When we talk about the Rhode Island economy, we tend to focus mostly on what’s going on in the public sector and the corporate sector. It’s easy to forget about ordinary households. But individual consumers form the heart of our economy. We are the ones who power growth, and when numbers move in the behemoth that is the household sector, the consequences can be massive. That is why the explosion in Rhode Island household debt in 2015 is so important.
Every year, the New York Fed tracks per capita state household debt, publishing numbers for the fourth quarter of every year. Their new numbers contain shocking news for our state. While per capita household debt went up by $290 nationally from 2014Q4 to 2015Q4, it exploded by $1,240 in Rhode Island.
Statewide, we’re talking about $1.09 billion.* To put that number in context, it is a bit bigger than the sales tax. It is 2.1 percent of our state’s personal income. It is so huge that it swamps the effect of just about every 2014 economic policy.
State policy has a very important effect on economic outcomes, but large swings in household debt can sometimes drive enormous changes in the economy. If taxpayers go deep into debt, it can more than compensate for bad state policy. For instance, Jeb Bush presided over a surging Florida economy mainly because his term corresponded to a catastrophic spike in household debt fueled by a gargantuan housing bubble.** But when the music stopped, Floridians were mired in debt, and the state economy cratered.
That’s why it’s important to watch household debt levels closely. If ordinary consumers are going into debt, it can mask the effect of bad public policy.
In 2015, Rhode Island’s economic performance was fairly mediocre. Per capita income rose by 3.6 percent, compared to a nationwide average of 3.5 percent. But if you take the debt numbers into consideration, you’d normally expect very strong growth. Basically, it looks an awful lot like Rhode Islanders dipped into our personal finances to bail out bad policy.
*The New York Fed only surveys people with a credit report and a social security card. We don’t really know what’s going on in the rest of the population.
**In Rhode Island, the debt surge can’t be explained by a sudden housing bubble. In fact, Rhode Island house prices fell a tiny bit relative to the US average.