Friday, June 13, 2008

Seduced my borrowed money

I have not blogged in this space for five weeks. Two of them were vacation weeks--spent mostly celebrating graduations from college by my two daughters. The last weeks is just recovering from vacation.

Have you started to notice the new tone about money in America? Some sanity is starting to reappear. It is still faint but the momentum is building. The old moral structure around money (David Brooks term) from the Puritans and Benjamin Franklin is being reintroduced to public dialogue. Is the virtue of frugality making a comback?
First, let us look at what shredded the old American and Protestant virtues of hard work, frugality and savings. The first thing that happened was the widespread use of credit cards. I remember telling my 3 year old daughter (she is now almost 22) that the reason people were poor and homeless was because they didn't have enough money to pay for food and hosuing. She responded innocently, "Why don't they use their credit card!" Well, you could see by then the genie was out of the bag. Between 1989 and 2007, credit card debt quadrupled --$238 billion to $950 billion. Attitudes toward luxury and instant gratification replaced the older virtues of thrift and temperance.
Government joined the party. Before Reagan, all Presidents of every stripe denounced deficits and restrained spending. Eisenhower warned about the military industrial complexes appetite for spending. Truman set his defesne budget based on what could fit in the budget. Even Jimmy Carter never had deficits over $50.
Then the "supply Siders" took over the GOP. Remember the Laufer Curve? The "supply side argument that we just need to tax less and invest more and grow the pie larger" has been in vogue since Reagan came into office in 1980. The original vision made sense. We overtaxed capital and discouraged investment. The economy was sluggish and inflation was rampant. I would know--try to find work coming out of college in 1979 with 11% unemplyment. Reagan said it well: "a man should not be expected to pay more then half his income in taxes. At the time the top marginable rate was 70%.
Americans used to invest what they saved. Now the savings rate is less then 1% (a few months ago it was negative). Now we borrow to save and use leverage in all our purchases. The foreclosure rate is skyrocketing, not just because of subprime loans and sky high prices--the fact that we no longer put 20% down when we purchase homes is the real culprit. If you put 20% down and then the housing prices drop 15%--distressed buyers can still get out and break even. Now they just turn in the keys. They have no skin in the game. But the nothing down and leverage to the hilt approach to money has been growing for many years. The Federal government during Reagans years started the trend. To hide the skyhigh deficits , Congress did two things. In shoring up social security by increasing rates and raising the retirment ages--they also agreed to unify the budget picture. The social security receipts were added to the general tax revenue numbers (they used to be kept seperate) and also added to the spending numbers. Since the current social security receipts greatly exceed the current payout, this surplus in social security was used to mask the size of the Reagan supply side deficits. Thanks to Ross Perot---the ticking time bomb of social security expsenses when the boomers retire--was exposed and the Bush I and Clinton Presidencies spent all their political capital shoring up the fiscal foundations. Then the costly Iraq War and an idiot massive tax cut made the already dire situation disasterous. Bush II's fiscal recklessness is beyond shameful. Tom Delay is the worst enemy any of our grandchildren and great grandchildren can have. The next 20 years of Presidential political capital will ahve to be spent correcting Bush II's supply side lunacy.
A related moral tale is the states participation in gambling. the lottery is a severe tax on the poor and it feeds financial recklessness. 20% of Americans are frequent players, spending about $60 billion a year. The spendy is regressive. A household with less then $13,000 income spends, on average, $645 a year, roughly 9% of their income. I will not be supporting the initiative on the Maryland to bring more gambling into the state.
We need better usagy laws to protect people from the social habits of instant gratification. Payday lending needs to be reigned in. Banks are finally get needed regulation to curb some pernious practices that brutally punish borrowers.

Several years ago in my last pastorate the school board formed a comittee to come up with core values the schools needed to teach. They put a community board together and my freind, the Reformed church pastor , was a member of the Board. (I got stuck on the sexuality curriculum committee that was meeting at the same time.) My friend Tim suggested that one value we needed to teach and encourage was "thrift." He argued his case but the rest of the community members thought thrift was an outdate and "unamerican" concept. We have a long way to shift our values back to where we honor the values of frutality, thrift, temperance and hard work that amde this nation great. draft 6/12/08 by James


chriscd said...

I believe the terrorists who have their sight on America and innocent people in other countries are your children's and grandchildren's worst nightmare.

Terrorists have no country of their own and they have no regard for human life.

I will agree that we need to return to thrift and frugality, but until America recognizes God for who He is and turns our sight back on Him, I don't see it turning around.

AM Kingsfield said...

We are certainly sabotaging ourselves. I am guilty of great wasteful spending, laughingly encouraged as "retail therapy" and extolled by the president himself as my American duty. Television doesn't help much either.

Part of our problem is our isolation from poverty here in the suburbs. It is important to be aware through programs that assist the poor, like through Habitat for Humanity or our Warm Nights program.

From where I stand, Americans do recognize God. We just don't always apply that honor effectively. I don't want to live in a theocracy, that's one thing for sure.

Mom said...

For a personal application of how to learn good use of our money I highly recommend the Financial Peace University course taught occasionally at CCPC. Our son took the course and has gone from having to borrow money to pay the rent to now having a savings account that has gotten him through several unexpected financial crisis, and he has cut his credit card debt in half. It takes time to overcome bad habits, but it can be done.

KevR said...

I read a report recently that showed if you add the federal, state, local, payroll, and sales taxes up that most folks pay about 40% of their income in taxes every year. If you then add retirement withholding which ALL of us should pay into; this is limited to 15% -- then you get a 55% "tax rate"... some will contribute to a Roth on top of this for retirement again, shrinking the take home pay further. That's consistent with the Europeans who have top tax rates around 50% but have guaranteed lifetime medical and some form of retirement.
Problem is we BORROW to close losses in tax receipts from our tax cuts -- massive borrowing which has dragged down the dollar and helped raise the price of oil. It just doesn't work to borrow faster than the economy is expanding and that's where we are now after 20 yrs of supply-side experimentation, which I'd say is probably an utter failure and should be put in the dustbin of history.

Anne said...

Maybe someday, I hope sooner than later, thrift will be brought back into vogue and taught. When I was in high school, I got a large allowance, but I had to pay for everything out of it, school lunches, movies, etc. When it was gone, it was gone. It was a good lesson, but now I'm trying to get my daughter to grasp this idea of budgeting and saving and I'm having a hard time of it.

don g said...

James, you fiscal conservative you! A politcal topic on which we can comisurate. Very cool.

The latest admitted federal debt figure is nine trillion dollars! I cannot even begin to fathom that number. The terrorists just have to sit back and wait for us to destroy ourselves as we collapse under the weight of servicing our ever burgeoning IOUs. And they will not need to wait long. Once the entitlement outlays start to exceed receipts, we will be spinning out of control.

While we agree on the problem, I doubt we'll agree on the fix. I do not think a higher tax rate is the answer. Rather, fiscal restraint via a real balanced budget amendment might give us a fighting chance. Energy self-sufficiency, not relinquishing more power and money to the federal government (ie national health care, global warming 'remedies', etc), dumping the Dept of Education, removing illegals from the federal trough and the line-item veto would also help. I'm sure something in that short list got under your skin. Unfortunately, I have not heard any good ideas on how to handle the 800 lb gorilla, aka entitlements.

The federal government is waaay too big. This is not what our founding fathers (or the constitution) envisioned. We don't need a fiscal diet, we need an economic gastric bypass with lipo!

This is not like Al 'chicken little' Gore. This is a real, looming economic catastrophy that is entirely self-imposed. The sad thing is I don't see the political will from either party needed to start to right the ship.

There's a documentary coming out called I.O.U.S.A. It's supposed to explain this mess in an informative and entertaining fashion. It's in my Netflix queue.

Your ever-loyal finance chair.

Steve Lapp said...

Hello cousin James - Americans have an unrealistic concept of necessity versus luxury. My favorite example is the proliferation of technology as a perceived necessity. Electricity has become a necessity, except among the Amish - and when the power goes out, many in America think they cannot survive. As a utility, electricity is billed continually. Then came the telephone, which has become another necessity, billed monthly.
Then came radio and television - both "free" at one time. However, cable and satellite television are now also considered to be expensive "necessities". Recently cell phones and internet computer access have been added to the "necessary" utilities for which we are billed monthly.
I personally cannot afford pay T.V. , cell phone service, or broadband internet access.
I haven't even mentioned the automobile - the most expensive "necessity" for Americans today, next to housing.
Maybe the Amish can teach us a few things, after all.

Sincerely, Steve Lapp in Quihi, Texas