It's a debt, debt world...
The Weekend Edition:
Why Americans Are Going Broke
Times are bleak for the U.S. consumer. The average household owes 20% more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations. And the nation's economy isn't in much better shape. The government's new stimulus plan will give Americans some cold hard cash and they are counting on recipients not to save it or put it toward debt. The goal is to have Americans do what we've done best over the past 30 years: spend it. Newsweek's Jennifer Barrett spoke with author Stuart Vyse about the wisdom of such a stimulus plan and why it's getting harder for so many Americans to stay afloat.
Newsweek: You say the common assumptions about why Americans can't hold onto their money are insufficient. Why?
Stuart Vyse: The most common assumption is that people are irresponsible and that they are not wise about their money. It's basically victim blaming an attempt to shift the blame onto individual consumers. The other point of view on this issue is that it is primarily the fault of predatory lending practices the "evil" credit card companies. One of the most important factors is the easy availability of universal credit. The House and Senate have passed economic stimulus packages that include rebates to taxpayers, which the government is encouraging them to spend. That seems like an irresponsible message for taxpayers who have debt or no savings.
Why is it assumed that the poor and middle class are likely to spend the rebates?
Under normal circumstances, they are the ones who have less disposable income. If you are on the lower end of the curve, you are more likely to need the money for immediate expenses.
Why wouldn't they save it or put it toward a debt?
If they are smart, they would. The problem for most who are seriously in debt is that $600 or so doesn't amount to much. So what can consumers do in a world designed to encourage them to overspend? Using techniques from behavioral economics, it helps if you can make saving automatic. I also recommend automatic monthly bill payments. Split your paycheck into two with some going into a bill-paying account in which you have no ATM access, and the rest should go into another account that would house your disposable income.
What would you propose the government do to help reverse the trend in consumer debt?
One of the most important things is to promote savings and obviously we need reasonable limits on credit. There was a time when if a banker gave someone a loan and the person failed to pay it back, the banker felt some responsibility because he had made a bad assessment. That ethics in banking obviously is gone.
If consumers actually saved money and paid off their debt, could it hurt the U.S. economy?
One reason we have all these problems is that we are supposed to. It drives our economy. If everyone had no debt and was into saving, then our economy (as it is designed today) would not be performing as well as it should, according to economists.
Why Americans Are Going Broke
Times are bleak for the U.S. consumer. The average household owes 20% more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations. And the nation's economy isn't in much better shape. The government's new stimulus plan will give Americans some cold hard cash and they are counting on recipients not to save it or put it toward debt. The goal is to have Americans do what we've done best over the past 30 years: spend it. Newsweek's Jennifer Barrett spoke with author Stuart Vyse about the wisdom of such a stimulus plan and why it's getting harder for so many Americans to stay afloat.
Newsweek: You say the common assumptions about why Americans can't hold onto their money are insufficient. Why?
Stuart Vyse: The most common assumption is that people are irresponsible and that they are not wise about their money. It's basically victim blaming an attempt to shift the blame onto individual consumers. The other point of view on this issue is that it is primarily the fault of predatory lending practices the "evil" credit card companies. One of the most important factors is the easy availability of universal credit. The House and Senate have passed economic stimulus packages that include rebates to taxpayers, which the government is encouraging them to spend. That seems like an irresponsible message for taxpayers who have debt or no savings.
Why is it assumed that the poor and middle class are likely to spend the rebates?
Under normal circumstances, they are the ones who have less disposable income. If you are on the lower end of the curve, you are more likely to need the money for immediate expenses.
Why wouldn't they save it or put it toward a debt?
If they are smart, they would. The problem for most who are seriously in debt is that $600 or so doesn't amount to much. So what can consumers do in a world designed to encourage them to overspend? Using techniques from behavioral economics, it helps if you can make saving automatic. I also recommend automatic monthly bill payments. Split your paycheck into two with some going into a bill-paying account in which you have no ATM access, and the rest should go into another account that would house your disposable income.
What would you propose the government do to help reverse the trend in consumer debt?
One of the most important things is to promote savings and obviously we need reasonable limits on credit. There was a time when if a banker gave someone a loan and the person failed to pay it back, the banker felt some responsibility because he had made a bad assessment. That ethics in banking obviously is gone.
If consumers actually saved money and paid off their debt, could it hurt the U.S. economy?
One reason we have all these problems is that we are supposed to. It drives our economy. If everyone had no debt and was into saving, then our economy (as it is designed today) would not be performing as well as it should, according to economists.
Labels: Debt
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