Consumer debt: A diagnosis or a distraction?

Analysts have been trying to determine a precise diagnosis for the economy ever since it tanked in 2008. However, over the past several months, as conditions slowed, the conversation has risen anew. At the core of the debate is consumer debt, specifically how it has been affecting by the collapse of the housing market and its relation to wider economic activity. Analysts argued that indebted households are moving to pay down their mortgages, student loans and credit cards in the wake of the market collapse and high unemployment, all the while restraining nondiscretionary spending. Washington Post contributor Brad Plumber argues that much of the confusion can be attributed to the housing bubble. For example, he notes, Americans saw some $8 trillion in housing wealth disappear with the housing market crash. "Even if consumers had no debt at all, they still have less wealth, and we could expect a drop-off in consumption of about $400 billion to $560 billion compared with 2007," Plumer writes. "And incomes haven't been rising quickly enough to offset this loss." This suggests consumer debt has not contributed to the tepid economic recovery as many have assumed.