Monday, April 25, 2016

The insanity of debt in the lives of ordinary Americans

I've written many times before about the impact of debt on nations, companies and individuals.  It's probably the single most economically devastating factor impacting most of us today.

Now an article in the Atlantic looks at debt's impact on the typical US resident, with vignettes from the author's own life and experience to illustrate the extent of the problem.  Here's a very brief extract from a very long article, to set the scene.

Financial impotence goes by other names: financial fragility, financial insecurity, financial distress. But whatever you call it, the evidence strongly indicates that either a sizable minority or a slim majority of Americans are on thin ice financially ... A ... study conducted by Annamaria Lusardi of George Washington University, Peter Tufano of Oxford, and Daniel Schneider, then of Princeton, asked individuals whether they could “come up with” $2,000 within 30 days for an unanticipated expense. They found that slightly more than one-quarter could not, and another 19 percent could do so only if they pawned possessions or took out payday loans. The conclusion: Nearly half of American adults are “financially fragile” and “living very close to the financial edge.”

. . .

Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.

. . .

With the rise of credit, in particular, many Americans didn’t feel as much need to save. And put simply, when debt goes up, savings go down ... The personal savings rate peaked at 13.3 percent in 1971 before falling to 2.6 percent in 2005. As of last year, the figure stood at 5.1 percent, and according to McClary, nearly 30 percent of American adults don’t save any of their income for retirement. When you combine high debt with low savings, what you get is a large swath of the population that can’t afford a financial emergency.

So who is at fault? Some economists say that although banks may have been pushing credit, people nonetheless chose to run up debt; to save too little; to leave no cushion for emergencies, much less retirement. “If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.”

. . .

In a 2010 report titled “Middle Class in America,” the U.S. Commerce Department defined that class less by its position on the economic scale than by its aspirations: homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year ... A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that.

. . .

In effect, economics comes down to a great Bruce Eric Kaplan New Yorker cartoon that was captioned: “We thought it was a rough patch, but it turned out to be our life.”

There's much more at the link.  Informative reading, albeit not much fun.

The thing I found most depressing about the article was the author's open acknowledgment that his own choices had landed him in difficulties - yet he did not express regret for those choices.  Instead, he justified them on the basis of the demands of the lifestyle he had chosen, or the pressures of society, and so on.  He even spoke (without apparent regret) of drawing on his parents' generosity to fund his children's education, with consequences I can only describe as tragic.  (Bold, underlined text is my emphasis.)

And then, on top of it all, came the biggest shock, though one not unanticipated: college. Because I made too much money for the girls to get more than meager scholarships, but too little money to afford to pay for their educations in full, and because—another choice—we believed they had earned the right to attend good universities, universities of their choice, we found ourselves in a financial vortex ... In the end, my parents wound up covering most of the cost of the girls’ educations. We couldn’t have done it any other way. Although I don’t have any regrets about that choice ... paying that tariff meant there would be no inheritance when my parents passed on. It meant that we had depleted not only our own small savings, but my parents’ as well.

As I read those words, I could hardly believe my eyes.  Why would his parents turn into enablers for an education their grandchildren could not afford, to such an extent that they impoverished themselves?  That seemed - and still seems - insane to me.  Why does he have no regrets, even when he openly admits to depleting his parents' savings?  What about the impact on them?  Has he no shame at all?  And what's this nonsense about a 'right to attend good universities'?  One has no 'right' whatsoever to anything of the sort!  That's a choice one makes, not a law of nature!

(A personal aside:  when I left home, I was on my own, and I knew it.  My father was on the point of retirement, and my parents would need his pension to support themselves.  They didn't have the money to send me to university, but I didn't resent that in the least.  It was up to me, with occasional assistance from them when they had a bit extra and could afford it.  In fourteen years of part-time and distance education, studying at two universities while living in three different cities, I got a general Bachelors degree, then a post-graduate management diploma, then a Masters degree in management from the top business school in South Africa.  I paid for them out of my own pocket, and spent many weary hours over and above my work day studying hard to earn them.  I didn't go into debt, and I didn't have to impoverish my parents to get them.  What's more, I did that during a period of rolling civil unrest, armed conflict and social upheaval, about which I've written elsewhere.  My available study time was frequently interrupted by other demands, including military service and humanitarian relief efforts - hence the many years it took me to earn my degrees.)

The choices the author made seem incomprehensible to me.  Surely one's starting point for life choices should be what's realistic, rather than what one aspires to?  (That doesn't prevent one aspiring to a great deal - it simply means that one begins with one's foot on the first rung of the ladder, and plans to step on each rung on the way up.  Very few of us have the good fortune to be able to jump up several rungs at a time, although that can happen.)  Unfortunately for the author of this article, he didn't - and he openly admits it.

Choice, often in the face of ignorance, is certainly part of the story. Take me. I plead guilty. I am a financial illiterate, or worse—an ignoramus. I don’t offer that as an excuse, just as a fact. I made choices without thinking through the financial implications—in part because I didn’t know about those implications, and in part because I assumed I would always overcome any adversity, should it arrive ... We all make those sorts of choices, and they obviously affect, even determine, our bottom line. But, without getting too metaphysical about it, these are the choices that define who we are. We don’t make them with our financial well-being in mind, though maybe we should. We make them with our lives in mind. The alternative is to be another person.

. . .

In retrospect, of course, my problem was simple: too little income, too many expenses.

That's precisely the problem.  The author chose to be the person he became, even though he couldn't afford to be that person.  That's not logical, nor is it laudable.  It's insane!  To 'follow your dreams' when those dreams are utterly impractical is to set yourself up for failure.  Dreams are great, and I fully support having them;  but you can't live on them.  You've got to earn them, and that means building a solid foundation for real life before you can indulge in them.

I don't have a problem with someone choosing to live in a slum, and live off the simplest, cheapest foods, and get their clothing from thrift stores and flea markets, in order to save every penny to study for their dreams.  That's a temporary choice they're making, an investment in their own future.  However, when it comes to the 'starving artists' of this world, those who live like that in pursuit of a dream that isn't so much an investment as a delusion . . . they're on their own - or they should be.  They wouldn't agree, of course.  'Starving artists' are the sort of people who agitate for the establishment of a National Endowment for the Arts, or something similar, and legislatively confiscate the money of taxpayers like you and I to support people like them - whether or not we like or support their so-called 'art'.  Like hell!  Let them earn their living, not steal it from me!

I'd like to offer Miss D. and myself as an example of practical, realistic living.  We aren't wealthy, not by any stretch of the imagination;  but we try to be responsible in our earning and our spending.  When we married, we made it a top priority, overriding everything else, to pay off the debts each of us brought into our life together.  In five years we not only succeeded in doing that, we also built up a financial reserve that provided the deposit for the home we've just bought together in Texas.  (Part of our reason for moving here was that house prices are significantly lower than where we were before.  Our present home would have cost us between 50% and 100% more in even the less costly suburbs of our former city.  It was financially prudent and realistic to make the move, which helped to support our other reasons such as friends, climate, etc.  Without that, we might not have done so.)  Our reserve also covered unexpected medical expenses and loss of income for me last year and earlier this year, when my earning capacity was drastically reduced.  We're on our way back to full liquidity now, by dint of not spending money like water, watching our outflows carefully, and exercising basic financial discipline.  We choose to live within our limited means, and we thank God for them every day.

I think we're hardly unique in living like that.  I think many of you, dear readers, live the same way.  We use common sense.  Unfortunately, it seems common sense isn't very common in the circles described by the author of the above article.  They're living beyond their means to follow their dreams delusions, rather than building the future one step at a time before actually taking that step.  I think their ancestors would look at them in . . . I don't know . . . disgust?  Depression?  Disbelief?  It wasn't that long ago that people expressed sound common sense in maxims by which most people lived:

I could go on, but why bother?  We, as a society, appear to have lost sight of the real truth underlying those maxims.  We don't want to hear or know that truth, because it gets in the way of our aspirations;  so we disregard it.  Unfortunately, that's landed us in our current economic mess.  As the author concludes:

Money may change everything, as Cyndi Lauper sang. But lack of money definitely ruins everything. Financial impotence casts a pall of misery. It keeps you up at night and makes you not want to get up in the morning. It forces you to recede from the world. It eats at your sense of self-worth, your confidence, your energy, and, worst of all, your hope. It is ruinous to relationships, turning spouses against each other in tirades of calumny and recrimination, and even children against parents ... To fail—which, by many economic standards, a very large number of Americans do—may constitute our great secret national pain, one that is deep and abiding. We are impotent.

Uh-huh.  Folly meets reality . . . and reality wins, every time.



Gorges Smythe said...

And then there's folks like me who haven't been able to land a decent job for the last ten years and have seen their standard of living slowly go down the tubes.

Bob said...

“If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.”

That is the classic "I got mine, screw you" attitude, particularly since financial security is a subject not taught in any grade, middle or high school nationwide.

It's like saying "If you want your car to run, its maintenance and repair is 100% up to you". (no garages, no mechanics, etc., just YOU)

How many people have been taught how to disassemble and repair an automatic transmission? Crikey, most schools don't even teach auto mechanics anymore.

Educate first, then point fingers.

Old NFO said...

This is, to my mind, a continuation of the 'me' generation... No thought for actual consequences, just doing what 'they' wanted to do, figuring somebody else would bail them out/pay for everything.

kurt9 said...

The worse part of this is not mentioned in the article. That is how those of us who have made rational life choices and rational financial management are expected to pick up the tab, through taxation, for the idiots like the Atlantic author.

The mere suggestion of such pisses me off to no end.

libertyman said...

He sent one kid to Stanford, as I recall. ( I haven't finished the article) The kid may have staggering debt as student loans, too.

As you suggest, it is all about choices, and choices have consequences.

TGreen said...

@Old NFO

The other thing that the "me" generation has lost sight of is that
while I ought to help if I know you are in need and have the means,
that is a duty I owe Him, not you.

Dirk said...

I've told my kids to not expect my help with college costs. Times have been tough, single-income for 6+ years. They'll be looking in-state, and will be going for degrees that offer good employment prospects. Or they'll learn a skilled trade. Practicality is the key concept here.

Roy said...

I say it's time for us as a society to give the finger to the thieves and charlatans running our higher education system. There is no good reason for tuition and fees to be as high as they are today.

Of course, that won't happen as long as the prerequisite for even the simplest jobs require a stupid degree nowadays.

mark leigh said...

When a degree actually means you can do the work it ain't stupid OTH degrees in stupidity seem to be in demand.

Javahead said...

We told our kids that we'd help them reach their Bachelor's degrees with no debt if they did one of:

A good public, rather than private, university
Private school with good scholarship(s)

If they wanted an expensive private school with no scholarships, we warned them that although we'd give them the same level of support needed for the other options, we would *not* cosign any loans. And that signing up for debt without any clear plan on how they'd pay it off was a bad, bad, idea.

Both went to good public schools and graduated debt-free, helped by both scholarships and student jobs. It's amazing how many of the students on needs-based grants and loans had a *lot* more in the way of expensive consumer goods. But they were "poor" and our kids were "rich", so you weren't supposed to mention that, even if those toys accounted for sizeable percentage of their student debt.

freddie_mac said...

Once my siblings & I hit adolescence, the running joke in our house was how badly our parents screwed up ... by teaching us morals, ethics & how to manage money.

I moved cross-country about 20yrs ago to chase my dream. Many a night I sat in the kitchen, frantically checking between the calculator & checkbook, figuring how much I could spend on groceries after meeting the necessities (train ticket, subway fare, & rent). Things did get better, but I still remember the days of counting my change to determine if I could splurge on coffee & a donut from a sidewalk cart ...

Moving into a house and taking out a mortgage nearly sent me into a panic attack (I'm signing up for 30yrs of debt???). Years later, home improvements are still financed by savings. Planning on moving back West in the next year (partly for the lower cost of living, mostly for the mental relief of getting off the east coast), and I'm looking at the most cost-effective way to do things without burning through all of my savings. Crossing my fingers that I'll be able to take my job with me (my boss is on board), which would make the financial picture much better.

Bibliotheca Servare said...

I've gotta say that is a pretty darn flawed analogy, in my opinion. It *might* be more accurately compared to saying "you want to lose weight and eat a healthier diet? That's 100% up to you." ie, it is something only *you* can control. No "teacher" can force you not to make foolish choices in how you spend your money. Sure, some debt is unavoidable such as medical emergency expenses or chronic illness, and so on, but it's much easier to survive those times if you spend more responsibly before those circumstances present themselves. Acknowledging that you, and you alone, have control over your non-emergency spending does *not* mean refusing to consider seeking advice on how to handle your finances etc. Quite the opposite, in fact. God bless. :-)

Anonymous said...

Sorry but I have zero sympathy for people making 100,000 dollars a year who "can't make it". They've never been really poor and have no clue what it's like. There have been times in the past decade where I didn't make 5 figures let alone 6. That's poverty. The dbag in the article can jam it in deep and on a slant.

When your job is shipped to China and you're unemployed like the 200 other people at the plant so you're picking up scrap metal and cutting and selling firewood to keep the electricity on you have my sympathy. When the difficult menial job you accept out of desperation after your factory job is shipped to China is taken by illegal aliens and other imported foreigners you have my sympathy. When you're crippled and unemployable and you're living 3 weeks out of the month on biscuits from the bag of flour and can of shortening you bought at the dollar store because you needed propane to keep from freezing to death you have my sympathy. You're in a financial mess because you've got some half-assed pipe dream about being a movie critic or a writer, live in the second most expensive city in the US, send your kids to gold plated schools and live beyond your means? Go f yourself.

Anonymous said...

The anonymous response above sums up the problem in the west and especially within America. The simple fact is that the guy complaining about his position earning $100k a year is now in the same position as you. Yes he made some stupid life choices but show me a poor person who hasn't done the same in other areas, we all do.
So instead of castigating that person you should be standing in solidarity with them, because solving their problem, solves yours.
If the Financialisation of Higher Education makes it possible for the $100k guy to think his Kids will be OK and at the present level of fees it is impossible for him to create a College Fund for his kids. The answer is free at the point of delivery Higher Education paid by Taxation, this solves your kids problems as well.
Do not fall for the 1%'s trick of trying to convince you that the guy pulling in $100k gross and taking home $75,000 after tax's is some super rich guy because he's not. If he's trying to live the nice house, 2 cars, holiday every year and college for the kids lifestyle of his parents he can not do this on a net income of $75k and neither can you doing a Blue Collar Job now earning the same 30% less in real terms as he is. You both have the same problem.
But if the 1%'s turn you against each other, who stays in power ? Yep you got it the 1%'s earning $1m a year or more. So get of your high horse and stick together otherwise you'll just loose the fight.
The Ginge.

Bibliotheca Servare said...

" at the point of delivery Higher Education paid by taxation..." Did you read this before you posted it? Let me give you a hint, pal: TANSTAAFL. "Free paid by taxation" is...oh goodness, I'm not even going to try. I will tell you this, though: the "top ten percent" in terms of income and "wealth"? They pay 90% of the taxes that would fund your delusional fantasy. Taxation is theft, and "the government" screws up everything it touches, be that business, healthcare, charity, or education. And the government is *never* punished for its screwups, because it can't be.

BreatheEasy said...

I learned as a teenager (and not at school - at a "life skills for teens" seminar offered by a consortium of local churches) that financial rule number one was to never borrow money for anything that doesn't appreciate in value. That's a tough one to follow in your late teens / early 20s when all your friends are just signing their name for new vehicles, big screen TVs, furniture, scuba gear, sailboards, etc. while you're riding a bicycle to work saving to buy a car, or when a financial bump results in you sleeping on a coworkers couch for $30/week, but after the first few years the results are well worth it. I even quit my job at 29 for a 2 year motorcycle trip, just because I could, while my aforementioned friends were fully enslaved to servicing their debt - and still are.