seen a rather startling increase in terms of total debt, in terms of household income. And consumers have jumped up in the last 15 years from about 80 percent of personal debt to almost 95 percent of household income.

PAUL SOLMAN: That's total debt. That would include mortgages, I take it?

ROBERT MANNING: Yes.

PAUL SOLMAN: And just credit card debt, or consumer debt at net of mortgages?

ROBERT MANNING: Well, one of the big issues about credit cards today is they've gone from being a charge card to an all purpose, consumer loan. So one of the issues is that credit cards really obscure the many different reasons that consumers are getting a much higher limit on their credit cards today.

PAUL SOLMAN: So are you worried?

ROBERT MANNING: Oh, I think it's very clear today that as wages have stagnated and Americans are seeing tremendous increases in certain costs, such as higher education, college for the kids, or the parents that are retired and contracting Medicaid and Medicare, that there are some costs that clearly can't be anticipated and be covered by existing wages.

PAUL SOLMAN: So that the problem--there is a problem with the level of debt we've got.

ROBERT MANNING: What we're seeing is that different groups now are finding that they've reached their capacity without an existing warning signal.

PAUL SOLMAN: Okay. Mr. Chimerine.

LAWRENCE CHIMERINE, Economic Strategy Institute: Paul, there is a problem for some groups. There are some people who have over-borrowed, and there are some people who have lost their job, as part of the wave of corporate downsizing we've had, or had an income squeeze, and are having difficulty servicing their debt. But these were relatively limited problems. The debt problem for the population at large is way overstated. In fact, the statistics, themselves, are overstated.

PAUL SOLMAN: Explain what you mean by overstated.

LAWRENCE CHIMERINE: Well, Bob mentioned, himself, the changing role of credit cards, but what he didn't mention is the fact that credit cards increasingly are being used as a method of payment. That's the biggest change in credit cards over the last ten to fifteen years. That's substituting for cash and checks and the payments process. And some of that substitution, some of that payment use of credit cards shows up in the debt statistics, but it's really not bad. It just takes time before you get the bill in the mail and pay your credit card bill.

PAUL SOLMAN: You mean, so the numbers he's talking about are a total number that include something that used to be done in cash.

LAWRENCE CHIMERINE: That's exactly right. It includes ordinary payment transaction use of credit card that inflates the debt statistics. When you look on an overall basis nationwide, credit levels are not extraordinarily high, particularly in view of interest rates coming down, so it's easier to service the debt. It's coming down right now, even on home mortgages, which frees up purchasing power. A lot of the credit card increase indirectly is being used to finance the purchase of financial assets. That's not very different than if you go out and use it to pay for vacations or something.

PAUL SOLMAN: Okay. But I mean, a million bankruptcies? I mean, it sounds scary.

LAWRENCE CHIMERINE: This is a long-term trend. It's something to be concerned about. But bankruptcy is increasingly coming--becoming a first option in this country, not the last resort it used to be. Lawyers are promoting bankruptcy. A lot of them are caused by divorce, by unanticipated medical bills, by job loss. Bankruptcies have been rising faster than debt for the last 15 years.

PAUL SOLMAN: Well, if you think it is higher than it has been and worrisomely high, why, if we accept your argument for a moment, is credit as high as it is? Why are so many people taking on what you think to be so much debt?

ROBERT MANNING: Well, I think what we're seeing in the United States, in general, and also in terms of the global economy in particular is there's fundamental restructuring. And, in general, in terms of economic change on the business cycle, we've seen working class groups that have really borne the brunt of economic uncertainty. For the first time now the middle class is now being forced to confront fundamental economic changes through downsizing, anxieties now where it's required that households must be two earners, and when one earner goes full-time to part-time, given the extension of the debt capacity now, a lot of consumers really don't have any maneuverability to persevere for a few months.

PAUL SOLMAN: Let me read you something. This is from "The Indebted Society," by James Medof, Andrew Harliss, and it says, "Consumers have to borrow"--it's a new book that's come out--"consumers have to borrow to support a level of consumption they've come to anticipate, is that right?

LAWRENCE CHIMERINE: Yeah. There's no question. And I think this is what Bob is saying, that this is a macroeconomic issue, Paul. It reflects the downsizing, the growing income disparity and wealth disparity in the economy, the fact that a large portion of the population have fallen behind in the last 15 years.

PAUL SOLMAN: And that's what Medof and Harliss are talking about.

LAWRENCE CHIMERINE: Even though the economy overall has been growing. These problems are having financial difficulties not necessarily because they borrow too much, because of the fact they've lost income.

PAUL SOLMAN: Let me ask you a question. Are banks lending too easily, and is that part of the problem?

LAWRENCE CHIMERINE: Sure.

PAUL SOLMAN: We at our house are flooded with these credit card solicitations. My 16-year-old daughters gets these things.

LAWRENCE CHIMERINE: Paul, there are some people who are probably getting credit cards who shouldn't, and some people are not using them wisely. But what's happening with credit card solicitations is primarily the working of a very competitive industry. They're trying to take business away from somebody else and in the process, some people, as I say, are probably getting cards who shouldn't have them, but this is a small portion of the population.

PAUL SOLMAN: What do you think about that, Mr. Manning? Are people getting suckered into or lured into this? I read that 64 percent of all college students have credit cards, which seemed, given their income, to be a high number.

ROBERT MANNING: The real problem is that the banking industry has found themselves between a rock and a hard spot after financial deregulation. And as a result, credit cards are more profitable, at least two and a half to three times any other parts of their portfolio.

PAUL SOLMAN: Why is that?

ROBERT MANNING: Because with the decline in real interest rates, consumer loans have become incredibly profitable, combined with the dramatic transformation in terms of credit card technology.

PAUL SOLMAN: So I mean, how much does a credit card typically charge on a loan?

ROBERT MANNING: About 17 percent.

PAUL SOLMAN: Versus I guess 8 percent on a home mortgage or an auto loan or something like that?

ROBERT MANNING: Oh, clearly, without productibility.

LAWRENCE CHIMERINE: But they're unsecured, and secondly, don't forget, most people are using credit cards, they're using them as a method of transaction, not to borrow. Not everybody is paying 17 percent because most people just pay off their balances on a regular basis.

ROBERT MANNING: Yeah. But the problem with that whole issue is that those people that can least afford to borrow are the ones who have to pay 18 percent.

PAUL SOLMAN: Explain that.

ROBERT MANNING: In other words, working class people or middle class people in debt are going to be paying 18, 20 percent, the highest interest rates, when those people that pay off at the end of the month are effectively subsidized by those people that carry a balance at the end of the month. So instead of banks charging people maybe 6 percent that it costs them to have that account, they'd much rather gouge people at 17, 18 percent, who don't pay, and let what they call the free riders get off loose.

PAUL SOLMAN: Do you see that as a problem? Or is there an upside to that?

LAWRENCE CHIMERINE: There's no question, Paul, that some people who are carrying more debt than they should, for whatever reason, and carry debt on a regular basis on their credit cards, are paying high rates. These same people, though, if they took out other loans, would pay the very high rates on those loans, as well. They're higher risk borrowers who are going to be charged higher rates for lending, regardless of what vehicle they take.

PAUL SOLMAN: What about the fact, the question of democratization here, I mean, that is if more people can get credit cards, I suppose that would mean that it's, you know, a more democratically-available line--lines of credit for people?

ROBERT MANNING: Well, one of the problems with the economy right now is the people that really need loans aren't getting them. Small businesses--and I have a whole chapter in my book about how small business people can't get an 8 percent loan--and the bank will turn around and give them an 18 percent credit card.

LAWRENCE CHIMERINE: I think Bob's making a very interesting point. I tend to agree with the thrust of your question, Paul. Credit cards have essentially democratized the availability of credit in this country, plus with the CRA program on home mortgages--

PAUL SOLMAN: CRA--

LAWRENCE CHIMERINE: This is the Community Reinvestment Act, which essentially requires banks to make some mortgage loans available to lower income families. Ten or fifteen years ago, these lower-income and higher-risk families could not get access to any credit. And now at least they do get credit cards; they get home mortgages. Some of them can't manage wisely, but the bulk of them do, and I think you're dead right. It is democratized credit and in the process I think improved the quality of a lot of families' lives.

PAUL SOLMAN: So democratized or suckering people into it?

ROBERT MANNING: Well, the problem is we haven't addressed the fact why 18 percent--I mean, why couldn't we democratize credit card rates at 10 percent and have a real equitable, free distribution, where people are getting resources that they pay for, instead of being charged double-digit rates?

PAUL SOLMAN: Well, let's look just for a second at the holiday season and what does this all imply. And we haven't gone out and checked the cars in the mall. I know. I asked both of you before hand. But what doe you think this implies? Are people credit-they got stuck with their credit up to here, so they can't buy anymore, and we'll have a weak season?

ROBERT MANNING: Well, what we're seeing right now is that the credit card industry is going to be pulling our heartstrings here, and they're going to be sending us low interest rates, they're going to be telling us we can skip a payment this month, we may only have to pay 1 1/2, 2 percent, and not tell consumers that it may take them 34 years to pay off that balance if they only submit a minimum payment.

PAUL SOLMAN: So if they keep making those offers, then people would be buying this holiday season, I take it?

LAWRENCE CHIMERINE: Paul, the biggest driver of spending is income growth, is wages and salaries, and other income. It's the availability of jobs. It's how people feel about their job security, confidence in the future of the economy, inflation. All of these factors are plus now. The confidence numbers are at all-time high levels, which suggest, by the way, people are not only concerned about their debt levels. We'll have an okay Christmas. It won't be a boomer because the financial conditions don't support that. But all the factors suggest moderate growth in spending. For some families who have high debt, they may have to cut back a little, but for the bulk of the population, spending will exceed last year by a moderate amount.

PAUL SOLMAN: Well, thank you both, gentlemen, very much for coming in today.

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