Our Debt Problem-The Consumer Side

David Leonhardt, via Mark Thoma:

But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.
The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.

Further on, he says:

Earlier this year, Charles M. Holley Jr., the chief financial officer of Wal-Mart, said that his company had noticed consumers were often buying smaller packages toward the end of the month, just before many households receive their next paychecks. “You see customers that are running out of money at the end of the month,” Mr. Holley said.
In past years, many of those customers could have relied on debt, often a home-equity line of credit or a credit card, to tide them over. Debt soared in the late 1980s, 1990s and the last decade, which allowed spending to grow faster than incomes and helped cushion every recession in that period.
Now, the economic version of the law of gravity is reasserting itself. We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings. This pattern is a classic one.

This is something that is often overlooked when searching for the villains in the financial crisis.  We are collectively villains (although Wall Street holds the key villains).  Consumers are overly indebted.  We have borrowed more and more in the 80s, 90s and oughts, and the bill is coming due.  Continuously lower interest rates have allowed us to take on higher and higher amounts of debts as a percentage of income.  Meanwhile, the government also was allowing us to spend more by lowering taxes and borrowing to pay for government.  The main issue is how to mitigate the impacts of deleveraging.  In my opinion, the only way to proceed is to improve the fiscal situation by making cuts in spending which will have the minimum negative effects on struggling people while raising taxes on the best off, because they are the ones who can afford to pay more.  It doesn't make sense to me to refuse to raise revenue and try to narrow the deficit by spending cuts only.  Likewise, there is no possible way to get a balanced federal budget at this time.  Pushing for a balanced budget amendment while refusing to increase revenues is just plain stupid.  Yet, that is what the majority in the House of Representatives is pushing for.