America's money tree: Debt: Present and Future, Private and Public

Andrew Kline, Free Lance Star, 1/22/2013

Debt is not our only problem. It is merely the consequence of not knowing how to distinguish wants from needs and thereby resist slavery. The real solution, after we have paid down our debt, is to reform ourselves and our institutions so that we make it as easy as possible to remain free.

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Subject: Thrift

More by: Andrew Kline

Americans struggle mightily with spending more than we earn and not saving for a rainy day. Peter Tufano of the Harvard Business School discovered in a recent survey that more than half of Americans could not raise $2,000, within 30 days, from all available resources, including family and friends. Two thousand dollars, he reasoned, was a good figure to represent the usual "life happens" emergencies. Just the problem of poor and unfortunate folk? He found that only 25 percent of Americans making between $100,000 and $150,000 could come up with $2,000 in the same timeframe! This hits home because it shows how even the financially literate might feel like they live paycheck to paycheck.

Consider the gloomy statistics about preparedness for retirement. Our individually funded defined contribution plans will only deliver a familiar standard of living if each of us saves roughly 15 percent of our salary from when we start working in our 20s until when we hope to retire in our 60s. This requires discipline. The miracle of compound interest will not work if we borrow against these funds for college education or spend them for medical and employment emergencies.

As it stands, 40 percent of us will never save for retirement and the average amount saved in a retirement fund is $35,000. Twenty percent have no savings at all. And 46 percent of Americans die with virtually no financial assets. Currently, average annual household income is $43,000. The average total bank account balance is $3,800. The statistic that matters most? The average household debt now stands at $118,000.

Shall we look for other people to blame for this? There is a public side to debt, of course. Our national debt is registered not in billions but in trillions. If we can hardly tread water now, how will our children make those interest payments? Passions are high. Pledges have been made never to raise taxes or to keep entitlements at all cost. Reputable economists cannot show you that the economy grows or shrinks according to the tax rate; it's just not true. And yes, something must be done about runaway health care costs. None of us are going to get away without making sacrifices.

With all the hand-wringing and shouting most of us have never worked our way through the federal budget (much less crafted our own). We don't really know what's in it. We've been told: unfunded wars, tax expenditures (i.e., loopholes), and so much social insurance (Medicare, Medicaid, and Social Security) that someone else will have to pay for it. Yet we have never heard anyone explain at length how, with revenue dialed up here, and an expense dialed down there, we could over time balance the budget.


I was instructed by "White House Burning: Founding Fathers, The National Debt and Why It Matters To You." Despite the provocative title, two economists from MIT explain how a nip here and a tuck there can make all the difference. We've done it, or failed to do it, before. In 1812, we went to war without bothering to appropriate the means to pay for it. The White House was burned to the ground. We got serious about raising taxes and primitive central banking.

A budget is a moral document. Meditate on this fact: We spend the same amount on the military ($670 billion) as we do on Medicare, Medicaid, and Social Security combined. On a chart it is the same piece of pie. In the real world they are two utterly different but desirable things. We want a world at peace and our interests protected. We want a society that takes care of its elderly and less fortunate. The choices we make in each category tell us what kind of society we want. The pie is the picture of what the infamous "sequester" is all about.

As "White House Burning" points out, the government's finances are not like a family's finances; it is rather more like the finances of a family business. Businesses live and die by borrowing. Sole proprietors hear all the time that there is all sorts of capital seeking to be invested in enterprises just like theirs. Yet the family business that has operated for years with a line of credit can't get the loan to stay open or expand in uncertain days and months. What is going on? What makes it work?

It's the financial sector. That's where the stories of public and private debt come together. Louis Hyman has written an entertaining history of consumer debt titled "Borrow: The American Way of Debt." He insists we see borrowers and creditors through the same lens. His great insight is to note that the birth and growth of consumer credit has correlated with the shifting of capital investment away from asset creation to the creation of securitized financial instruments.


As the American Dream of home ownership recedes on the horizon, he lets us in on a secret: "Without a good alternative, capital continues to be invested in consumer debt. It is more important to ask why there was so much money to invest in mortgage-backed securities than to ask about the particulars of how those investments went awry. Don't ask just why Americans borrowed; ask why our financial institutions lent!"

His solutions will not seem practical to many. He suggests creating a new market for small-business investment, modeled on the FHA or Fannie Mae, which he calls Bobby Mac, that will make it more profitable for the financial sector to lend to entrepreneurs and small businesses than to speculate on paper promises.

He is onto something. There is nothing like good old-fashioned value. We need to value those who create things again – not those who just leverage assets in order to break them up and sell them off.


Thrift was summed up by Benjamin Franklin as "industry, frugality, and generosity." Thrift is not just about "saving" or "bargain-hunting." Thrift is a big idea. Stated as a theorem, thrift is "the ethic of wise use." Ever since "Poor Richard's Almanac" laid a claim on the American character, we have learned that "the way to wealth" is some combination of being productive, shunning waste and extravagance, saving and learning to build capacity, and being a steward who is future-minded about the better legacy we are meant to leave to our fellow citizens. In order to thrive in every imaginable condition, both individuals and governments are challenged to use their resources most wisely.

In 2008, when all eyes were on the bailout of our financial institutions and on the emerging outlines of the public and personal debt crisis that would be christened the Great Recession, the Institute for American Values published a report to the nation titled "For a New Thrift: Confronting the Debt Culture." No less than David Brooks of the New York Times said: "This may be damning with faint praise, but it's one of the most important think-tank reports you'll read this year." The analysis and proposals etched in the report are even more important today.


Start a public educational campaign, create national savings plans, build new thrift institutions, repurpose the lottery, and incentivize thrifty behavior in every area of our lives. It is a call to personal responsibility, and a reminder of the crucial role that sound institutions guided by creative public policy play.

We don't spend a lot of time moralizing about this debt culture. We take note of the free riders, the undisciplined, and the predatory alike. Complaining about personal and corporate rent-seeking is too easy anyway. Rather, we lift up those who have solved past the problems of creating social mobility and access to markets. We highlight the history of credit unions, the promise of community development financial institutions, models of reform that have both succeeded and failed. We challenge our leaders to provide alternatives to the contemporary payday lending (usury) industry; we challenge ourselves to teach people to build real wealth.

Pick up the report and read it. The most important phrase you will never learn if you don't is this: "anti-thrift institution." We may drive by a payday lender or a rent-a-center every day and not think about it this way: "Anti-thrift institutions do more than simply hand out expensive credit. They also establish social norms and promote cultural values. For today's anti-thrifts, the effort to influence values takes the form of highly organized and self-conscious marketing and lobbying campaigns. These efforts are necessary to lower psychological and social inhibitions against over-borrowing and over-indebtedness."

Take the largest, most potentially corrupting, anti-thrift institution of them all: government sponsorship of gambling. One can hardly think of a more regressive, predatory practice than the state lottery – unless you bring in slot machines. Every day, the lottery taxes the poor by selling them a lie that their best (and only bet) is to get rich quick. "For a New Thrift" puts the contrast starkly: "With pro-thrift institutional incentives, many low- and moderate-income Americans might be able to join the class of savers and investors. Instead, the lottery has managed to recruit them into a class of habitual bettors." We might just as well run the numbers: a class of habitual losers.


Even as state-sponsored gambling seems accepted by all, something cries out to be done. Take a look at groundbreaking research on a savings vehicle called Prize Linked Savings. It turns out that credit unions, notably in Michigan but also elsewhere, have developed a "Save to Win" account that repurposes the lottery. The pooled resources of this classic savings account goes to awarding monthly and annual prizes. And it works. More people open accounts and more people save. However, it is illegal in most places because of the government's monopoly on gambling.

Get the government out of gambling. Do more than stay out of debt: celebrate thrift.

Debt is not our only problem. It is merely the consequence of not knowing how to distinguish wants from needs and thereby resist slavery. The real solution, after we have paid down our debt, is to reform ourselves and our institutions so that we make it as easy as possible to remain free.

One last suggestion: "Bring Back Thrift Week," which was celebrated nationally from 1916 to 1966 on Benjamin Franklin's birthday. From Jan. 17 to 23 – this week in fact – we can share ideas about how we can encourage the small saver and revive the middle class. Drive through your neighborhood and take note of those anti-thrift institutions, resist your spendthrift ways and reflect on our national priorities, and find out what thrift institutions make your community stronger. We can discover together what will make us more productive in our work, creatively frugal in the stewardship of resources, and progressively generous as future minded citizens.

Do your part, and we will all be in your debt.

This article originally appeared here.


Institute for American Values, 420 Lexington Avenue, Room 300, New York, NY 10170-0399