Dictionary definition: Affordability refers to the quality of being inexpensive or the ability to purchase something without financial stress. It indicates whether a product or service is within the reach of individuals or groups. This implies living within your means. Prior to the 1950s introduction of universal credit cards, this was, for most people, the way it was.
Political definition: If an individual wants or believes they need something, the government should find a way to make it available, at a price the citizen can afford. The government’s options for making good on its promises are limited. One method is the subsidy, a path that typically requires borrowing, leading to additional deficit spending. The other path is robbing Peter to pay Paul, think rent controls, for example.
Economists’ definition: Economists have watched the affordability issue with some confusion. They tend to argue that Americans are mistaken. Over the past few years, yes, prices have risen, but wages have generally risen somewhat faster. According to the definitions that most economists use, except for the last few months, America has been more affordable than at any time in its history. In other words, don’t confuse me with the facts, my mind is made up.
Investors should consider the consequences of adding to the national debt when borrowing is the preferred strategy. If it’s taking from Peter to pay Paul, it is important for investors to understand, who’s Peter.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
