When people rack up massive credit card debts it is easy to blame the card companies for seducing us poor moppets into living life beyond our means. So it is perhaps a little surprising that the sort of hysteria that has done for “Big Tobacco” (what, as opposed to “little tobacco”?) has not caused a political clampdown on credit card firms. I guess the reason why they have escaped heavy controls is that because the majority of the adult population use them, it would be electoral suicide for politicians to call for them to be banned or heavily restricted.
Debt is clearly a serious problem for lots of people and the have now, buy later culture plays a part in this. A lot of people are also unaware that if you do not repay a card in full every month, the bill can swell alarmingly. A rising burden of taxation has not helped, either, which can hardly be blamed on wicked money-lenders. Strengthening the incentives to save and avoid indebtedness is a good thing. Cutting taxes on investments and savings products is a good start.
Yet the supposedly “conservative” columnist David Brooks comes out with the sort of panicky, “We are all dying of debt” item that you just can tell is a warm-up to calls for heavy government regulation. He places a lot of the blame on the likes of financial services firms, and avoids mentioning the role that central banks like the Fed and government-backed mortgage agencies like Freddie Mac might have played in fuelling heavy borrowing. And there is this paragraph that really raised my eyebrows:
Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus.
Huh? Ursury laws? Forgive me, but I was not aware that charging interest on loans was or is a civil or criminal offence, as it is in the Muslim world or was the case in the Middle Ages. And the line about restricting or even banning advertising of financial products like credit cards so that poor, gullible college kids do not buy them is patronising nonsense. After all, if Mr Brooks wants to use the government to help give people financial planning advice, it is pretty silly to prevent firms from advertising products that are legal, as credit cards are.
But then I remember that Brooks is not all that keen on the idea of the state leaving adults alone, even if that means their making mistakes, anyway. That’s just so Reaganite, dahling. Check out this article.
Many jurisdictions of the U S have had, and some continue to have “laws” (legislation) setting a maximum rate of interest, which when exceeded is deemed usurious, and making criminal any efforts to collect or benefit from excess rates.
Competition for financial services has impacted those “laws,” as many operations became based in jurisdictions with no or minimal usury statutes.
“Cutting taxes on investments and savings products is a good start.”
Why?
How about cutting taxes on production and incomes so that people have more disposable to save or spend as they please?
How about getting rid of asset-based means testing?
Most tax-breaks for saving are regressive – they only benefit people with spare money who could and would save anyway (i.e. me).
And how about having Land Value Tax to keep house prices low and stable? In times when house prices are soaring ahead faster than you can save for a deposit, there is simply little point in saving up for a deposit. The flipside is that those who do own property get suckered into ‘mortgage equity release’, so whether property owner or not, people tend to save less.
And finally, the net amount of savings is always close to nil, as one man’s spending/dis-saving is another man’s income/savings.
Mark, you are quibbling over nothing. I am of course in favour of slashing taxes across the board. But if it is savings one wants to stimulate, then slashing taxes on interest etc is a good idea, no?
David Brooks was indeed a conservative once upon a time. He professed admiration for the philosophy of Michael Oakeshott. I once heard him explain his understanding of Oakeshott’s philosophy when he said that “the greatest order in society inheres in the thousands of little decisions made by ordinary people acting in their own self interest and not in the decisions made by government or any group of elite rulers.”
But then he got a job at The New York Times.
Nothing would go against the grain of Oakeshott’s political philosophy like a new social experiment such as that now advocated by David Brooks. He believed and taught that man’s efforts to reorder society by the expansive application of pure reason would be destructive of freedom and end in failure. Brooks used to believe that also.
Brooks makes the perfect “tame conservative” for the New York Times. He is only moderately bright, but is insightful enough to recognise trends about 20 years after people who are actually paying attention notice the same things. (Compare this book (2004) with this one(1991)). As the readers of the New York Times aren’t paying attention either, he manages to write stuff that they can find vaguely interesting without feeling challenged or threatened. He is a classic example of why most newspaper journalism is so mediocre.
Moderate inflation and low interest rates are the cause of massive consumer/housing spending. Moderate inflation causes people to think that their ever increasing incomes are real (i.e they think the 1 with all those zeroes means the same as it did 20-30 years ago) and low interest rates have people spending money they haven’t earned yet. So people think that when they are making $100,000 they’re in the big leagues when they really aren’t, and interest being low makes borrowing real cheap. So when their paychecks don’t seem to go as far as they think they should, they then borrow to live the lifestyle they think they should be living. I’ve seen this in three co-workers in a relatively small office.
I place the lion’s share of the blame on the individual, but do keep in mind that our Socialist Overseers ulitmately output these people – they control the acid eating effect of inflation, they control the interest rates, and they control the “education” institutions that output economically illiterate people.
Constant inflation is a relatively new phenomenon. Our parent’s generation dealt with the massive inflation of the late 70’s but that was a bit of an anamoly. Since then we’ve had 2-4% inflation. What effect does an average 3.5% inflation, compounded, have on an income? Over twenty years it cuts the value of money in half. I think too many late 30-40 somethings are operating under the impression that their paychecks in some way resemble what that money was when they came out of school. They are the ones who are making up this rotten portion of the PRIME lending that is now going bad.
As for tax rebates or cuts seeming to be feathering the lining of more well to do people, keep in mind that even the conservative estimated effect of inflation over the next 25 years is about a factor of 3. So don’t look it as a bad thing. Inflation itself is essentially a savings tax, so any cut in the basic rate simply offsets the corrosion of your savings and the effect that that will have on your lifestyle. It makes those who are economically ignorant of the effect of inflation thus far over more to be pitied because they aren’t keeping their eye on the ball and know the type of money they will need to have saved to lead the lifestyle they plan on in retirement. If a person is living on $100,000 today, and wants to retire in 25 years, and estimates that they will live 20 years, they will likely need $60,000 in today’s dollars (hopefully no need for a house payment of savings contribution), which will mean they will need $180,000 in future dollars in the first year of retirement and $275,000-$325,000 in their final year. Granted their lifestyle may be curbed somewhat by health in those last years, but then there will be less transfer through government possible so that extra money will be going toward health care the elderly don’t have to pay now. So that still means at least a couple million dollars in savings 25 years from now (those future dollars). Who’s saving that much? Not only are people not saving, many are massively in the hole. One can’t help but think that the socialist backdrop behind all this is the ultimate source of the problem. Behind all this is the concept that they will be bailed out somehow so they don’t have to keep their head in the game.
So the credit problem is merely a compounding of the problem that people are not intelligently balancing the fruits of their labor between current consumption and savings. Socialism is to blame. And it is deflating that our leftward leaning brothers blame everyone except government for the cycle we are in, and want more government involvement to force rationing. Perhaps a free market, with intelligent players in it, who know that they are ultimately responsible for themselves today and tomorrow will create an “invisilbe hand” to rationing. The words rational and ration come from the same root after all. It is the irrationality inherent in collectivism and socialism which has bred a generation of boobs.
“Small tobacco” would be family farms. In the south, burley tobacco is still raised in patches as small as 30 acres. “Big Tobacco” would be the giant firms that peddle the stuff.
Lamont
For those concentrating on taxation and where it is applied (for Gov’t revenues) keep in mind Milton Friedman’s injunction:
It is not a question of how much they tax, but how much they spend.
Of course that takes us to consider where and why the spending occurs.
A good post J.P. – as so often. My normal habit (as you may have noticed) is to slag off anything I think is a mistake, in any bit of work by anyone, and totally fail to praise all the good things.
I do believe that debt is a very serious failing – but the moral failing (for it is a moral failing) of borrowing money for high living and then being destroyed by debt is not something that can be helped by the state.
It is not from the state action that we should look for moral improvement (I am stealing words from Gladstone of course).
As for usury laws and other restictions on credit companies, these are exactly what gives the opening to “loan sharks” – to organized crime.
It is the same with all forms of prohibition.
On the New York Times and its pet “conservatives”:
There is another one whose name escapes me just now.
He is very rich but (really “and” considering how many very rich Americans are wild statists) spends half his time demanding higher taxes on the very rich. That he could just give his money to the government never seems to occur to him.
The other half of his time he spends denouncing the theory of evolution.
Exactly what the New York Times wants in a “conservative” – an obvious nut.
I can guess what Oakeshott would have said about such people.
“Oh dear” he would have said – before going off to watch the cricket.
Toolkein –
Here is another perspective:
Constant inflation acts as an ongoing adjustment to reduce those debts (fixed obligations) which are not adjusted (upwards) in terms of legal tender.
If all fixed obligations contained terms that called for the principal owed to increase as the “value” of the legal tender fell (or vice -versa) [which was one of the effects of a metallic standard] or required equivalent adjustments in the real “carry costs,” the uses of credit and outstanding amounts would adjust automatically. That would require no interventions by authority (but look out for consumer advocates).
And, hey, I guess I am, in my 80’s, one of those who has experienced what you recite; as well as the reverse (deflation in my childhood). Let prices be your guide, always.
Jonathan, let me say as a chartered tax advisor with a working knowledge of economics that Milton Friedman got it spot on (see quote above) he also said that the second least bad tax was a flat tax on all income with a generous personal allowance, but no other tweaks. I accept that inflation acts as a kind of tax on interest income, so there are arguments for taxing it at a lower rate, but it goes no further than that.
All these PEPs and ISAs and TESSAs and tax-breaks for pensions are just a huge great scam that are there to create business for banks and insurance companies.
The gummint cannot make people better off by sloshing money round in ever decreasing circles. It is social engineering, it never works.
Since, here in the UK, half the working population is employed by the state, forty percent sell goods and services to them and each other, and the other ten percent work to supply the credit which allows these goods and services to circulate at the necessary speed, a credit crunch would be pretty bad news.
I think that the description of David Brooks as a “conservative” is rather off the mark these days. He seems to be leaning toward Obama in the Presidential race.
So, in other words, people who can’t even sort out their lives, let alone handle money are poor because they don’t have investment bankers.
This is like saying that an illiterate person is unable to use a computer because he doesn’t have the instruction manual.
As Lamont says, Small Tobacco does exist. Not just on family farms, either. I had a lovely chat, while changing planes at Raleigh Durham a few weeks ago, with a chap who owned a small, independent, cigarette manufacturer.
I read that piece too and added this to the other issues that I agree with Brooks about. I am not concerned with his tag as conservative or something else, but I find his tendency to unduly idolize the past as completely pretentious. Part of what makes people’s lives today far better is that the no one living in any part of the world a century ago had the option of borrowing in the first instance.
It is therefore presumptuous to state that they were all parsimonious. He merely betrays a poor grasp of economic history. Look at South Asia and Sub-saharan Africa where people are not indebted but it is not because they are more virtuous or in need of no loans.
I’m confused. Is that a tax based upon the value of property? How does making property more expensive to own make it cheaper?
BTW, was Brooks the guy who suggested gasoline control, similar to rent control? Or was it some other moron?
Following on from RRS comment
some of the MSN are aware of the direction that sould be taken and the arguements advanced.
http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/06/12/do1204.xml
Mr Brooks supporting Senator Obama – if true that would make Mr Brooks another Marxist “conservative”, hardly what the world needs.
Even Ben Stein (yes I have remembered the ever higher tax and down with evolution guy’s name now) draws the line at supporting Senator Obama.
At least till the next edition of the New York Times…..