Measuring indebtedness

There has been much concern about the levels of debt held by households, but how exactly do we measure this debt? Are there alternative methods? N.C. State University economist Mike Walden answers.

“With most economic measures, there are several ways of looking at the same issue, and this is no exception. When we’re looking at debts — household debt — one very simple way would simply be to measure the total amount of debt that households have. And if we do that, we see a big run-up in the last 30 years. And there’s been a modest pull-back in recent years.

“Perhaps a better measure would be to look at the debt to income ratio and how much debt you have relative to how much income you earn. You see the same trend there — big run-up over the last 30 years; a little bit of pull-back recently.

“But as we go further, some economists say a better measure is not to look at debt and income but to look at debt and assets: It is how much debt you have compared to the value of our assets. And here actually we see a rather stable number. Recently it’s been a little higher, but then it’s been dropped back with the recession.

“But perhaps the best way that economists think of when we look at debt is to simply say, Out of your paycheck or out of your income each month, of your household, what percent of that do you have to allocate for debt payments? I mean, that really tells us what the burden of debt is. And we had a run-up in that again over the last 30 years, but we’ve had a pretty nice pull-back recently.

“And, in fact, that measure is now down to 1990 levels, and that’s giving economists a lot of encouragement.”