When is paying off debt not really savings?

A few days ago Ezra Klein was posting about tax cuts and the usual claim that poor people spend them while rich people don’t. He cited some studies that seemed to show that poorer people (not poor, mind you, nobody surveys them) were more likely to say that they were going to use tax-cut money to pay off debt rather than spend.

It struck me at the time that this was questionable, because for poorer household debt is one of the things that constrain consumption.  If you’re paying 20-plus percent on your outstanding balance, knocking that down by $500 means another $10 a month you can spend on food and gas. Or even more bluntly, if you’re pretty much at the limit of what you can carry on your cards, paying down $500 on your debt means not only immediately improved cash flow but also $500 that you can spend during the coming month or couple of years as your debt slides right back up to the limit. Either way, it’s not really savings as typically thought of, it’s debt management in the service of fairly immediate increased consumption.

In a macro sense, this would normally count as savings, because the money is available to lend out again, but the availability of money to lend at most financial institutions really isn’t particularly correlated with how much people are paying them back. So if it’s savings in that sense, it’s technical only.

What we would like to ask people about tax cuts (for purposes of stimulus) is not really whether they’re going to spend the money immediately versus paying off debt or putting it in savings/investment, it’s how it’s going to change their non-debt-service consumption. To statisticians, the interest you pay on loans is consumption just like food or gas or televisions — you’re paying for the use of someone else’s money. But for individuals, not so much.

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