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Consumers are finally beginning to swear off the habit as well, after running up the average credit-card balance to more than $1,600, compared with less than $500 in 1982. The debt-cutting trend is bad for retail sales in the short run but bodes well for the mid-1990s. Most committed to saving are baby boomers, who want to save money for their children's education and for retirement. "Debt is a dirty word for consumers now," says Robert McKinley, president of Ram Research Corp., which tracks credit-card use. Consumers are unlikely to change their penurious ways until they feel that their debts have reached comfortable levels and their jobs are secure. "Consumers are reacting very rationally to the kind of situation they are confronted with," says Gail Fosler, chief economist for the Conference Board, a business-research group.
The real estate bust has added to the insecurity, since many people who urgently bought homes during the run-up in the 1980s now find their equity shriveled. In July the median price of a new home in the U.S. fell 7.9%, to $115,000, from $124,900 in June. Low inflation has almost completely removed the urgency to dash out and buy a house before the price goes up. "Ten years ago, I told my clients to buy the biggest and most expensive house they could afford and borrow every dime they could," said Atlanta C.P.A. Jim Frazier. "Now I tell them to buy only as much house as they need and look at it only as a roof over their heads."
The consumer-debt hangover will be far easier to solve than the government's. With the national debt an estimated $4 trillion and this year's budget deficit expected to reach nearly $334 billion, the government is limited in how much it can stimulate the downtrodden economy with the usual recession cure of a quick jolt of spending. Yet a growing number of economists are contending that shrinking the federal deficit is a worthy goal that should be temporarily suspended until the economy is back on track. While the national debt will hamper the economy over the long run, its net effects on growth over the short run are insignificant compared with such problems as unemployment, declining wages and worker dislocation.
The other primary slump-fighting tool, monetary easing, has just about been played out. The Federal Reserve Board has cut short-term interest rates 24 times since 1990, bringing them down from 9% to 3%, the easiest credit since the 1960s. But critics have complained that the Fed wasted its fuel by easing so gradually and slowly that the economy never got the swift kick it needed. Now rates are so low that the Fed has little room left to maneuver, and additional interest reductions have been hampered by the need to keep the U.S. dollar from dropping against the overmuscled German mark.