Tuesday, June 10, 2008

The Debt Spiral

An organization called the "Institute for American Values" has produced a report, For A New Thrift: Confronting The Debt Culture that, in its own modest words, "powerfully addresses the linked problems of overindebtedness, lack of savings, and growing inequality in the United States."
The focus is on institutions. When a society creates democratic institutions to encourage thrift, more people are likely to engage in the positive activities of saving, conservation, and asset building. When a society fails to nurture such institutions, limits access to them, or supports institutions opposed thrift, more people are likely to over-spend, fall into consumerism as a philosophy of life, and go into debt.
I don't know whether to congratulate them for being sufficiently thrifty to make the report available by mail for a mere $7, or point out that they could save money and trees by offering it for download. But my biggest regret in their selling the report is that it leaves me unable to see the source for David Brooks' latest column, The Great Seduction.

I think Brooks is being sincere in his column - he's a rich man, earning probably at least a mid-six-figure income, has no meaningful contact with anybody who works a low-end job, and doesn't understand why the average American can no longer save 10-20% of their wages. After speaking of the nation's "Puritan legacy", Brooks declares,
The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.
Right.... The nineteenth century, for example, has no glaring examples of corruption by wealth. That's why terms like "robber baron" don't exist in the English language.
Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.
Is Brooks trying to be elitist and condescending, or did it just come out that way? He truly believes that the growth of debt, and the associated decline in savings, within the middle class is a form of decadence? Here's a dose of ugly economic reality - the economic changes that have led to a negative savings rate arise primarily from the costs of maintaining a two-income family, not from overspending.

Now let me take a step back here, because there's a fair response to what I just said - which is that if you're spending more than you make, you're overspending. Period, end of story. That's the way I lived most of my life, and at times I lived well below my means so I could bank funds and pay off my student loans. I've been self-employed for most of my adult life, and the best way to avoid cash flow problems is to have a decent sum of money in the bank. From the time I got my very first credit card, I've paid off my balance in full each month. I'm the type of consumer that I suspect lending institutions secretly hate - I may have a good credit score, and be a fantastically low risk borrower, but they have a hard time making money off of me. Seth Godin's advice here, on getting out of debt and staying out of debt, is tough - but I would still recommend it. My natural income is to tell people who "can't" save money, "You're not trying hard enough."

But I'm not going to condescend to a family with two wage earners, who have purchased a home in a neighborhood with decent schools and who need two cars to commute to their jobs, and who aren't being financially irresponsible in any traditional sense of the word but still can't manage to save money, or have to run up a credit card bill to cover the increased cost of their commute. I'm certainly not going to condescend to a family that has to run up some debt due to the sudden loss of income due to an illness or layoff. There's very little cushion for the modern middle class, wages are pretty stagnant, and as Brooks has profited during the Bush II "invisible recovery" he has managed to miss how his gain has come at the expense of others. Changes in the savings rate are not, as Brooks sees it, a "deterioration of financial mores" - they're a manifestation of the deterioration of the economic ground beneath the middle class.

I also don't care for his "there are two types of people" caricature of the problem:
Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.
If he were referencing the financial trends of the past thirty years, and the increased concentration of wealth in the hands of "the investor class", he might have a point. But a lot of the middle class people who are sqeezed and who aren't saving money have tax-deferred savings plans. Some of them have had to cash out those plans or borrow against them. It's also terribly condescending to those people suggest that, as they're not saving, they're part of a "lottery class" - they're borrowing to make the mortgage payment and car payments, put groceries in the fridge, and fill the gas tank, not to play the lotto. It seems that in Brooks' world the middle class isn't just disappearing - it has completely disappeared. (Or is it actually that the middle class is beneath his notice.)

Describing what he sees as a loss of social consciousness about money and debt, Brooks writes,
The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.
My guess is that David Brooks is among the "some" who would call the lottery a "tax on stupidity". I personally find better uses for my money. But you know what? There are people who play the lottery for fun. And contrary to what Brooks suggests a lot of the tickets aren't sold on the premise that you'll win $millions. They're sold on the basis that you'll win a few dollars, or maybe a free ticket, with a chance at a five to six figure windfall if you "hit it big".

Also, even at the alarming $645, 9% of income rate Brooks observes, this unusual household (one supported by a single minimum wage earner?) is only spending $12.40 per week on the lottery. As vices go, that's about as cheap as you're going to find. I would bet that many of those people do recover a percentage of their expenditure in $2, $5, and $10 wins - with few exceptions, well below what they spend, but perhaps reducing the actual weekly loss to $10 or so. Brooks imagines that these people dream of striking it rich for nothing? Possibly in an abstract, "Imagine what we could do if..." sense, but in my experience most people who play the lottery understand the long-shot odds.

Brooks also criticizes payday lenders,
They seductively offer fast cash - at absurd interest rates - to 15 million people every month.
True, but now we've moving away from the earlier discussion of credit card debt, and into the world of people who have maxed out their cards or who can't qualify for conventional credit. Is there a person on the planet who would turn to a payday lender as their first choice? Although I admit to having little sympathy for payday lenders, there is some truth to their argument that if they could not charge their ridiculous interest rates and fees they could not serve their community of borrowers. There's enormous risk in serving the bottom end of the financial market - the people with the shakiest job histories and the worst credit scores.
Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.
Speaking as somebody who could reasonably be described as a financially astute person who pays off his debt, I can tell you this: I get targeted by credit cards. I can't recall the last time a week went past without my getting a "You're preapproved!" credit card offer in the mail, along with proposals for me to transfer balances between cards at "attractive" rates, "convenience checks" to use to pay bills with a credit card... it's huge a stack of junk mail. But as I mentioned earlier, I'm not where the money is. I have no fee cards, effectively use them to float an interest-free loan for one to two months, then pay off the cards in full. The only way a credit card company makes money off of me is through the commissions they charge to merchants.

Credit card companies haven't suddenly realized that there's more profit to make off of people who don't pay off their bills - they've known that from day one. But I got my first credit cards in college, probably had four by the time I graduated, and still managed to be a responsible (and probably unprofitable) credit card borrower.
Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.
Respectable? In what sense? In the sense that hack pundits who would have been jumping down the throat of a President Gore or President Clinton, had they demonstrated the same type of fiscal irresponsibility that has been a hallmark of the G.W. Bush presidency? As perpetuated by John McCain in his effective call for larger deficits and his attacks on Obama's call for modest tax increases on the wealthy? When can we expect David Brooks to "call out" McCain on that one?
Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?
Funny, I don't think that hedge fund managers' compensation makes much of an impression on the country. If it did, Congress would make short work of passing the reform bill that would tax their earnings as income, rather than turning a blind eye to the pretense that their earnings are capital gains.

The ideas Brooks describes as coming from the report, for the most part, seem reasonable.
Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.
The exception, of course, is the passing reference to taxing "consumption, not income". That sounds like a call for the most regressive of tax "reforms", removing the tax burden from the wealthy (who can afford to save their money), while increasing the tax burden on those who are already living paycheck-to-paycheck, or who are falling deeper into debt each month.

I also take issue with the suggestion that we need to enforce and strengthen usury laws, as I see a broader need for reform. It's insane, for example, that it's usury for me to lend my neighbor $500 at an 8% interest rate, but it's perfectly legal for a bank, credit card company, or "payday lender" to charge effective interest rates at many times that rate. It's even more absurd that I would be committing a crime if I were to lend somebody money "at a rate exceeding 25% at simple interest per annum", but that's par for the course (and sometimes would be a favorable rate) among lenders who serve the poor. Michigan's usury laws aren't about protecting the poor - they're about protecting commercial lenders from competition.

Brooks concludes,
There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.
I understand why Brooks has drawn this conclusion. I just happen to see it, at least from a "real world" perspective, as elitist crap. The people I've met who are in a spiral of debt, fighting collection agencies or struggling to pay off a payday loan that instead grows with each new paycheck, are not imagining that there are no consequences to their debt spiral. The middle class family that sees its credit card debts grow each month, and can't quite stretch their paychecks to make ends meet, is not enjoying its high debt lifestyle. Real people are worrying themselves sick over debt.

The people who enjoy debt, and play with it as if it has no consequences? The lenders, financial managers, CEO's and others who... you know, fall within Brooks' present peer group.

1 comment:

  1. Very, very well said. I'm a saver too, being influenced by my dad who saved the first dollar he ever made. We live well below our means, and I am so grateful that I can do that.

    But, as you said, it is very hard to do when someone loses a job, has an illness, gets a pay cut (see: American Axle). The parents of my students work their collective asses off...and are still living paycheck to paycheck. Saving any money is simply out of the question. And now, with gas prices through the roof, many are choosing between eating and driving.