Is the Collection Industry Good for the U.S. Economy?

In August 2, 2006

The debt collection industry is good for the U.S. economy! I’ll bet you didn’t know that, right? This conclusion was reported recently in a study commissioned by ACA International, the trade organization for the collection industry. Surprisingly, there has been very little media attention about the report.

Given the mountain of bad publicity that the collection industry has received in recent months, it’s interesting that this report didn’t receive more notice.

The survey, conducted by Pricewaterhouse Coopers LLC, reports that in 2005 the collection industry returned $39.3 billion to creditors. To drive the point home, it states that “…the $39.3 billion in debt returned to creditors on a commission basis is equivalent to an average savings of $351 per American household that might have otherwise been spent had businesses been forced to raise prices to cover the unrecovered debt.” Further, this translates to “…approximately 19 bags of groceries, 129 days of electricity or 155 gallons of gasoline.” A footnote informs us that a typical bag of groceries costs $18.79, the average monthly electricity bill is $81.42, and the average price of regular gasoline was $2.27 in 2005. (I’d like to know where they are shopping for groceries!)

The study cites numerous figures in support of the overarching claim that debt collection is a wonderful thing for our economy. Moreover, it’s a growth industry with nearly double the jobs (150,000) in 2005 versus 1990 (70,000).

Skeptical? Me too. I’ve little doubt that the figures cited in the survey are reasonably accurate based on the scientific sampling of collection companies that was conducted. The $39 billion figure is probably a pretty good measure of the size of the industry. But is it really so straightforward a relationship that it translates to $351 for every household? Not likely.

There are some serious flaws in the logic used to arrive at this conclusion. For starters, who’s to say that the $351 ever made it back to the American consumer? There’s simply no way to analyze this. We don’t know whether that $39 billion in revenue returned to American businesses was used to hold off on price increases, as the report claims with no supporting evidence whatsoever. How do we know the returned money simply didn’t go into corporate coffers, mergers and acquisitions, or executive compensation plans? Taking the figure of $39 billion and simply dividing by the number of American households is, quite frankly, an absurd thing to do, as it assumes even distribution across our society.

But that’s not even my main objection to the conclusion of this report. What about the offsetting costs in lost productivity due to collection activities? As anyone who’s been on the receiving end of a collection phone call knows, there’s no way to concentrate on getting anything useful done while a collector is haranguing you. This important factor is simply ignored in the report, as though there were no costs on the other side of the equation.

So let’s do some fuzzy math of our own here to provide a more balanced treatment of this issue. If there are 150,000 collectors working in the industry, that translates to 300 million person-hours per year, or 18 billion work-minutes per year. So I think it’s reasonable to say that it took 18 billion collection minutes to recover that $39 billion of debt. That works out to $2.16 per minute, which is why the collection industry is so profitable. But someone was on the other end of the telephone for those 18 billion minutes, presumably not getting any work done. That translates to 300 million hours of lost productivity to the economy.

What’s the value of an hour of labor? I’m sure there’s a statistic on this someplace, but I’ll pull a number out of the air and say $50 value per hour. Remember, it’s not the average wage that we’re comparing here, but the revenue generated by that wage. It’s probably higher than that, but if the average annual income is around $40,000, that’s $20 per hour. An employer had better be making 2-3 times in revenue what’s being paid out in wages or they won’t be around for very long. So this works out to at least $15 billion in lost productivity due to collection activity. It’s interesting when you look at both sides of the story, isn’t it?

Another flaw in the report’s conclusion is that the $39.3 billion was “returned” to the economy. So, where was that money in the meanwhile — in the twilight zone? Presumably, that money was sitting in banks across the country, being lent out by the bankers in loans. Or it was money that would have been spent on other things anyway, like groceries, mortgage payments, car repairs, home improvements, etc. By taking the raw number of dollars collected and not looking at the other side, the report gives the false impression that the $39 billion was sitting in offshore bank accounts, totally outside the U.S. economy. That’s simply not the case, and that money was already doing other useful work in our economy.

While I do think that creditors have a right to collect what’s owed them, and the collection industry serves that purpose with ruthless efficiency, I seriously doubt that this report paints an accurate picture of that industry’s value to the U.S. economy as a whole. Rather, it tells only one side of the story, as though American consumers had $39 billion tucked away in coffee cans until those wonderful debt collectors came along and “returned” it to the rest of us. I guess this is just another example of how statistics can be used to say just about anything one wants them to say.


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