Saturday, January 12, 2013

The lost art of frugality

“As a newly-graduated person, someone coming straight out of college, I don’t like the idea of having less money coming to me due to the selfish interests of people in Congress who don’t have any interest in reducing our financial problems,” [Gabriella] Hoffman told [some of us who have been around the block a couple of times ain't too wild about it either, kiddo].  “This is an impediment for future economic growth. It’s going to make it harder for young people like myself to get married, find a better job, you name it. ... 
“Although it’s a small quantity on a monthly basis, just having less money going into my paycheck will prevent me from doing things and force me to be more frugal,” she said [Oh no, not frugality!  O the inhumanity!].  “I’ll be more cautious with my spending.”

Consumer credit as a percentage of GDP, 1/1/73 – 11/1/12
Judging from some people's reactions, you'd think we never paid 6.2% Social Security tax before. Of course, many of those people were making up to twice as much more seven years ago, long before the Obamination was in office let alone suggesting a temporary reduction in SSI taxes.  (Not me — $2/hr more but fewer benefits.)  But at the same time, many of these same people probably shrugged in indifference while FoxNews was foaming at the mouth about raising the top withholding bracket back to the Clinton-era 39.6%.

I can't put very much weight in such grumbling.  All but the most improvident people will take care of the necessities first and cut back on the extra comforts (I can't in good conscience call them luxuries): one night out less per month; pork chops instead of steaks; Wal-Mart instead of Kroger's, Von Maur or IKEA.  They might even find that happiness, good times and love are still possible on $40 a month less.

The fact of the matter is, thirty years of credit-driven prosperity have pretty much ruined our culture's ability to be thrifty (frugality as a virtue rather than a necessity).  Any squirrel will tell you that the time to stuff away the nuts is in summer, when the nuts are plentiful, so you can live off your storage when the winter comes.  Winter comes every year; eventually, no matter how hard the government works to prevent it, recessions follow growth.  In economics and finance, the line between inductive reasoning and a hot hand fallacy is slender indeed.

One of the first things I learned in Accounting 201 is the basic rule: "Provide for all expenses, anticipate no revenue."  But what took me much longer to learn is that loans, credit cards and HELOCs all violate this principle through spending unearned income — income that, through no fault of one's own, may not be there when the time comes to pay it back.  (By no means am I putting myself forward as a model of financial stability!)

This should be common sense, and yet consumer credit spending as a percentage of GDP has increased about 34.09% since January 1973, much of which is an explosion of revolving credit (credit cards and home equity credit lines), which jumped from 13.59% of total credit in January 1977 to 41.23% in April 1998, then slumped a bit only to peak out again in October 2008 at 39.96%.  (Since then, it's slumped to 31.01% as of November — still more than double where it was at the beginning of the Carter Administration.)

Percentage of consumer debt owned by the US Government 1/1/77-11/1/12
By the way, were you aware that the federal government, as a result of economic measures such as bailouts and quantitative easing, now owns 18.83% of all consumer debt, a 411% increase from 2007?  Make of that what you will.  Regardless, it's a bit much to expect the government to spend within its income when 40% of the population doesn't.
Yeah, consumer credit is a positive economic driver that's largely responsible for our technological development and our way of blah-blah-blah, yadda-yadda-yadda.  It doesn't follow that you have to put the 60" flat-screen or the Cozumel vacation on the card if you haven't saved or can't save up the cash ... in fact, it doesn't follow that you need the 60" flat-screen or the Cozumel vacation to have a happy and fulfilling life, that your existence will have been a failure and a waste if you haven't crossed the Alaskan cruise or the HALO skydive off your bucket list.  Kids grow up in apartment buildings, sharing bedrooms with siblings, without turning into gangstas and Sterno bums; employers accept degrees from commuter colleges as well as Ivy League universities; you can get from Point A to Point B in a Kia Spectra just as efficiently as in a Lexus and more cost-effectively than in a Hummer.

The similes of the birds and the lilies (Mt 6:26-34) and the Parable of the Rich Fool (Lk 12:13-21) complement each other, for both remind us that the future is largely beyond our control, and that we shouldn't anticipate joys or fret over sorrows that haven't yet come to pass.  But to push them into an "eat, drink and be merry, for tomorrow we die" construction is to push them beyond Jesus' intentions.  Credit is debt, and debts contracted in good faith must be paid in good faith; to borrow more than you can repay or to pay less than is due is a form of theft: "You shall not steal" (Ex 20:15; Dt 5:19; Mt 19:18).  Thus the Catechism of the Catholic Church:

2410 Promises must be kept and contracts strictly observed to the extent that the commitments made in them are morally just.  A significant part of economic and social life depends on the honoring of contracts between physical or moral persons [i.e., corporations or other entities treated by law as persons] — commercial contracts of purchase or sale, rental or labor contracts.  All contracts must be agreed to and executed in good faith.
2411 Contracts are subject to commutative justice which regulates exchanges between persons in accordance with a strict respect for their rights.  Commutative justice obliges strictly; it requires safeguarding property rights, paying debts, and fulfilling obligations freely contracted.  Without commutative justice, no other form of justice is possible [bold font mine.—TL].

Besides, as I've written in Outside the Asylum, lending at interest is still officially on the books as a sin, and the lending industry is genetically predatory.  That sounds like a harsh judgment — I make no statement on the intentions or moral worth of those who participate, since I would have to damn myself along with the rest of them — but no matter how it's rationalized, the root inequality of returning principal plus interest for principal alone is the major factor driving the ever-widening wealth gap.  Borrowing simply feeds the troll.

I've gassed on long enough.  Right now, I'm working on a cycle of posts anticipating the next fiscal battle, and economic issues are getting pretty old.  So let me tie a bow on this and say this: 

If the worst thing that happens to you with the return to 6.2% is that you have to skip on a night at the movies, you're a lot better off than the person whose Social Security check is the only income they can get.
Frugality is not a social disease.