Tuesday, July 22, 2008

On Debt

Both Richard Cohen and David Brooks offer observations on the great American pastime: spending and owing, and according to both of them, it comes back to being a matter of character.

Mr. Brooks first:

Decision-making — whether it’s taking out a loan or deciding whom to marry — isn’t a coldly rational, self-conscious act. Instead, decision-making is a long chain of processes, most of which happen beneath the level of awareness. We absorb a way of perceiving the world from parents and neighbors. We mimic the behavior around us. Only at the end of the process is there self-conscious oversight.


And now the reckoning has come. The turn in the market punishes many of those seduced by financial temptations. (Sometimes capitalism undermines the Puritan virtues, but sometimes it reinforces them.)

Meanwhile, social institutions are trying to re-right the norms. The government is sending some messages. The Treasury and the Fed are trying to stabilize the system while still ensuring that those who made mistakes feel the pain.

But the important shifts will be private, as people and communities learn and adopt different social standards. After the Depression, a savings mentality set in. After the dot-com bubble, a bit of sobriety hit Silicon Valley. Now it’s the borrowers’ and lenders’ turn. As the saying goes: People don’t change when they see the light. They change when they feel the heat.

Mr. Cohen sees it as if it was like a tattoo; a permanent solution to a temporary fancy.

I asked a college professor what she thought of tattoos, and she said that for young people, they represent permanence in an ever-changing world. But how is that possible? Anyone old enough and smart enough to get into college knows that only impermanence is permanent. Everything changes — including, sweetie, that tight tummy with its “look at me!” tattoo. Time will turn it into false advertising.

The permanence of the moment — the conviction that now is forever — explains what has happened to the American economy. We are, as a people, deeply in debt. We are, as a nation, deeply in debt. The average American household owes more than its yearly income. We save almost nothing (0.4 percent of disposable income) and spend almost everything (99.6 percent of disposable income) in the hope that tomorrow will be a lot like today. We bought homes we could not afford and took out mortgages we could not pay and whipped out the plastic on everything else. Debts would be due in the future, but, with any luck, the future would remain in the future.

Here and there the occasional scold warned that all this was unsustainable. Social Security is underfunded. The government ought to — just occasionally — balance its books. But for a long time, the unsustainable seemed sustainable. The immutable rules were mutable. Virtually the entire political establishment insisted that tomorrow would never come. Republicans joined with Democrats in never calling in a loan. Who says bipartisanship is dead? Not when it comes to fiscal irresponsibility.

It’s easy to blame our national indebtedness on a lot of factors, but when you get right down to it, it’s a matter of greed, envy, and shortsightedness. That’s not to be taken as a scold; that’s an observation of human nature. Thus have we always been and thus we will always be. The question isn’t how to stop the behavior, it’s how to manage it. It takes discipline and self-control, two things we expect out of everyone else except ourselves.