Opinion: How globalization sunk many Americans deeper in debt MarketWatch
Erik Loualiche
3 hrs ago
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Even as U.S. policy makers continue to debate the relative advantages and drawbacks of globalization, it’s abundantly clear that international trade is not the benevolent force it was once thought.
For all its promise of boosting incomes and strengthening growth, trade has had a disproportionately damaging impact on regions of the U.S. that have long depended on manufacturing. Recent data shows that these communities have suffered a great deal of economic distress, including high rates of underemployment and joblessness.
These communities have also become much more indebted compared with the rest of the nation, according to my latest research. During the years 2000 to 2007 — also known as the run-up to the Great Recession — overall American household debt doubled. That debt peaked in 2008, at almost $13 trillion. This leverage, however, was not shared equitably. Household debt in regions of the country where manufacturing jobs had shifted overseas grew an additional 20-30% over that period. In other words, nearly a third of American household debt during that time frame can be attributed to import competition with China and other low-wage countries.
Why does this matter? For starters, the research — which I undertook with my colleagues Jean-Noel Barrot of MIT, Matthew Plosser of the New York Federal Reserve, and Julien Sauvagnat of Bocconi University — shifts the narrative on what fueled the credit bubble that preceded the Great Recession. To date, most of the economic literature has focused on the supply side and the private sector’s drive for short-term profit. Greedy banks sold unsuspecting customer risky loan products. Money-hungry private lenders made mortgages too easy to get. And fund managers sought new investments through high-yield mortgage-backed securities.
But our study shows that the demand for debt was also a big contributing factor. Perhaps more importantly, our study suggests that a great deal of this household debt can be tied directly to globalization.
It’s not difficult to piece together what happened. As factories shut down and manufacturing jobs were shipped overseas, many Americans — especially blue-collar laborers without a college degree — found themselves without a paycheck. So they borrowed to make ends meet. This borrowing often came in the form of home-equity loans or mortgage refinancing. (In fact, we found that the rise in household debt was strongest in areas where house prices had appreciated the most.)
In theory, this is how financial markets ought to work. People should be able to borrow money when they need it — and it makes sense to use a home as collateral, particularly when the value of that home has increased.
In hindsight, though, we know better. When house prices collapsed, many Americans were so overly burdened with household debt that they couldn’t afford to maintain their spending. They had already tapped into their homes for equity to pay for everyday spending and without any income, that debt load became untenable. Millions of Americans defaulted on their mortgages.
It wasn't so long ago that economists thought that international trade was uniformly positive for global growth. While it’s true that free-trade practices can open markets and lead to broader economic development, this carries real costs, and in certain regions these costs have been overwhelming. Many Americans have seen their jobs and incomes disappear; they’ve lost their homes and gone deeply into debt.
The lesson for policy makers is clear: globalization has winners and losers. We must not pretend otherwise.
Erik Loualiche is an assistant professor of finance at the MIT Sloan School of Management.
Poster Comment:
According to the rules of the Uniform Commercial Code, we are ALL DEBTORS. The only way to become the Secured Party is to have your Security Agreement on file with the Secretary of State of your state of residence. And mine is on file.