I walked out of Purdue free of debt (except for the payments on the brand new 1960 Dodge Dart I bought for $980 two weeks before graduation) and into a sumptuous $6,500 a year job at Sarkes Tarzian.
One hears today in the media, and even from the halls of power in Washington, that student loan debt has become a great problem. Student loan debt in the United States, we are exhorted, has grown to just over a trillion dollars.
I'm sorry, but I have trouble understanding why that should be a problem. Didn't these people know what college was going to cost? Didn't they formulate a plan to cover those costs as they went along? If they didn't have the intellect and fortitude to do that, I should like to suggest that they may not have been college material in the first place.
Or maybe it's a mindset that they've inherited. Average household credit card debt at the end of 2014 is $15,611. The total credit card debt for all Americans is 882.6 billion dollars, roughly twice the gross national product of Austria.
In 1960, we didn't have credit cards. If you needed to borrow money, you went to Morris Plan and took out a loan against the equity in your house, or you signed an installment loan contract – as I did for the $980 for my new Dodge in 1960 – and paid for the product plus interest over time. Everything else was strictly cash.
Today, the United States has become not only a cashless society, but a debt logged society. In total, American consumers are 11.74 trillion dollars in debt. That is a staggering figure – rivaled only by the 17 trillion dollars of debt incurred by our federal government.
"So what?" you may say. "We're going to pay off the debt eventually, so what harm is there in living on credit?" The harm, my friend, is in that pesky interest. At 6%, that 11 trillion dollars generates 700 billion dollars a year in interest. That's 700 billion dollars that came from nowhere injected into the economy.
You can think of an economy as a giant scale. In one pan are all the automobiles, toasters, computers, and other wealth manufactured in a year and in the other pan is all the money that entered the economy in that year. And the pans always balance. If you put money in the money pan without a commensurate amount of manufactured wealth in the wealth pan, each unit of money must deteriorate in value to keep the scale in balance. And that is the definition of what we call inflation.
And inflation is the reason you can no longer buy a new car for $980 or live comfortably on $6,500 a year like we did in 1960.
But debt has another deleterious effect beyond the fact that it's inflationary. It erodes responsibility by creating the illusion that you can get what you want without having to work for it. And the corrosive effects of that illusion are evident not only in our indentured college graduates but in our irresponsibly profligate federal government.